1988 (3) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Whether surtax is deductible while computing business income.
2. Whether surtax is an expenditure laid out wholly and exclusively for the purpose of business u/s 37 of the Income-tax Act.
3. Whether surtax is a tax levied on profits or gains of business within the meaning of section 40(a)(ii) of the Income-tax Act.

Summary:

Issue 1: Deductibility of Surtax While Computing Business Income
The Tribunal held that surtax is not deductible while computing business income. The assessee, a public limited company, claimed deduction of surtax paid from its total income. The Appellate Assistant Commissioner and the Tribunal, following the decision in Amar Dye Chemicals Ltd. v. Income-tax Officer, confirmed that surtax is not deductible.

Issue 2: Surtax as Business Expenditure u/s 37
The assessee contended that surtax is an expenditure laid out wholly and exclusively for the purpose of the business and should be deductible u/s 37 of the Income-tax Act. However, the court held that surtax is levied on the income of the assessee and is not an expenditure incurred for the purpose of earning profits. It is an application of income after it is earned and not an expenditure incurred in the course of business. Therefore, surtax is not deductible u/s 37.

Issue 3: Surtax as a Tax on Profits or Gains u/s 40(a)(ii)
Since the court determined that surtax is not an allowable deduction u/s 37, the question of whether it falls within the mischief of section 40(a)(ii) does not arise. The court emphasized that surtax, like income-tax, is a tax on the total income computed under the Income-tax Act and is not deductible before arriving at the profits.

Conclusion:
The court answered the questions in the affirmative and against the assessee, aligning with the views of the Calcutta, Karnataka, Kerala, and Madras High Courts. The reference was answered accordingly with no order as to costs.