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In C.I.T., Kerala v. K. Srinivasan(1) on which the appellant relies, this Court has traced the history of the concept of 'surcharge' in tax laws of our country. After considering the report of the Committee on Indian Constitutional Reforms, the provisions of the Government of India Act, 1935, the provisions of Articles 269, 270 and 271 of the Constitution and the various Finance Acts, this Court held, differing from the High Court, that the word "income- tax" in section 2(2) of the Finance Act, 1964 includes surcharges and the additional surcharge.

We are unable to accept this contention Article 269(1) of the Constitution provides that the duties and taxes mentioned therein shall be levied and collected by the Government of India but shall be assigned to the States in the manner provided in clause (2). Article 270(1) provides that Taxes on income other than agricultural income shall be levied and collected by the Government of India and distributed between the Union and the States in the manner provided in clause (2). By Article 271, notwithstanding anything in Articles 269 and 270, Parliament may increase any of the duties or taxes referred to in those Articles by a surcharge for purposes of the Union. Surcharges leviable under section 2(1) of the Finance Act. 1963 are relatable to Article 271 of the Constitution.

Section 2(1)(a)(ii) of that Act provides, in so far as relevant, that for the assessment year commencing on April 1, 1963 income-tax shall be charged at the rates specified in Part I of First Schedule and in cases to which Paragraph A of Part I applies, the income-tax shall further be increased by an additional surcharge for purposes of the Union calculated in the manner provided in the First Schedule. `Clause (c) of Paragraph prescribes the manner in which the additional surcharge is to be calculated. It provides that additional surcharge for purposes of the Union shall be calculated "on the amount of the residual income'. at the rates mentioned in that clause. Thus both the purpose and concept of the additional surcharge are different from those of income-tax. The additional surcharge is leviable exclusively for purposes of the Union so that the entire proceeds of such surcharge may under Article 271 of the Constitution, from part of the Consolidated Fund of India. taxes and duties mentioned in Article 269(1), though levied and collected by the Government, have to be assigned to the States in the manner provided in clause (2) of that Article. Then again, the additional surcharge levied for purposes of the Union is to be calculated not on total income like the income-tax but it is to be calculated on the residual income. Section 2(8) of the Act of 1963 defines residual income as total income reduced by (a) capital gains, if any, included in that total income and (b) the amount of tax (exclusive of additional surcharge) which would have been chargeable on such reduced total income if it had been the total income no part of which had been exempt from tax and on no portion of which deduction of tax had been admissible. In order that the exemption granted to co-operative banks by section 81 (i) (a) may not lose its meaning and content, section 2(8) of the Finance Act introduces the concept of residual income on which alone the additional surcharge is payable. The residual income is not the same as the business income of a co-operative bank, which is exempt under section 81(i)(a) from income tax. For ascertaining the residual income the total income is reduced by the amount of capital gains and further by the amount of tax (other than additional surcharge) which would have been charged on such reduced total income on the assumption that the whole of it was liable to be brought to tax.