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TMI Blog1990 (7) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... x (Appeals) holding that the ground relating to levy of interest under section 215 was not appealable under section 246 of the Income-tax Act, 1961 ?" It may, at the outset, be mentioned that question No. (i) as framed by the Tribunal requires reframing, inasmuch as it does not bring out the real controversy between the parties. The controversy is whether the expenditure incurred on repairs of the flats owned by the assessee or taken on lease which are used for the residence of its employees is to be considered for disallowance under section 40A(5) of the Income-tax Act, 1961. It is not really material whether such an expenditure amounts to a perquisite in the hands of the employees. In the circumstances, question No. (i) is reframed as under: "Whether the expenditure incurred on repairs of the assessee's own flats and the flats taken by it on lease and used by its employees for residence is to be considered for disallowance under section 40A(5) of the Income-tax Act, 1961 ?" It is common ground that the expenditure incurred herein amounted to Rs. 11,960 (Rs. 5,500 on the repairs of the flats owned and Rs. 6,400 on the flats taken by the assessee on lease). These flats are ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-clause evidently has two parts. The first part applies only if the expenditure results in any perquisite to the employee. But we are not concerned with that part in this case. The second part so far as it is relevant for the case applies to a case where the assessee incurs any expenditure in respect of any of its assets used by an employee for his own purposes or benefit. Admittedly, the assessee has incurred expenditure on repairs in respect of certain flats owned or taken by it on lease. Admittedly again, these flats are used by the employees of the assessee for residence. Under these circumstances, on the basis of a plain construction of tile provision, the expenditure incurred herein by the assessee is covered and hit by the provisions of the second part of section 40A(5)(a)(ii) of the Act. We are fortified in this view, of ours by a Full Bench decision of the Kerala High Court in the case of CIT v. Forbes, Ewart and Figgis (P.) Ltd. [1982] 138 ITR 1. It was held in that case that there can be no scope for any ambiguity in regard to the meaning of the corresponding provision as it stands in section 40A(5). That provision contemplates the disallowance of a deduction in exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . . (iii) any expenditure incurred after the 29th day of February, 1964, which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the company in respect of any obligation which but for such payment would have been payable by such employee), to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee for any period of his employment after the aforesaid date: Provided ......" The second part of the provision in section 40A(5)(a)(ii) is conspicuously absent in section 40(c)(iii). It is true that the Andhra Pradesh High Court considered the provisions of section 40A(5) in its decision in CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 173 ITR 290 and took the view that counsel for the assessee is persuading us to take. However, beyond following its earlier decision in CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 324 which was on the provisions of section 40(c)(iii), there is no discussion as to why the same view was required to be taken despite the fact that the two provisions were materially different. The question befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds were untenable. In order to appreciate the rival contentions, it is desirable to refer to the nature of the Surtax Act. It is a Central Act being Act No. VII of 1964. The preamble states that it is an Act to impose a special tax on the profits of certain companies. The charge under section 4 is on the chargeable profits as defined in section 2 (5) which is the total income of an assessee computed under the Act for any previous year or years subject to adjustments contemplated by the provisions of the First Schedule. In other words, the basis is the total income for the purpose of income-tax and the adjustments to be made to such profits by applying the First Schedule mostly show that certain items of income or figures computed-for the purpose of income-tax under the different heads are either excluded or deducted and certain items of expenditure which had been allowed in income-tax are to be added back. The charge under section 4 again is not on the entire chargeable profits but only on so much thereof as exceeds the statutory deduction, the statutory deduction being, according to the definition in section 2(8), an amount equal to 10 per cent. of the capital of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of owner-cum-trader, it must be treated as having been laid out as a trader. Be that as it may, the test in the present case will continue to be whether surtax is payable by the assessee as a person carrying on business or as a person who has earned profits from business beyond a particular limit. The answer is obvious. Surtax is payable by him not merely for his carrying on the business but on the further condition of his having profits beyond a limit. This is also the view taken by a Full Bench of the Kerala High Court in the case of A. V. Thomas and Co. Ltd. v. CIT [1986] 159 ITR 431, where it was observed as under (headnote) : "Surtax which is levied on excess chargeable profits is a levy on the total income computed under the Income-tax Act after it is adjusted in accordance with the machinery provided for it under the Surtax Act. In the nature of this tax, it is a levy on the basis of the profits or gains of the business. It is an application of the profits or gains of the business after they have been earned. Like in the case of income-tax or super-tax, so in the case of surtax, any sum paid on account of such levy is not an expenditure laid out or expended for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of deduction. Accordingly, we hold that surtax is not allowable as deduction under section 37 of the Act. In the view we have taken on the first aspect of the question, strictly speaking, it is not necessary to consider further whether allowability of surtax is also hit by the provisions of section 40A(ii). Since the matter was argued at length, we will consider that aspect also. As stated by us in paragraph 10 (see page 32) of the judgment, surtax is a charge on the chargeable profits of certain companies. Chargeable profits are computed on the basis of the total income computed for income-tax purposes subject to adjustments provided in the First Schedule. There again, the charge is not on the whole of chargeable profits so computed. The charge is on so much of the chargeable profits as exceeds the statutory deductions, i.e., 10 per cent. of the capital of the assessee-company computed in the manner laid down in the Second Schedule. On a consideration of the provisions for adjustment prescribed in the 12 clauses of the First Schedule, it becomes clear that, as a result of adjustments, the chargeable profits are nothing but profits of a business as commercially understood re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits or gains of the business, inasmuch as it was chargeable on the basis of chargeable profits and not on the profits or gains of the business. In our view, this argument overlooks the material fact that for determination of chargeable profits, the total income of an assessee computed under the Income-tax Act is the starting point. The mere fact that the total income is subjected to certain adjustments contemplated in the First Schedule to the Surtax Act does not mean that surtax ceases to be a tax levied at least on portion of profits and gains of the business. The basic character of the income does not undergo any change just because while computing the chargeable profits, the total income is subjected to certain adjustments. In this view of ours, we are fortified by a decision of the Rajasthan High Court in Associated Stone Industries (Kota) Ltd. v. CIT [1988] 170 ITR 653, a Full Bench decision of the Kerala-High Court in the case of A. V. Thomas and Co. Ltd. v. CIT [1986] 159 ITR 431 and the Madras High Court decision in the case of Sundaram Industries Ltd. v. CIT [1986] 159 ITR 646. Accordingly, we answer the second question in the negative and in favour of the Revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is liability to pay such interest on the ground that he is not liable to pay advance tax at all or that the amount of advance tax determined as payable by the Income-tax Officer is not correct. In the instant case before us, there is no doubt that the assessee had preferred an appeal to the Appellate Assistant Commissioner in which the principal ground of attack against the charge of penal interest levied against it was that the assessee-company being a non-resident company was not liable to be assessed to advance tax all inasmuch as its income was under one or the other head falling under section 18 of the Act and was outside the purview of section 18A of the Act. In other words, it was a clear case of an assessee 'denying its liability to be assessed under this Act' and as such the appeal to the Appellate Assistant Commissioner was competent under section 30(1) of the 1922 Act." Following the observations made by the Full Bench in that case at page 980, quoted in the judgment, this court held in the case of CIT v. B. V. Sabunani [1989] 177 ITR 56 that even when the liability to be assessed to advance tax was challenged or to some extent disputed or denied, an appeal against lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, it appears to us that where the liability to pay interest is being denied as such, such an appeal would be covered by the first limb being an order in which the assessee, being a person by whom interest is payable, is denying his liability to the payability of that interest. But where such liability to pay interest as such is not being denied, but only the imposition is being challenged either being excessive or not being made in regular course, such appeals, in our opinion, are not covered by the first limb being orders in respect of which the assessee can be said to be denying his liability to the payability of interest under the Act." We are not able to appreciate how this decision lays down anything different from what is laid down by the Full Bench of our court. The fact that a special leave petition filed against the Calcutta High Court decision was rejected by the Supreme Court naturally does not make any difference in the situation. The Supreme Court has, of course, held in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 that the levy of interest under section 215 is a part of the process of assessment. It is significant to note that the question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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