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TMI Blog1986 (1) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... his deduction by an additional ground was raise before the Appellate Assistant Commissioner who negatived the claim on the ground that the surtax paid was not expenditure incidental to the carrying on of the business. The matter was taken to the Tribunal. A similar question was already before the Tribunal in an appeal filed by Messrs. Industrial Chemicals Ltd., Madras. The Tribunal had already taken the view in the case of Messrs. Industrial Chemicals Limited that the liability to pay tax becomes an allowable deduction only if the payment is made for the purpose of the business and if the expenditure is laid out by the assessee as owner-cum-trader and if it is really incidental to the carrying on of the business. It was found that the surtax was in a sense a surcharge levied on the assessee in addition to the income-tax paid by the assessee and computed in accordance with the formula laid down in the Act and surcharge was also a tax on the chargeable profits, the basis of which is the total income as worked out for income-tax purposes. Applying the ratio of the decision of the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, the Tribunal took the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avy reliance has been placed before us on the decision of the Supreme Court in Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735, in which it was held that the wealth-tax paid by the assessee which was a trading company on assets held by it for the purpose of its business was deductible as a business expense in computing the assessee's income from business. Some decisions were cited by way of illustration to indicate that taxes paid are permissible deductions under section 37 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). In that context, reference was made to the decision in Jaipuria Samla Amalga mated Collieries Ltd. v. CIT [1971] 82 ITR 580 (SC), Dehra Dun Tea Co. Ltd. v. CIT [1973] 88 ITR 197 (SC) and Mitsui Steamship Co. Ltd. v. CIT [1975] 99 ITR 7 (SC). In the case of Jaipuria Samla Amalgamated Collie- ries Ltd., the question was whether the cess paid under the Bengal Cess Act, 1880, and education cess under the Bengal (Rural) Primary Education Act, 1930, in relation to the coal mines which the assessee company had taken on lease was deductible or whether such deduction was prohibited under section 10(4) of the Indian Income-tax Act, 1922. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sui Steamship Company's case [1975] 99 ITR 7 (SC), where the assessee which was a Japanese shipping company had to pay municipal property tax on their vessels which was held to be allowable as a deduction under section 10(2)(xv) of the Income-tax Act, 1922. The substantial argument of the learned counsel for the assessee in this case is that if payment of tax is to be treated as incidental to the business, then by the very terms of section 37 of the Income-tax Act, 1961, the expenditure so incurred must be treated as wholly and exclusively for the purpose of business. In pointing out the meaning of the word " incidental ", the learned counsel has referred us to the observations of Griffith C.J. in Moffatt v. Webb [1913] 16 CLR 120, which had been cited with approval by the Supreme Court in the Indian Aluminium Company Ltd.'s case [1972] 84 ITR 735. The observations are as follows (p. 743): "The possession of land is necessarily incidental to carrying on the business of a grazier; the payment of land tax is a necessary consequence of the possession of land of taxable value, whether the land is freehold or leasehold; the payment of land tax is therefore a ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. International Instruments P. Ltd. [1983] 144 ITR 936 (Kar). The Division Bench of the Karnataka High Court held that the surtax levied on the chargeable profits under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the " Surtax Act ") was nothing but an additional tax on the profits and gains of an assessee's business and since surtax was a charge on the profits and gains of the business of companies, the company was not entitled to claim deduction of surtax payable by it in computing its total income under the Income-tax Act. This decision does not refer to the decision of the Calcutta High Court and the conclusions have been independently arrived at. Mr. Subramaniam who appeared in the other tax case has adopted the arguments of Mr. Swaminathan on the question whether the surtax liability was deductible under section 37 of the Act but submitted with regard to the construction of section 40(a)(ii) of the Act that the word " tax " is defined in section 2(43) and it must have the same meaning in section 40(a)(ii). According to him, since " tax " as defined in section 2(43) of the Act, in so far as the year of assessment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes of earning profits and not for the purposes of paying income-tax and though the earning of profits and the payment of taxes are not isolated and independent activities of a business, yet the expenditure incurred or laid out for the purpose of the payment of income-tax would not fall within the scope of the expression for the purpose of the business ". With reference to the definition of " tax " in section 2(43), it was contended that the definition section commences with the usual phraseology " unless the context otherwise requires ". Thus, according to the learned counsel for the Revenue, the term " tax " must be given a wide meaning and should not be restricted to mean only " income-tax ". It is now an accepted principle in the matter of construction of an Indian statute that as far as possible, there must be uniformity of construction and if the provisions of law which fall for consideration before the court have already been construed by another High Court or High Courts, unless there are compelling reasons to depart from that view, normally that construction should be accepted. Therefore, before we consider the arguments el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to meet such taxes cannot be deducted. But, where the tax was levied, as it was in Harrods' case ([1964] 41 TC 450 (CA)], on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits." At page 338, the Calcutta High Court dealt with the argument advanced on behalf of the assessee that the earning of profit and payment of taxes are not isolated and independent activities and those activities are continuous and take place from year to year and since the liability to pay income-tax and surtax arises because a person is carrying on the business by which he earns profits, the liability to pay the tax is an incidence of carrying on of the business through which he earns profits. Negativing this argument, the Calcutta High Court observed as follows (at page 338 of 144 ITR): The question in this case is whether a tax imposed on the profits of a company is allowable as deduction in computing the total income of the company. The subject-matter of the tax is profits. Whatever profits the company has made are b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International Instruments P. Ltd. [1983] 144 ITR 936, also takes a similar view. The Karnataka High Court referred to the observations of the Privy Council in Ashton Gas Co. v. Attorney-General [1906] AC 10 (HL) (at p. 12), which were as follows (p. 940): "The income-tax is a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax-you have no right to deduct the income-tax before you ascertain what the profit is. " After referring to the provisions of the Surtax Act, the Division Bench of the Karnataka High Court observed as follows (p. 941): "It is thus seen from the above provisions that the surtax levied on the chargeable profits under the Surtax Act is nothing but an additional tax on the profits and gains of the assessee's business. The total income computed under the I.T. Act undergoes a further process of computation under the Surtax Act to arrive at the chargeable profits, but, none the less, the surtax remains ultimately a charge on the profits and gains of the companies." Though the argument with regard to the provisions of section 40(a)(ii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he First Schedule, a procedure is laid down for computing the chargeable profits. Adjustments as indicated in the First Schedule are to be made but those adjustments are to be made in " the total income computed for that year under the Income-tax Act ". Rule I refers to certain exclusions. Rule 2, which operates after rule I is given effect to, deals with certain further deductions. Under rule 3, the net amount of income calculated in accordance with rule 2 has to be increased as indicated therein. It is, therefore, clear that the Act is expressly intended to impose a special tax on the profits of certain companies and chargeable profits for the purpose of surtax have to be determined primarily with reference to the total income of the assessee-company computed under the Income-tax Act, 1961. It is difficult to see why the surtax cannot be considered as an additional tax imposed on the subject-matter of the charge which is to be computed taking the total income of an assessee computed under the Income-tax Act, 1961, as the basis. Undoubtedly, the liability to pay tax arises on the determination of the profits in accordance with the provisions of the Income-tax Act. When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion " in section 10(2)(xv) of the Indian Income-tax Act, 1922, is identical to the phraseology used in section 37 of the Income-tax Act, 1961. This phraseology was originally considered by the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964) 53 ITR 140 (SC). Undoubtedly, in that decision, the Supreme Court observed that the expression "for the purpose of the business " is wider in scope than the expression " for the purpose of earning profits At page 150 of that decision, the observations are as follows : "The aforesaid discussion leads to the following result The expression for the purpose of the business 'is wider in scope than the expression for the purpose of earning profits'. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether wealth-tax in respect of property which constituted the assets of the business was paid as owner or as trader and it is in that context the observations of Griffith C.J. in Moffatt v. Webb [1913] 16 CLR 120, on which reliance has been placed, were referred to by the Supreme Court. The land in respect of which tax was paid in Moffatt v. Webb [1913] 16 CLR 120, was the land which was put to use for the purpose of business as a grazier. Indeed, that was the sole use as will appear from the observations of Barten J., which are reproduced by the Supreme Court at page 743. They are as follows: "...... the sole use to which the appellant puts the land is for the purposes of his business as a grazier. He needs a large area of land for that purpose, and this area of about 18,000 acres is applied to his business needs. It seems too much altogether to say that he would have to pay the federal tax on this land if he did not carry on the grazing business. Somebody would be taxed, no doubt, but would it be the appellant? It cannot be predicated that he would own the land at all if he carried on any other business. It is scarcely an inference from the case to say that he holds the land si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o have been laid out by him as a trader and as incidental to his business." It appears to us that these observations have to be read as indicating that the payment became incidental to the business because the tax was paid as owner-cum-trader in respect of the assets of the business. These observations, cannot be read, in our view, with respect, as meaning that surtax required to be paid only after determination of profits will be a payment incidental to the business. This aspect is highlighted in the judgment of Beg J., as he then was, in which the learned judge observed as follows (p. 749 of 84 ITR): "The Court of Appeal quoted passages from the opinions of the law Lords in Rushden Heel Co.'s case [1948] 30 TC 298 (HL) and Smith's Potato Estate's case [1948] 30 TC 267 (HL) to show that the ratio decidendi of these two decisions confined the principle applied there to cases where taxes, like the income-tax and excess profits tax, had to be paid upon and after a calculation of profits and did not extend to other cases. In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of raising coal from coal mines and selling it. He had paid road and public works cess under the local State Cess Act as well as education cess under the local State Cess Act in relation to the coal mines which had been taken on lease. The cess was leviable under the respective statutes on the annual net profits which had to be calculated on the average of the annual net profits for the last three years for which accounts had been made up. The question was whether the deduction of these payments was prohibited by section 10(4) of the Indian Income-tax Act, 1922. In that context, the Supreme Court held that the profits arrived at according to the provisions of the two local statutes could not be equated to the profits which were determined under section 10 of the Act and, therefore, section 10(4) was not attracted; and the cesses paid by the assessee were allowable as deductions in computing its business profits. The Supreme Court construed the words " profits and gains of any business, profession or vocation " in section 10(4) as having reference only to profits or gains as determined under section 10 and cannot cover the net profits or gains arrived at or determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Income-tax (Amendment) Act, 1972, made wealth-tax also non-deductible by adding a new clause after clause (a) in section 40 as follows: "(iia) any sum paid on account of wealth-tax ......... (" Explanation is not relevant for our purpose). This amendment has given rise to an argument that where the Legislature contemplated that certain taxes should not be deducted for the purpose of computation of total income, which has been specifically so enacted, and since reference is made only to wealth-tax, the other taxes, if any, must necessarily be considered as deductible. The argument cannot be accepted because we have to construe section 40(a) and its clauses harmoniously and if in view of the general provision in section 40(a)(ii) it would not be permissible to allow surtax to be deducted, merely because wealth-tax alone is mentioned by an amendment, the scope of the general provision in section 40(a)(ii) cannot in any way be restricted. Having considered the arguments of the learned counsel for both the assessees, we must, therefore, hold that the amount of surtax paid or payable by the assessee-company was not deductible under section 37 and further that section 40(a)( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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