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Judgment
M.B. Shah, J.—The Income Tax Appellate Tribunal has referred the following question for our opinion u/s 18 of the Companies (Profits)
Surtax Act, 1964, read with section 256(1) of the Income Tax Act, 1961 :
Whether, on the facts and in the circumstances of the case and scheme of the Surtax Act, the Tribunal was justified in law in rejecting the claim of
the appellant for deduction of interest charged u/s 217(1A) and section 139(8) of the Income Tax Act, 1961, as part of ''income tax in computing
net chargeable profits'' ?
The aforesaid question arises in the background of the fact that for the assessment year 1979-80, the assessee (Kashiram Textile Mills Private
Limited), inter alia, claimed that in computing chargeable profits under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as ""the
Surtax Act""), deduction of interest payable u/s 217(1A) and section 139 of the Income Tax Act should be reduced as provided under rule 2 of the
First Schedule to the Surtax Act. The assessee contended that as per rule 2, the amount of Income Tax is required to be reduced and the amount
of Income Tax would include interest payable by the assessee on the same tax, as it was part of the tax or was in the nature of compensation for
delay in payment of the tax. That claim was rejected by the Income Tax Officer and in appeal by the Commissioner of Income Tax (Appeals). The
Tribunal confirmed the said decision and at the instance of the assessee the aforesaid question is referred.
For appreciating the contentions, it is necessary to refer to rule 2 of the Rules for computing chargeable profits as provided in the First Schedule
to the Surtax Act, as under :
The balance of the total income arrived at after making the exclusions mentioned in rule 1 shall be reduced by -
(i) the amount of Income Tax payable by the company in respect of its total income under the provisions of the Income Tax Act after making
allowance for any relief, rebate or deduction in respect of Income Tax to which the company may be entitled under the provisions of the said Act
or the annual Finance Act, and after excluding from such amount -
(a) the amount of Income Tax, if any, payable, by the company in respect of any income referred to in clause (i) or clause (ii) or clause (iii) or
clause (viii) of rule 1 included in the total income;
(b) the amount of Income Tax, if any, payable by the company under the provisions of the annual Finance Act with reference to the relevant
amount of distributions of dividends by it.
Explanation. - In this sub-clause, the expression ''the relevant amount of distributions of dividends'' has the meaning assigned to it in the Finance
Act of the relevant year;
(c) the amount of Income Tax, if any, payable by the company u/s 104 of the Income Tax Act.
Explanation. - In relation to the assessment year commencing on the 1st day of April, 1964, the reference in this sub-clause to ''income tax'' shall
be construed as a reference to ''supertax''. . . .
Considering the rule as it is and its unambiguous language, in our view, there is no substance in the contentions raised by the assessee that the
phrase ""the amount of Income Tax payable by the company in respect of its total income"" would include interest payable by him on its delayed
payment either u/s 217(1A) or section 139 of the Income Tax Act.
Further, even if we consider this phrase in the context of the Scheme of the Act and the Rules for computing the chargeable profits, in our view,
the result would be the same. Section 4 of the Surtax Act provides that, subject to the provisions of the Act, on every company a tax in respect of
so much of its chargeable profits of the previous year as exceed the statutory deduction shall be charged at the rates specified in the Third
Schedule. In view of the aforesaid section, surtax is to be charged on the chargeable profits. The phrase ""chargeable profits"" is defined u/s 2(5) of
the Surtax Act to mean that the total income of an assessee computed under the Income Tax Act, 1961, for any previous year and adjusted in
accordance with the provisions of the First Schedule. The First Schedule provides rules for computing the chargeable profits and it provides that in
computing the chargeable profits of a previous year, the total income computed for that year under the Income Tax Act shall be adjusted as
provided in rules 1, 2 and 3. Rule 1 provides for exclusion from the total income of specified income which is component part of the total income
with which we are not concerned in the present reference. Rule 2 provides that the balance of the total income arrived at after making the
exclusions mentioned in rule 1 shall be reduced, inter alia, by the amount of Income Tax payable by the company in respect of its total income
under the provisions of the Income Tax Act after making allowances for any relief, rebate or deduction in respect of Income Tax to which the
company may be entitled under the provisions of the said Act and after excluding from such amount, the amount of Income Tax as mentioned in
clauses (a), (b) and (c) of sub-rule (1) of rule 2. Rule 3 of the First Schedule provides for increasing the net amount of income calculated in
accordance with rule 2 upon the expenditure mentioned therein to the extent such expenditure, in the opinion of the Assessing Officer, is excessive
having regard to the circumstances of the case. So, from the aforesaid scheme of the First Schedule, it appears that it extensively provides for
adjustment of total income calculated under the Income tax Act for determining the amount which is exigible to tax for the purpose of charging
surtax. Rule 1 provides for exclusion; rule 2 provides for reduction and rule 3 provides for increase by the disallowable expenditure. These rules
are exhaustive which specifically provide the amounts mentioned therein for its exclusion or inclusion. In this context, if rule 2 is read, it is apparent
that it provides for reduction of an amount of Income Tax payable by the company in respect of its total income under the provisions of the Income
Tax Act after excluding the Income Tax payable by it on the income as mentioned in clauses (a), (b) and (c) of rule 2. It is not provided that
Income Tax payable by the company should be increased by the amount of interest payable by it on the Income Tax. Hence, it would be difficult
to accept the contention of learned counsel for the assessee that the amount of Income Tax payable by the company would include the amount of
interest payable by the company for the late payment of Income Tax. The phrase ""amount of income tax"" is clear and unambiguous.
It is true that the word ""tax"" is not defined under the Surtax Act. However, sub-section (9) of section 2 of the Surtax Act provides that all other
words and expressions used in the Act but not defined and defined in the Income Tax Act shall have the meanings respectively assigned to them in
the Income Tax Act. Clause (43) of section 2 of the Income Tax Act defines ""tax"", inter alia, to mean Income Tax chargeable under the provisions
of the Act. Section 4 provides that Income Tax shall be charged for any assessment year at any rate or rates in respect of the total income as
provided by the Central enactment for the concerned previous year. A Similarly, section 2(28A) of the Income Tax Act, inter alia, defines the
word ""interest"" to mean interest payable in any manner in respect of any moneys borrowed or debt incurred. From these definitions, it is apparent
that the amount of ""income tax"" and the amount of ""interest"" would be two different concepts. Hence also it would be difficult to hold that the
amount of Income Tax would include the amount of interest payable by the assessee for delay in discharging the liability incurred to pay Income
Tax.
Learned counsel for the assessee submitted that in view of sub-section (8) of section 139 of the Income Tax Act, the interest payable u/s 139(8)
would be a component part of the tax. In our view, this submission is without any substance because sub-section (8) of section 139 specifically
provides that where the return under sub-section (1) or sub-section (2) or sub-section (4) for an assessment year is furnished after the specified
date, or is not furnished, then the assessee shall be liable to pay simple interest at 12 per cent. per annum, reckoned from the day immediately
following the specified date to the date of the furnishing of the return, or, where no return has been furnished, the date of completion of the
assessment u/s 144, on the amount of the tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if
any, paid, and any tax deducted at source. This, in our view, would indicate that the concept of tax is totally different from the concept of interest.
Further, under the proviso to the said sub-section, interest in such cases and under such circumstances can be waived by the Income Tax Officer.
For the Income Tax payable by the assessee there is no question of waiver. Similarly, u/s 156 of the Income Tax Act, it has been specifically
provided that for non-payment of tax, interest, penalty or any other sum which is payable in consequence of any order passed under the Income
Tax Act, the Income Tax Officer shall serve upon the assessee a notice of demand specifying the sum so payable. This would also mean that the
concept of tax, interest on it, penalty, fine is different and it cannot be said that interest is a component part of tax. Similarly, u/s 217(1A) of the
Income Tax Act also, the concept of Income Tax and interest is quite different. Merely because the Income Tax Officer is required to determine
the amount by calculation as provided u/s 217 at the time of making regular assessment, it would not mean that the interest recoverable for the
delayed payment of tax as provided in the said section would be a component part of the Income Tax.
For advancing his contention, learned counsel for the assessee referred to the decision of the Supreme Court in the case of C.A. Abraham,
Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, and submitted that in the aforesaid case, the Supreme Court had
rejected the contention that a proceeding for imposition of penalty and a proceeding for assessment of Income Tax are matters distinct, and section
44 may be resorted to for assessing tax due and payable by a firm business whereof has been discontinued, but an order imposing penalty u/s 28
of the Act cannot by virtue of section 44 be passed. Rejecting the said contention, the court had, inter alia, observed that by section 28, the liability
to pay ""additional tax"" which is designated penalty is imposed in view of the dishonest contumacious conduct of the assessee. It is true that this
liability rises only if the Income Tax Officer is satisfied about the existence of the conditions which give him jurisdiction and the quantum thereof
depends upon the circumstances of the case. The penalty is not uniform and its imposition depends upon the exercise of discretion by the taxing
authorities; but it is imposed as a part of the machinery for assessment of tax liability. In our view, it is not possible to accept the contention raised
by learned counsel for the assessee that because the Supreme Court has used the phrase ""additional tax"" for penalty, the penalty would be a
component part of the Income Tax. Nowhere in the said case this question is considered by the Supreme Court. The court was dealing with the
contention whether penalty can be imposed on a firm after dissolution and proceedings for imposing penalty u/s 28 of the Indian Income Tax Act,
1922, can be continued against such a firm.
The aforesaid phrase used in the case of C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, is clarified
by the Supreme Court in the case of Commissioner of Income Tax, Andhra Pradesh Vs. Bhikaji Dadabhai and Co., wherein it is observed (at
page 128) :
This court regarded penalty as an additional tax imposed upon a person in view of his dishonest or contumacious conduct. It is true that under the
Hyderabad Income Tax Act, distinct provisions are made for recovery of tax due and penalty, but that in our judgment does not alter the true
character of penalty imposed under the two Acts.
The observations in the case of C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, were further
explained by the Supreme Court in the case of Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, wherein the court has
held as under (at page 700) :
It is significant that in C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, this court was not called upon to
determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional
tax were made in a different context and for a different purpose.
Lastly, learned counsel, Mr. Kaji, relied upon the decision of the Supreme Court in the case of Mahalaxmi Sugar Mills Co. Vs. Commissioner
of Income Tax , Delhi, wherein the court was required to deal with the question whether the interest paid on arrears of cess u/s 3(3) of the U. P.
Sugarcane Cess Act, 1956, is a permissible deduction u/s 10(2) (xv) of the Indian Income Tax Act, 1922. In the context of section 3(3) of the U.
P. Sugarcane Cess Act, 1956, the court observed that interest payable on arrears of cess u/s 3(3) is in reality part and parcel of the liability to pay
cess. It is an accretion to the cess. The arrear of cess carries interest. If the cess is not paid within the prescribed period, a larger sum will become
payable as cess. The court further held that it is not by way of penalty and in that context the court held that interest paid u/s 3(3) of the U. P.
Sugarcane Cess Act cannot be described as a penalty paid for an infringement of the law; as that was the only ground on which the Revenue
resisted the claim of the assessee to a deduction of the interest u/s 10(2)(xv) of the Indian Income Tax Act, 1922, the assessee was entitled to
succeed. The court further observed that there was no dispute that the payment of interest represents expenditure laid out wholly or exclusively for
the purpose of business and that it was in the nature of revenue expenditure. In our view, assuming that interest payable by the assessee is an
accretion to Income Tax, it would not be Income Tax payable by the assessee for the purpose of rule 2 of the First Schedule to the Surtax Act.
Payment of interest is totally different from tax liability. The question of paying interest would arise only if there is delayed payment of tax. Hence,
both the concepts are totally different.
In this view of the matter, the Tribunal was justified in law in rejecting the claim of the assessee for reduction of interest charged u/s 217(1A)
and section 139(8) of the Income Tax Act, 1961, as part of the Income Tax in computing the net chargeable profits. Hence, the question is
answered in the affirmative, i.e., in favour of the Revenue and against the assessee. The reference stands disposed of accordingly, with no order as
to costs.