16 April 1996
Supreme Court


Case number: Appeal (civil) 1187 of 1985






DATE OF JUDGMENT:       16/04/1996


CITATION:  JT 1996 (4)   231        1996 SCALE  (3)562



JUDGMENT:                          O R D E R      A common  question arises in this batch of appeals. For the sake  of convenience,  we may  refer to  the question in Civil Appeal  No.455 of  1987 directed  against a Full Bench judgment of  the Kerala  High  Court  [159  I.T.R.431].  The following question  was stated  by the  Income-Tax Appellate Tribunal under  Section 256(1) of the Income-tax Act for the consideration of the Kerala High Court:      (1) "Whether Rs. 76,777/- being the      surtax liability  is to  be allowed      as a  deduction  in  computing  the      total income  of the  assessee  for      the assessment year 1976-77?" The claim  for the  said deduction  was  disallowed  by  the Income Tax  Officer on  the basis  of and  with reference to sub-clause (ii}  of clause (a) of Section 40 which read thus at the  relevant time:      40. Notwithstanding anything to the      contrary in  Section 30  to 39, the      following  amounts   shall  not  be      deducted in  computing  the  income      chargeable under  the head ’profits      and   gains    of    business    or      profession-      (a) in the case of any assessee-           (i).......................           (ii) any  sum paid  on account           of any  rate of  tax levied on           the profits  or gains  of  any           business  or   profession   or           assessed at  a proportion  of,           or otherwise  on the  basis of           any such profits or gains."      On appeal, the Appellate Assistant Commissioner allowed the assessee’s  claim but on further appeal by the Revenues, the Tribunal  upheld the Revenues’ contention and disallowed



the claim  for deduction  on the basis of Section 40(a)(ii). The High  Court has affirmed the view taken by the Tribunal. The only  question before us is whether the tax levied under the Companies Profits (Surtax) Act, 1964 is "a tax levied on the profits  or gains  of  any  business  or  profession  or assessed at a proportion of or otherwise on the basis of any such profits or gains", as contemplated by the said      Section   40   opens   with   a   non-obstante   clause "notwithstanding anything  to the contrary in Sections 30 to 39", which  means that  even if  any amount  is entitled  to deduction under  any of the provisions contained in Sections 30 to  39, it  will be  disallowed if  it  falls  inter-alia within sub-clause  (ii) of  clause (a)  of Section  40.  The question, therefore,  is whether  the tax  levied under  the Companies  Profits  (Surtax)  Act,  1964  falls  within  the mischief of said sub-clause. We think it does.      The preamble  to the Surtax Act says that it is "an Act to impose  a surtax  on the  profits of  certain companies". Indeed, the statement of objects and reasons appended to the Bill makes  the said intention clear. It says "the object of this Bill  is to  impose a  special tax  on companies (other than those  which have  no share  capital) on  their  excess profits, namely,  the amount  by which the total income of a company as  reduced by  certain types  of income and certain sums and  the income-tax and super-tax payable by it exceeds a sum  of ten  per cent  of the capital reserves and certain borrowed moneys  or  a  sum  of  Rs.2  lakhs,  whichever  is higher..." Section  4  is  the  charging  Section.  It  says "subject to the provisions contained in this Act, there shall be  charged on every company for every assessment year commencing on  and from  the first day of April, 1964, a tax (in this  Act referred  to as  the surtax)  in respect of so much of  its chargeable  profits of  the  previous  year  or previous years,  as the case may be, as exceed the statutory deduction, at  the rate  or rates  specified  in  the  Third Schedule." The expression "chargeable profits" is defined in clause 5  of Section 2. It reads: "Chargeable profits" means the total  income of  an assessee computed under the Income- tax Act,  1961 for  any previous  year or years, as the case may be,  and adjusted  in accordance  with the provisions of the First  Schedule." It is thus clear beyond any doubt that the surtax  is levied  on the profits of a company, i.e., on the profits  above the  prescribed limit. The mere fact that the tax  is levied upon ’chargeable profits (which means the total income  of the  assessee computed under the Income-tax Act, 1961  adjusted in accordance with the provisions of the First Schedule)  does not mean that the tax is not levied on the profits  of business. In other words, the mere fact that the First  Schedule provides  for certain further deductions out of  the total  income computed  in accordance  with  the provisions of  the Income-tax  Act, 1961,  it Cannot be said that amount  on which  the surtax is levied ceases to be the profits of  the business.  For this reasons, it must be held that the  surtax levied  under the Surtax Act squarely falls within the  mischief of  sub-clause (ii)  of clause  (a}  of Section 40  and cannot  be  allowed  as  a  deduction  while computing the  business income  of the  assessee  under  the provisions of the  Income-tax Act.      The learned  counsel for  the assessee  sought to  rely upon Section  15 of  the Surtax  Act  in  support  of  their contention that surtax does not fall within the four corners of Section  40(a)(ii). Section 15 of the Surtax act reads as follows: "Notwithstanding  anything contained  in clause (i) of Section  109 of  the Income  tax Act,  in  computing  the distributable income  of  a  company  for  the  purposes  of



Chapter XI-D  of that Act, the surtax payable by the company for any  assessment year  shall be deductible from the total income of  the company assessable for that assessment year," A reading  of the  above provision makes it evident that its operation  is   confined   to   the   computation   of   the distributable income  of  a  company  for  the  purposes  of Chapter XI-D of the Income-tax Act. It cannot be extended to any other chapter or provision in the Act.      The learned  counsel for  the appellants  placed strong reliance upon  the decision  of this Court in Jaipuria Samla Amalgamated Collieries Ltd. v.. commissioner of  Income-Tax. West Bengal, (82 I.T.R. 580) to contend that a tax has to be computed in accordance with the provisions of Income-tax Act to fall  within the  mischief of Section 40(a)(ii). Inasmuch as the  surtax is  computed on  a basis  different from  the basis prescribed  in the Income-tax Act, it is contended, it cannot fall within the four corners of Section 40(a)(ii). It is not  possible to  agree with  this contention either. The said decision was rendered with reference to sub-section (4) of Section  10 of  the Indian  Income-tax  Act,  1922  which corresponds to  sub-clause (ii)  of clause (a) of Section 40 of the  present Act.  The question  therein was  whether the amount payable  as (i)  road and  public works  cess  levied under the  Bengal Cess Act, 1880 and (ii) the education cess levied under  the Bengal  (Rural) Primary Eduction Act, 1930 fall within  the mischief  of Section 10(4). This Court held that they  do not.  A perusal of the decision shows that the road and  public works cess was levied on immovable property to provide  for construction  and maintenance  of roads  and other works  of public  utility. Under  Section 5 of the Act (Bengal  Cess  Act,  1880)  all  immoveable  property,  with certain exceptions,  was subjected  to payment  of road cess and public  works cess.  Section 6  provided that  the  said cesses shall  be assessed  on the annual value of lands and, until provision  to the  contrary was made by Parliament, on the annual  net  profits  from  mines,  quarries,  tramways, railways and  other immovable property at such rates as were to be  determined in  the manner  prescribed. Similarly  the education cess  was also  levied under  Section  29  of  the Bengal (Rural)  Primary Education  Act, 1930,  on  immovable property   on which  the road  and public  works cesses were assessed. The  rate at  which the  education cess  was to be levied depended  upon the  character  of  the  property;  in respect of  miner and  quarries, it was leviable at the rate of three  and a  half pice  on  each  rupee  of  annual  net profits. It  is thus  abundantly  clear  that  the  levy  of aforesaid cesses  was upon  the immovable properties and not on profits.  It is  no doubt  true that the tax was measured with reference  to the  net profits  of decisions  but it is well-settled by a series of decisions of this Court that the measure by  which a  tax is  computed does not determine the character of  the tax  vide union  of India  vs. Bombay Tyre International.(A.I.R 1994 S.C.420) and Goodricke Tea Company v. State  of West  Bengal,(1995 (1)  suppl.S.C.C.707).It is, therefore idle  to contend  that the said decision helps the assessees’ case  in any manner. The cesses considered in the said decision were not taxes "levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise  on the  basis of  any such  profits or  gains" within  the   meaning  of  Section  40(a)(ii)  as  explained hereinabove. The  learned counsel,  however, relied upon the following observations  in the  said  decision:  "the  words "profits and  gains of any businesss profession or vocation" which are  employed in  section 10(4)  cans, in the context, have reference  only to profits or gains as determined under



section 10 and cannot cover the net profits or gains arrived at or  determined in  a manner  other than  that provided by section 10.  The whole  purpose of enacting  sub-section (4) of section  10 appears to be to exclude from the permissible deductions under  clause (ix)  and (xv)  of sub-section  (2) such cesss,  rate or  tax which  is levied on the profits or gains of any business, profession or vocation or is assessed at a proportion or on the basis of such profits or gains. In other words,  sub- section (4) was meant to exclude a tax or a cess  or rate  the assessment  of which  would follow  the determination or  assessment of  profits  or  gains  of  any business, profession  or vocation  in  accordance  with  the provisions of  section  10  of  the  Act....  These  profits arrived at  according to the provisions of the two Cess Acts can by  no stretch  of reasoning  be equated  to the profits which are  determined under section 10 of the Act. It is not possible to  see, therefore,  how  section  10(4)  could  be applicable at  all in the present case." The learned counsel pointed out  that  this  Court  has  in  the  said  decision approved the  decision of  the Privy Council in Commissioner of Income-tax  vs. Gurupada  Dutta, (14  I.T.R.100) and  has further observed  that the Parliament must be deemed to have accepted the view taken by the Privy Council by not changing the language  of the  relevant provision  in  the  1961  Act [Section 40(a)(ii)].      We are  unable to see as to how these observations help the assessees  herein. Firstly, it may be mentioned, Section 10(4) of  the 1922  Act or  Section 40(a)(ii) of the present Act do not contain any words indicating that the profits and gains spoken  of by  them should be determined in accordance with the  provisions of  the Income Tax Act. All they say is that it  must be  a rate  or tax  levied on  the profits and gains of  business or  profession. The  observations  relied upon must  be read  in the said context and not literally or as the  provisions in  a statute.  Bat so  for as  the issue herein is  concerned, even  this literal reading of the said observations does  not help the assessee. As we have pointed out hereinabove  the surtax  is essentially  levied  on  the business profits  of the company computed in accordance with the provisions of the Income-tax Act. Merely because certain further deductions  [adjustments] are provided by the Surtax Act from the said profits, it cannot be said that the surtax is not  levied upon  the profits  determined or  computed in accordance  with  the  provisions  of  the  Income-tax  Act. Section 4  of the  Surtax Act  read with  the definition  of "chargeable  profits"   and  the  First  Schedule  make  the position abundantly clear.      We may  mention that all the High Courts in the country except the  Gauhati High  Court have taken the view which we have taken  herein. Only  the Gauhati High Court has taken a contrary view  in the decisions in Makum Tea company [India] Limited  & Anr.V. Commissioner of Income Tax [178 I.T.R.453] and Doom Dooma Tea Company Limited V. Commissioner of Income Tax [180  I.T.R.126]. tax.  The decision of the Gauhati High Court in  Mukum Tea  Company [India] Limited is under appeal before us  in Civil  Appeal Nos.  3976-77 of 1995. Similarly Civil Appeal  No.3246  of  1995  is  preferred  against  the decision of the Gauhati High Court following the decision in Doom Dooma  Tea Company  Limited. (On enuiry, the office has informed that  no Special  Leave petition/Civil  Appeal  has been filed  against the  decision in  Doom Dooma Tea Company Limited.) For  the aforesaid  reasons, we can not agree with the view  taken by  the Gauhati  High Court in the aforesaid decisions.      We agree with view taken by the High Courts of Calcutta



(Molins [India]  Limited V. Commissioner of Income Tax, West Bengal-III [144  I.T.R.317]) and Brooke Bond [India] Limited V.  Commissioner  of  Income  Tax  [193  I.T.R.390),  Bombay (Lubrizol [India] Limited V. Commissioner of Income Tax [187 I.T.R. 25]  followed in  several  other  decisions  of  that Court), Karnataka  (Commissioner of Income Tax, Karnataka V. International Instruments  Private Limited  [144 I.T.R.936), Madras  (Sundaram  Industries  Limited  V.  Commissioner  of Income Tax  [159 I.T.R.646]),  Andhra Pradesh  (Vazir Sultan Tobacco Company  Limited V.  Commissioner of Income Tax [169 I.T.R.35]), Rajasthan  (Associated Stone  Industries Company Limited V.  Commissioner of  Income  Tax  [170  I.T.R.653]), Gujarat (S.L.M.Maniklal  Industries Limited  V. Commissioner of Income  Tax [172  I.T.R.176] followed  in  several  cases thereafter),  Allahabad   (Himalyan  Drug   Company  Private Limited V.  Commissioner of Income  Tax [218 I.T.R.346]) and Punjab Haryana  High Court (Hiqhway Cycle Industries Limited V. Commissioner of Income Tax [178 I.T.R.601])      Accordingly, the appeals preferred by the assessees are dismissed with costs assessed at Rupees two thousand in each appeal, while  the two  appeals preferred by the Revenue are allowed with costs of Rupees two thousand in each appeal.      Before parting with this case, it may be mentioned that when this batch of appeals was posted before us, it included an appeal preferred against a judgment of the Andhra Pradesh High  Court  rendered  by  a  Bench  comprising  one  of  us (B.P.Jeevan Reddy,J.).  The said decision merely followed an early decision  of that  Court. Accordingly with the consent of the  counsel for the parties, the said appeal was deleted from the  batch and the remaining appeals in the batch taken up for hearing.