1987 (1) TMI 32 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of surtax payable under the Companies (Profits) Surtax Act, 1964, as business expenditure u/s 37 of the Income-tax Act, 1961.

Judgment Details:
- The judgment was delivered by M. N. Rao J. based on a reference made by the Income-tax Appellate Tribunal, Hyderabad, u/s 256(1) of the Income-tax Act, 1961.
- The question referred was whether the assessee is entitled to deduction of surtax payable under the Companies (Profits) Surtax Act, 1964, as business expenditure u/s 37 of the Income-tax Act, 1961, or as expenditure incidental to the carrying on of the business deductible u/s 28 of the Income-tax Act.

Contentions Raised:
1. The profits received by the assessee could not be treated as income due to the doctrine of overriding title.
2. The surtax paid constitutes expenditure incidental to business and should be deductible u/s 37(1) of the Income-tax Act.

Arguments Presented:
- The Revenue contended that the surtax paid cannot be deducted as it falls within the ambit of section 40(a)(ii) of the Income-tax Act.
- The doctrine of overriding title in favor of the State was deemed untenable as the liability to pay surtax arises only after the computation of total income under the Income-tax Act.

Legal Analysis:
- The Companies (Profits) Surtax Act, 1964, imposes a special tax on the profits of certain companies, with chargeable profits being determined based on the total income of the assessee under the Income-tax Act.
- Section 40(a)(ii) of the Income-tax Act excludes any sum paid on account of any rate or tax levied on the profits or gains of any business or profession, which includes surtax paid.
- The doctrine of overriding title does not apply as the liability to pay surtax arises after the computation of total income under the Income-tax Act.

Precedent and Decision:
- The Calcutta High Court and Karnataka High Court held that surtax is not diverted to the State by an overriding title and cannot be deducted as business expenditure.
- Following the decisions, the High Court ruled in favor of the Revenue, stating that the surtax paid cannot be deducted as business expenditure.