Vazir Sultan Tobacco Co. Ltd. vs Commissioner of Income Tax

M.N. Rao, J.—At the instance of the assessee, M/s. Vazir Sultan Tobacco Co. Ltd., Hyderabad, this reference was made by the Income Tax Appellate Tribunal, Hyderabad, u/s 256(1) of the Income Tax Act, 1961. The question referred was as follows :

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of the surtax payable under the Companies (Profits) Surtax Act, 1964, as business expenditure u/s 37 of the Income Tax Act, 1961, or alternatively as expenditure incidental to the carrying on of the business deductible u/s 28 of the Income Tax Act while computing the income under the head ''Business ?

The contention raised by the assessee before the Tribunal was that the surtax payable by the company under the Companies (Profits) Surtax Act, 1964 (Act 7 of 1964) (for short "the C. P. S. T. Act"), should be allowed as deduction from the total income. Following the judgment of the Special Bench of the Tribunal in ITA No. 3643/Bom/1974-75 dated December 1, 1977, in the case of M/s. Amar Dye-Chem Ltd. v. ITO, the Tribunal held that the surtax payable cannot be allowed as deduction from the total income.

The relative assessment years are 1968-69 and 1969-70. Sri Y. Ratnakar, learned counsel for the assessee, has advanced two contentions which are as follows :

(1) The profits received by the assessee during the relevant years could not be treated as income since they were attracted by the doctrine of overriding title. Even before the profits reached the hands of the assessee, its liability to tax under the Companies (Profits) Surtax Act, 1964, assumes primacy, with the result that such profits go to the State without the assessee getting a chance to treat the same as income.

(2) In any event, the surtax paid by the assessee constitutes expenditure incidental to business and is, therefore, "wholly and exclusively" necessary for the purpose of business and so u/s 37(1) of the Income Tax Act, the same must be deducted from the tax net.

Sri M. Suryanarayana Murthy, learned counsel for the Revenue, contends that it was only after the profits had reached the assessee, that the same were brought to tax under the Companies (Profits) Surtax Act, 1964, and, therefore, the contention that the doctrine of overriding title in favour of the State was attracted, the counsel pleads, is untenable. So far as the second contention raised for the assessee, the plea taken by Sri Suryanarayana Murthy for the Revenue is that the surtax paid by the assessee cannot be deducted since the same falls within the ambit of section 40(a)(ii) of the Income Tax Act.

The Companies (Profits) Surtax Act, 1964, seeks to impose a special tax on the profits of certain companies. Section 4 of the Companies (Profits) Surtax Act, 1964, which is the charging section says that subject to the provisions of the Act, tax shall be levied on every company in respect of so much of its chargeable profits of the previous year or years which exceed the statutory deduction at the rate or rates specified in the Third Schedule. The expression "chargeable profits" is defined by section 2(5) of the Companies (Profits) Surtax Act, 1964, as meaning the total income of an assessee computed under the Income Tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. It is, therefore, clear that unless the chargeable profits are determined, the question of invoking the provisions of the Companies (Profits) Surtax Act, 1964, in respect of any company does not arise. When profits are received which fall within the ambit of "tax net" as contemplated by the Companies (Profits) Surtax Act, 1964, then alone the tax, as worked out under the Companies (Profits) Surtax Act, 1964, would be levied but not otherwise. The chargeable profits have to be computed with reference to the total income of the assessee under the Income Tax Act. The heads of income are specified in section 14 of the Income Tax Act : clause (F) speaks of "Income from other sources". Section 28 of the Income Tax Act deals with profits and gains of business or profession. Incomes from profits and gains of business or profession are chargeable u/s 28 of the Income Tax Act and the same are to be computed in accordance with the provisions contained in sections 32 to 43A of the Income Tax Act. Section 40 of the Income Tax Act lays down that notwithstanding anything to the contrary in sections 30 - 39, the amounts specified therein shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". 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. The embargo contained in section 40(a)(ii) covers, in our opinion, the surtax paid. As already noticed, it is only when the computation under the Income Tax Act is done in respect of the total income, that the question of application of the provisions of the Companies (Profits) Surtax Act, 1964, would arise. In the computation of total income under the Income Tax Act, the amounts paid by way of surtax cannot be deducted u/s 40(a)(ii) of Income Tax Act. The argument of Sri Ratnakar is that since section 40(a)(ii) of the Income Tax Act only speaks of "any sum paid on account of any rate or tax levied on the profits or gains of any amounts paid towards Income Tax and nothing else. We find it difficult to agree with this contention. Section 40(a)(ii) of the Income Tax Act covers not only any sum paid on account of tax but also the rates. The expression "tax" is not confined to Income Tax; it comprehends all taxes. Likewise, the expression "rate" comprehends all rates, Had it been the legislative intention to confine section 40(a)(ii) of the Income Tax Act only to Income Tax, it would have been expressed explicitly. Further, the very fact that rates are also included within the prohibition of section 40(a)(ii) of the Income Tax Act goes to show that whatever be the amount paid by an assessee towards any rates or taxes levied on profits or gains of any business or profession is not deductible in the payment of tax.

The contention that the doctrine of overriding title in favour of the State comes into play is, in our view, not tenable. The doctrine presupposes pre-existing liability. It is true that under the Companies (Profits) Surtax Act, 1964, the assessee is liable to tax in respect of chargeable profits in addition to the Income Tax to which he is liable. Chargeable profits were not diverted in favour of the State even before they reached the hands of the assessee. In a larger sense it can be said that the interest of the State in collecting taxes overrides the interest of the assessee, but that is different from saying that the taxes are diverted to the State even before they reached the hands of the assessee. In a larger sense it can be said that the interest of the State in collecting taxes overrides the interest of the assessee, but that is different from saying that the taxes are diverted to the State even before the profits on which the taxes are levied reached the hands of the assessee. The assumption regarding the applicability of the doctrine of overriding title of the State is totally unrealistic and factually incorrect. The liability to pay tax under the Companies (Profits) Surtax Act, 1964, would arise only after the computation of the total income was done under the Income Tax Act. The doctrine is applicable to cases where the assessee has alienated or assigned the sources of income, so that it is no longer his (vide Kanga and Palkhivala''s "The Law and Practice of income tax", Vol. I, Seventh edn., pp. 99-100). The question whether the surtax is not liable in view of the provisions of section 40(a)(ii) of the Income Tax Act came up for consideration before a Division Bench of the Calcutta High Court in Molins of India Ltd. Vs. Commissioner of Income Tax, . After reviewing the case law on the subject, the Bench held at page 327 thus :

"Surtax like excess profits tax is basically an additional tax levied on the income of a company. It does not divert any portion of that income at source by an overriding title. It is a tax on so much of the chargeable profits of the previous year as exceed the statutory deduction at the rate specified in the Act. Chargeable profits has been defined to mean total income of an assessee as computed under the Income Tax Act and adjusted in accordance with the provisions of the First Schedule. The Legislature by this Act has imposed an additional levy on the total income of a company. The subject-matter of the levy is the income of the company. That income does not cease to be the income of the company merely because an additional tax is imposed upon it. It is one thing to say that the Revenue is entitled to levy surtax on this income but it is quite another thing to say that the Revenue is entitled to get a portion of this income by an overriding title even before it reaches the company."

We are in entire agreement with the aforesaid view. The Karnataka High Court had also taken the same view in Commissioner of Income Tax, Karnataka Vs. International Instruments (P) Ltd., .

The second question centres round the aspect whether the liability for surtax should be allowed as business expenditure in computing the total income of the assessee. Any expenditure not covered by sections 30 - 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" (vide section 37 of the Income Tax Act). Although the surtax paid by the assessee is neither capital expenditure nor personal expenses of the assessee, it is not laid out or expended wholly and exclusively for the purpose of the business. The embargo contained in section 40(a)(ii) comes into play. Therefore, the same cannot be deducted as business expenditure. An identical question came up for consideration before the Calcutta High Court in the aforesaid decision in Molins of India Ltd. Vs. Commissioner of Income Tax, . Following the decision of the House of Lords in IRC v. Dowdall O'' Mahoney and Co. Ltd. [1952] 33 TC 259, the Calcutta High Court held thus (p. 340) :

"The tax imposed by the Companies (Profits) Surtax Act, 1964, is essentially of the same character as Income Tax or excess profits tax. Liability to pay this tax depends upon whether profits are made or not. It is a tax which can only be measured and the liability to which can be ascertained only after the total income of the company has been finally determined and the Income Tax payable thereon has been computed and deducted. To use the language of Lord Macmillan, it is a super Income Tax. In our opinion, having regard to the nature of the tax and the scheme of the Surtax Act, the liability to pay surtax cannot be allowed as a deduction from the total income of the assessee as expenditure wholly and exclusively laid out for the purpose of its business."

We are in entire agreement with the aforesaid decision of the Calcutta High Court.

For the above reasons, we answer the question in favour of the Revenue. There shall be no order as to costs.