Gauhati High Court
Doom Dooma Tea Co. Ltd. vs Commissioner Of Income-Tax on 26 April, 1989
Equivalent citations: [1989]180ITR126(GAUHATI)
JUDGMENT A. Raghuvir, C.J.
1. This reference is made under Sub-section (1) of Section 256 of the Income-tax Act, 1961, at the instance of the assessee, a tea company with the name Doom Dooma Tea Company Ltd. The reference relates to the assessment year 1975-76. The tea estate paid Rs. 2,26,280 under the Companies (Profits) Surtax Act VII of 1964, and unsuccessfully claimed deduction before the revenue authorities. The Income-tax Officer rejected the claim as prohibited under Section 40(a)(ii) of the Income-tax Act. The Appellate Assistant Commissioner, on appeal, entertained a doubt as to the tenability of such a claim, and, therefore, confirmed the order under appeal. The Tribunal dismissed the further appeal following a decision of the Bombay Bench of the Appellate Tribunal in I.T.A. No. 3643 (Bom) of 1974-75 dated December 1, 1977. Finally, at the instance of the tea estate, the following question is referred to this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the surtax liability of the applicant was not admissible as a deduction in the computation of its total income for income-tax purpose ?"
2. To answer the above question, it is necessary to know the origins of the three taxes levied in India. The three taxes are the income-tax, supertax and surtax. As on today, the super-tax is repealed by the amendment of Section 4 of Act VII of 1964 by the Finance Act XXIII of 1986. The surtax is discontinued for and after the assessment year 1988-89 under the Finance Act, 1986.
3. The income-tax was levied at first in 1886. In that Act, no distinction was drawn of sources like profession, business or income acquired from salary or other sources. The Act of 1918 brought forth these distinctions in the statute book. In the Act of 1922, the income under various heads was elucidated and loss under one head of income was allowed to be set off against the profit of another head. This method is continued to remain in the Income-tax Act of 1961.
4. As for super-tax, it is seen that in the United Kingdom, the House of Lords delineated super-tax as a new tax in the case of Brooks v. CIR [1914] 7 TC 236, and called it an additional duty of income-tax. This case was decided in 1914. The Indian (or Imperial) legislative authority introduced super-tax in 1917 and substituted in 1920 by another Act. When the 1922 Income-tax Act was promulgated, the provisions of the 1920 Act were incorporated in Sections 55 to 58 in Chapter IX of that Act. In these sections, super-tax was levied and quantified separately from the income-tax. This pattern is maintained in Chapter XI of the 1961 Act. Super-tax is levied and quantified under Sections 104 to 109 of the Act. In Chapter XI in Sections 95 to 109, certain companies are classified, grouped and defined like industrial companies and consultancy service companies and non-distributable profits are defined in this Chapter and super-tax is levied. Income-tax and super-tax are thus levied, quantified and collected under one common Act but the separate identity of the two taxes is maintained in the statute book ever since the inception of super-tax in 1917.
5. In the early sixties, the country was facing from the creditors, in particular, the international monetary fund, pressure to devalue the rupee. The Wanchoo Committee Report pointed out in their Report on direct taxes that in the early sixties evils of black money sprawled all over the body of the State. The Law Commission, in their Forty-seventh Report, pointed out that economic offenders were left at large. The academic circle pointed out that the liberal fiscal policy adopted was the root-cause of evils that were experienced at that time in the country. It was shown that under the taxing statutes large amounts escaped taxation under the guise of trusts. It is in this adverse climate that Parliament introduced surtax. In the Objects and Reasons of the Bill which became later Act VII of 1964, it is recited (see [1964] 51 ITR (St.) 82) : "The object of this Bill is to impose a special tax on companies (other than those which have no share capital) on their excess profits, namely, the amount by which the total income of a company as reduced by certain types of income and certain sums and the income-tax and super-tax payable by it exceeds a sum of ten per cent. of its capital, reserves and certain borrowed moneys or a sum of Rs. 2 lakhs, whichever is higher." Surtax is levied on chargeable profits from April 1, 1964. The distributable income after certain adjustments is specified in the First and Second Schedules of the Act. The rates of surtax are set out in the Third Schedule of the Act. Thus, surtax is levied on the chargeable profits of certain companies and it reduced the profits of the affected companies.
6. Thus, income-tax, super-tax and surtax, all the three taxes are collected under the Income-tax Act, 1961. The income-tax and super-tax are levied and quantified in one Act but their separate identity is maintained in the statute book. The incidence of the three taxes are different.
7. We see that in Section 15 of Act VII of 1964, it is recited that notwithstanding anything contained in Clause (i) of Section 109 of the Income-tax Act, surtax payable be deducted. No recital is there in the Act as to whether surtax can be deducted for income-tax purposes. In the absence of such an indication by Parliament, what inference is to be drawn is one of the questions raised in this regard. The Supreme Court in State of M.P. v. Sirajuddin Khan [1964] 53 ITR 158, 164, held that speculation, in the absence of a statutory provision, is not to be substituted for certainty in interpretation. We respectfully adopt the precept and to this aspect we will return later. The word "income" is defined in Clause (24) of Section 2 of the Income-tax Act, 1961, to include profits or gains. Clause (43) of Section 2 defines "tax" as income-tax chargeable under the provisions of the Income-tax Act. Section 28 of that Act covers profits and gains of business or profession. Section 29 sets out the method of ascertainment of income with reference to Sections 30 to 40A. Section 37 permits deduction of expenditure with certain exceptions. The scheme of deductions as found in Section 10(2)(xv) after the amendment by the 1939 Act of the repealed 1922 Act was adopted in the 1961 Act. One of us, speaking for the Division Bench (Chief Justice) in Income-tax Reference No. 2 of 1981 (India Carbon Ltd. v. CIT [1989] 180 ITR 117), reviewed the cases and held that taxes paid perforce under the statutes are to be deducted from the profit and loss account of the assessees. Broadlx, expenditure incurred for business was to be deducted and expenditure incurred for profits cannot be deducted.
8. A like question as in the instant case was considered by seven High Courts in the country. Barring a single judge in a Full Bench case of the Kerala High Court, in all cases the claim for deduction was rejected. There is, however, a livery discussion in the cases and, therefore, we turn to the cases.
9. The Calcutta High Court considered the question in Molins of India Ltd. v. CIT [1983] 144 ITR 317, and followed that decision without any discussion in Birla Jute Manufacturing Co. Ltd. v. CIT [1986] 162 ITR 413 (Cal). Before the Calcutta High Court, in the first case, it was argued on behalf of the assessee that surtax even before it reached the hands of the assessee stood diverted to revenue in law as a result of the interaction of the provisions in the two statutes (Act 43 of 1961 and Act VII of 1964). This contention was rejected. The computation of surtax was considered in this regard and it was stated that after income is distributed under Chapter XI-D of the Income-tax Act, surtax payable by a company is determined and profits alone are charged under the Surtax Act. Surtax paid, therefore, was not allowed to be deducted. Incidentally, it was stated that there is no provision in the Income-tax Act to deduct surtax and, therefore, the claim was disallowed. The question of diversion of the tax amount was faintly suggested in the Gujarat High Court to which we will turn immediately. In no other case, the plea of diversion was argued. In the instant reference, such a question is not raised by the assessee before this court.
10. The Karnataka High Court decided a similar issue in CIT v. International Instruments (P.) Ltd. [1983] 144 ITR 936 and followed it in Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836 (Kar). In the first Karnataka case, it was held that surtax is levied under a special statute. The scheme of taxation was held to be different from the Income-tax Act. In the former, tax is levied on chargeable profits of the previous year that exceed a statutory limit at the rates specified in the Third Schedule. Surtax, it was said, was an additional tax on profits and gains of the business. Finally, surtax was not deducted. The apex Court granted special leave against that opinion and it is pending consideration before the Supreme Court.
11. The Andhra Pradesh High Court held that surtax is a tax on income. What is taxed does not cease to be tax on income because additional tax is imposed. Holding so, the first Calcutta decision was followed.
12. The Gujarat High Court in S.L.M. Maneklal Industries Ltd. v. CIT [1988] 172 ITR 176 held that surtax is an additional tax on income after the income reached the hands of the assessee. Unless profits are earned, liability to pay surtax does not arise. If there is no income and no profit, payment of surtax in law does not arise. This is how the Gujarat High Court reasoned out for not deducting surtax under Section 37 of the Income-tax Act, 1961.
13. The Rajasthan High Court in Associated Stone Industries (Kota) Ltd. v. CIT [1988] 170 ITR 653, held that surtax was a tax on profits computed under the Income-tax Act, 1961. The deduction of surtax is prohibited under Section 40(a)(ii) and, therefore, was not allowed to be deducted.
14. The Madras High Court in Sundaram Industries Ltd. v. CIT [1986] 159 ITR 646, stated that the first Calcutta decision in Molins of India Ltd. v. CIT [1983] 144 ITR 317, is a well reasoned out decision, and, therefore, High Courts may follow that case. That court next held that surtax is charged on profits earned by companies and is determined with reference to the total income of the company under the Income-tax Act. The affected companies are liable to pay additional tax. Surtax, therefore, cannot be deducted as expenditure.
15. The Kerala High Court in a Full Bench case considered a similar question in A.V. Thomas and Co. Ltd. v. CIT [1986] 159 ITR 431. A majority of two judges held that surtax is levied on profits. It was pointed out that after the income is computed and adjusted, the balance is subjected to surtax. There is no statutory provision to deduct surtax, and, therefore, it cannot be deducted. The dissenting single judge held that surtax is tax on chargeable profits computed in terms set out in the First Schedule. Surtax is not charged on profits and gains of business. What is paid as surtax can be deducted under Section 28 or 37 of the Income-tax Act as business expenditure, and, therefore, surtax is to be deducted. The single judge, to strengthen his conclusion, pointed out that surtax is levied under Act VII of 1964 and not under Act 43 of 1961.
16. In the Income-tax Act, 1961, before any amount is deducted under Section 37, it is to be seen whether such an amount is prohibited under Section 40(a)(ii) of the Act. Therefore, the prohibition aspect is to be considered first. This court in Makum Tea Co. (India) Ltd. v. CIT [1989] 178 ITR 453, held that deduction of surtax levied under the Companies Profits (Surtax) Act, 1964, is not prohibited under Section 40(a)(ii). Thus, the only question to be considered is whether surtax paid can be deducted under Section 37 of the Income-tax Act.
17. Learned counsel for the assessee placing reliance on the definition of "tax" in Clause (43) of Section 2 of the Income-tax Act, 1961, argued that surtax is not a tax under the Income-tax Act and, therefore, deduction under Section 37 is not prohibited. The Calcutta High Court, in the first case, grappled with the definition of tax in Section 2(43) of the Income-tax Act, 1961, and held that the definition of "tax" in the context is inapplicable. The Andhra Pradesh High Court, in the case, cited, held that tax is not confined to income-tax and Section 40(a)(ii) covered all taxes and rates. The court did not note the definition in Section 2(43). The Madras High Court juxtaposed the definition of tax with the word "any" and concluded that tax means "any" tax and that, therefore, deduction of surtax is prohibited. There is no other case in which the definition of "tax" was considered.
18. We are not persuaded to accept that in the context of Act VII of 1964, the definition of "tax" is inapplicable as held by the Calcutta High Court. There is no necessity to enlarge the word "tax" in Section 40(a)(ii), to mean any tax as held by the Madras High Court.
19. Learned standing counsel for the Revenue at first argued that in Act VII of 1964 or in the Income-tax Act, 1961, there is no provision to deduct surtax and, therefore, surtax cannot be deducted. This argument, in our view, is tenuous. We cite half a dozen statutes where without such recitation, tax, rate or cess was allowed to be deducted under the Income-tax Act, 1961. Cess paid under the Bengal Village Self-Government Act, 1919, was allowed to be deducted by the Privy Council in CIT v. Gurupada Dutta [1946] 14 ITR 100. The cess paid under the Bengal Cess Act, 1880, and the Bengal (Rural) Primary Education Act, 1930, was deducted by the Supreme Court in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580. The cess paid under the U. P. Districts Boards Act, 1922, was deducted in Simbholi Sugar Mills Ltd. v. CIT [1962] 45 ITR 125, by the Allahabad High Court and by the Punjab High Court in CIT v. Banarsi Dass and Sons [1966] 61 ITR 414. The decisions of the Allahabad and Punjab High Courts were approved by the Supreme Court in Jaipuria Samla Amalgamated Collieries' case [1971] 82 ITR 580. The cess and interest paid under the U. P. Sugarcane Cess Act, 1956, was deducted in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (SC). The gratuity deposited in an irrevocable trust was deducted in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC). Tax paid under the Wealth-tax Act, 1957, was not deducted, after the first case in Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC). This decision was modified in Indian Aluminium Co; Ltd. v. CIT [1972] 84 ITR 735 (SC), to hold that an assessee when possessed of assets connected with the business and unconnected with the business, the wealth-tax paid for the assets connected with the business is permissible to be deducted and the wealth-tax paid for the assets not connected with the business is not permissible to be deducted. Soon after, the second or latter case was decided, under the Wealth-tax (Amendment) Act, 1972, with retrospective effect from April 1, 1962, Parliament declared that wealth-tax is prohibited from deduction by adding that sentence in Clause (ii)(a) of Section 40 of the Income-tax Act.
20. There is impressive literature as to why income-tax is not allowed to be deducted. Finlay J., in one of the cases in the United Kingdom, Alien v. Farquharson Brothers & Co. [1932] 17 TC 59 (KB), observed :
"Income-tax is not a deduction before you arrive at the profits ; it is a part of the profits. It is, as has been expressed by some well-known person--I cannot remember who, but it does not matter--the Crown's share of the profits." The well-known person not recollected by Finlay J. is the Earl of Halsbury who, in Ashton Gas Co. v. Attorney-General [1906] AC 10, 12 (HL), held : "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."
21. In a judgment of the Patna High Court in Maharajadhiraj Sir Kamesh-war Singh v. CIT [1961] 42 ITR 774, 777, it was observed : "It is said in an English case that income-tax represents 'the Crown's share of the profits'. It is not an expenditure for the purpose of earning profits". That income-tax is Crown's share is not a viable plea. When the Peshwas ruled India, they levied Chauth as Raja's Bhag. Even today, in South India, land revenue, after survey and settlement, is held to be Raja Bhagam. Any tax paid is Crown's share, as it is paid perforce under the statutes. All taxes are sovereign's share and fall under Article 265 of the Constitution. We have earlier referred to the two cases wherein wealth-tax paid was allowed and, because of the statute amendment, as on today, it is not allowed to be deducted. We may here point out that the Wealth-tax (Amendment) Act, 1972, does not wipe out the rationale contained in the judgment of the apex court in the case of Indian Aluminium Co. Ltd. [ 1972] 84 ITR 735. It was sufficient to have said in the Patna case that interest paid by the assessee was not connected with the business of the assessee and, therefore, was not expenditure. The two incidents of income-tax--Crown's share and income-tax should not be deducted from the income of the assessee--are entrenched as historical attributes rather than as attributes of a fiscal statute. There is no reason to fasten these incidents or attributes, to surtax. As we have earlier shown surtax is different from income-tax in all attributes and perspectives. Surtax was paid by the assessee in the instant case under the compulsion of the statute for running the business of tea, and, therefore, has to be allowed to be deducted under Section 37 of the Income-tax Act.
22. In this regard, see Section 109(i)(a) for super-tax, the income-tax paid was excluded. We have earlier in this regard referred to Section 15 of the Surtax Act, 1964, in that notwithstanding Section 109 for ascertainment of distributable income, surtax is to be deducted. That Parliament has not directed deduction of surtax in express language is not conclusive of the issue as we hold such a question has to be answered on consideration of the Act VII of 1964 and on consideration of the relevant provisions of the Act. We hold that deduction of surtax is not prohibited under Section 40(a)(ii) of the Income-tax Act and is paid by companies under a statute and, therefore, can be deducted under Section 37 of the Income-tax Act.
23. For all the aforesaid reasons, we answer the question in favour of the assessee and against the Revenue and hold that Rs. 2,26,280 be deducted from the profit and loss account of the assessee. No costs.
J.M. Srivastava, J.
24. I agree.