Case Note & Summary
The batch of appeals before the Supreme Court involved a common question arising under the Income-tax Act, 1961 regarding the deductibility of surtax paid under the Companies Profits (Surtax) Act, 1964 while computing business income. The lead matter was Civil Appeal No.455 of 1987 arising from a Full Bench decision of the Kerala High Court reported in 159 I.T.R.431. The assessee claimed deduction of Rs.76,777 towards surtax liability for assessment year 1976-77. The Income Tax Officer disallowed the claim under Section 40(a)(ii), which prohibited deduction of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of such profits or gains. The Appellate Assistant Commissioner allowed the claim, but on the Revenue's appeal, the Income-tax Appellate Tribunal reversed that order and disallowed the deduction. The Kerala High Court affirmed the Tribunal's view on reference under Section 256(1) of the Income-tax Act. The assessees appealed to the Supreme Court, while the Revenue also appealed against contrary decisions of the Gauhati High Court in Makum Tea Company (India) Limited v. CIT and Doom Dooma Tea Company Limited v. CIT, which had allowed the deduction. The central legal issue was whether the tax levied under the Companies Profits (Surtax) Act, 1964 fell within the mischief of sub-clause (ii) of clause (a) of Section 40 of the Income-tax Act, 1961. The assessees argued that surtax was computed on chargeable profits, which involved adjustments under the First Schedule to the Surtax Act, and therefore was not a tax levied on profits or gains as determined under the Income-tax Act. They relied on the Supreme Court decision in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT, which held that cesses on immovable property measured by net profits were not taxes on profits under Section 10(4) of the 1922 Act, and contended that Parliament had accepted that view by retaining similar language in Section 40(a)(ii). The Revenue, on the other hand, contended that the very scheme of the Surtax Act, including its preamble, charging Section 4, and the definition of chargeable profits in Section 2(5), showed that the surtax was imposed on the excess profits of companies, and hence squarely within Section 40(a)(ii). The Court examined Section 40 of the Income-tax Act, which opened with a non-obstante clause overriding Sections 30 to 39. It noted that the question was whether surtax was a tax levied on profits or gains of business. Analysing the Companies Profits (Surtax) Act, 1964, the Court observed that the preamble described it as an Act to impose a surtax on the profits of certain companies. Section 4 charged the tax on chargeable profits exceeding the statutory deduction, and chargeable profits were defined in Section 2(5) as total income computed under the Income-tax Act, 1961, adjusted in accordance with the First Schedule. The Court held that the mere fact that the First Schedule provided for further deductions or adjustments did not mean that the amount on which surtax was levied ceased to be business profits. Therefore, the surtax fell within the plain language of Section 40(a)(ii). The Court also rejected the reliance on Section 15 of the Surtax Act, which allowed surtax deduction in computing distributable income under Chapter XI-D, holding that its operation was confined to that chapter and could not be extended generally. With respect to Jaipuria Samla, the Court distinguished it on the ground that the cesses there were levied on immovable property, not on profits, and reiterated the settled principle that the measure of a tax does not determine its character, citing Union of India v. Bombay Tyre International and Goodricke Tea Company v. State of West Bengal. The Court noted that all High Courts except Gauhati had taken the view that surtax was not deductible. Accordingly, the Supreme Court disagreed with the Gauhati High Court and upheld the majority view, dismissing the assessees' appeals and allowing the Revenue's appeals against the Gauhati judgments, thereby confirming disallowance of surtax deduction under Section 40(a)(ii) of the Income-tax Act, 1961.
Headnote
A) Income Tax - Business Deductions - Section 40(a)(ii) of Income-tax Act, 1961 - Surtax under Companies Profits (Surtax) Act, 1964 is a tax levied on profits of business and hence not deductible - The Surtax Act's preamble, charging Section 4, and definition of chargeable profits in Section 2(5) show that surtax is levied on chargeable profits computed under the Income-tax Act, 1961 adjusted by the First Schedule, which are essentially business profits above the prescribed limit; therefore it falls within sub-clause (ii) of Section 40(a) and cannot be allowed as a deduction despite Sections 30 to 39 - Held that surtax cannot be allowed as a deduction while computing business income (Pages 1-5). B) Income Tax - Interpretation of Non-obstante Clause - Section 40 Income-tax Act, 1961 - Non-obstante clause overrides deductions under Sections 30 to 39 - Section 40 opens with 'Notwithstanding anything to the contrary in Sections 30 to 39', meaning any amount otherwise deductible under those sections is disallowed if it falls within sub-clause (ii) of clause (a); the clause subjects surtax to disallowance - Held that Section 40 has overriding effect over Sections 30 to 39 (Pages 1-2). C) Income Tax - Surtax Act Section 15 - Interaction with Chapter XI-D of Income-tax Act - Section 15 of Companies Profits (Surtax) Act, 1964 provides for deduction of surtax from distributable income only for Chapter XI-D purposes and cannot be extended to other provisions - The assessee relied on Section 15 to argue surtax outside Section 40(a)(ii), but court held its operation is confined to computation of distributable income under Chapter XI-D of the Income-tax Act, 1961 and cannot be extended to any other chapter or provision - Held that Section 15 does not support allowing surtax deduction under Section 40(a)(ii) (Pages 2-3). D) Income Tax - Precedent - Jaipuria Samla Amalgamated Collieries Ltd. v. CIT - Section 10(4) of Indian Income-tax Act, 1922 and Section 40(a)(ii) of Income-tax Act, 1961 - Decision on cesses levied on immovable property does not apply to surtax - The cesses in Jaipuria were levied on immovable property measured by net profits, not on profits themselves; surtax is levied on profits computed under Income-tax Act with adjustments; also, measure of tax does not determine character of tax - Held that Jaipuria decision is distinguishable and does not assist assessees (Pages 3-4). E) Income Tax - High Courts' Conflict - Gauhati High Court dissenting view rejected - Gauhati High Court in Makum Tea Company (India) Limited and Doom Dooma Tea Company Limited held surtax deductible, but all other High Courts including Calcutta, Bombay, Karnataka, Madras, Andhra Pradesh, Rajasthan, Gujarat, Allahabad, Punjab & Haryana held it not deductible - Supreme Court agreed with majority view and disagreed with Gauhati High Court, holding surtax falls within Section 40(a)(ii) - Held that appeals by assessees dismissed and appeals by Revenue against Gauhati High Court allowed (Pages 4-5).
Issue of Consideration
Whether surtax liability under the Companies Profits (Surtax) Act, 1964 is allowable as a deduction under Section 40(a)(ii) of the Income-tax Act, 1961 while computing business income, and whether the Gauhati High Court's contrary view should be accepted.
Final Decision
Supreme Court held that surtax levied under Companies Profits (Surtax) Act, 1964 falls within mischief of Section 40(a)(ii) of Income-tax Act, 1961 and cannot be allowed as deduction while computing business income. The Court disagreed with Gauhati High Court and upheld majority view. Consequently, appeals by assessees dismissed, and appeals by Revenue against Gauhati High Court decisions allowed; deductions disallowed.
Law Points
- Surtax under Companies Profits (Surtax) Act
- 1964 is a tax levied on profits of business and falls within Section 40(a)(ii) of Income-tax Act
- 1961
- Non-obstante clause in Section 40 overrides deductions under Sections 30 to 39
- Section 15 of Surtax Act is confined to computation of distributable income under Chapter XI-D
- Measure of tax does not determine character of tax
- Cess on immovable property measured by net profits is not tax on profits for Section 40(a)(ii)
- Jaipuria Samla decision distinguishable
