1996 (4) TMI 2 - SC - Income Tax

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 sub-clause - Held that the surtax levied falls within the mischief of section 40(a) (ii) & cannot be allowed as a deduction while computing the business income of the assessee under the provisions of the Income-tax Act

Summary

Issues:
1. Deductibility of surtax liability in computing total income for assessment year 1976-77 under section 40(a)(ii) of the Income-tax Act, 1961.

Detailed Analysis:
The judgment revolves around the interpretation of section 40(a)(ii) of the Income-tax Act, 1961, specifically concerning the deductibility of surtax liability in computing the total income for the assessment year 1976-77. The Income-tax Appellate Tribunal raised the question of whether the surtax liability of Rs. 76,777 should be allowed as a deduction. The Income-tax Officer disallowed the deduction based on section 40(a)(ii), which restricts certain amounts from being deducted in computing income under the head 'Profits and gains of business or profession'. The Appellate Assistant Commissioner allowed the deduction, but the Tribunal, upheld by the High Court, disallowed it, leading to the appeal before the Supreme Court.

The primary issue before the Supreme Court was to determine whether the tax levied under the Companies Profits (Surtax) Act, 1964, falls within the scope of section 40(a)(ii) of the Income-tax Act. Section 40 contains a non-obstante clause, indicating that deductions allowed under other sections may still be disallowed under section 40. The Court analyzed the nature of surtax under the Surtax Act, emphasizing that it is imposed on the profits of companies above a certain threshold. The Court held that the surtax is indeed a tax levied on the profits of a business and falls within the purview of section 40(a)(ii), thereby disallowing its deduction in computing business income.

The Court also addressed the argument raised by the assessees regarding the computation of surtax under a different basis compared to the Income-tax Act. Drawing on precedents and legislative intent, the Court rejected this argument, emphasizing that the surtax is essentially levied on business profits computed in accordance with the provisions of the Income-tax Act. The Court highlighted that the measure by which a tax is computed does not alter its character, especially when it is imposed on the profits of a business.

Furthermore, the judgment discussed the conflicting views of High Courts on this matter. While most High Courts aligned with the interpretation adopted by the Supreme Court, the Gauhati High Court held a contrary view. The Supreme Court dismissed the Gauhati High Court's interpretation and upheld the consistent view taken by other High Courts, emphasizing the uniformity in judicial decisions across different jurisdictions.

In conclusion, the Supreme Court dismissed the appeals by the assessees and allowed the appeals by the Revenue, affirming that the surtax liability cannot be deducted while computing business income under the Income-tax Act. The Court provided a detailed analysis of the legislative provisions, precedents, and the nature of surtax to support its decision, ensuring consistency with the interpretation adopted by other High Courts.