1. This is a reference under s. 256(1) of the I.T. Act, 1961 (referred to hereinafter as 'the said Act'). The question referred to us for our determination in this reference is as follows :
'Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 3 of the Finance Act, 1963, the Tribunal erred in law in holding that additional surcharge was not leviable against the assessee for the assessment year 1963-64 ?'
2. The facts giving rise to the reference are as follows :
The assessee is a co-operative society carrying on business in banking at Jalgaon. In respect of the assessment year 1963-64, the ITO did not charge additional surcharge as provided under the Finance Act, 1963 (referred to hereinafter as 'the said Finance Act'). Thereafter, by an order dated September 27, 1969, passed under s. 154, the ITO held that the additional surcharge of Rs. 31,810 was payable by the assessee and he levied the said additional surcharge by the said order. The assessee preferred an appeal to the AAC. It was contended by the assessee before the AAC that the assessee was carrying on the banking business and no income-tax was payable on its income in view of the provisions of s. 4 read with s. 81 and s. 110 of the said Act as they stood at that time, as it was entitled to a deduction at the average rate on its income from banking business. It was further contended by the assessee that once exemption was accorded regarding the income-tax, the exemption was extended to surcharge also and hence the levy of additional surcharge was not justified. This contention of the assessee was rejected by the AAC. The AAC held that the surcharge was clearly leviable by virtue of s. 3 of the said Finance Act. The assessee came up by way of second appeal before the Income-tax Appellate Tribunal. The Tribunal, relying upon the decision in Allahabad District Co-operative Bank Ltd. v. Union of India : 83ITR895(All) , held that the levy of additional surcharge by the ITO under the provisions of s. 154 of the said Act was not sustainable. It is from this decision of the Tribunal that the aforesaid question has been raised in this reference.
3. Before considering the arguments advanced before us, we may make a note of the relevant provisions. The relevant part of sub-s. (1) of s. 2 of the said Finance Act provides that :
'(1) Subject to the provisions of sub-sections (2), (3), (4) and (5) for the assessment year commencing on the April 1, 1963, - (a) income-tax shall be charged at the rates specified in Part I of the First Schedule and, -...
(ii) in the cases to which Paragraphs A and C of the aforesaid Part apply, shall further be increased by an additional surcharge for purposes of the Union (hereinafter referred to as the additional surcharge) calculated in the manner provided in the said Schedule.'
Sub-section (8) of s. 2 defines the expression 'residual income' for the purposes of Paragraphs A and C of Pt. I of the First Schedule. That definition provides that 'residual income' means the amount of total income as reduced by certain amounts like the amount of capital gains, if any, included in the total income.
4. Section 3 of the said Finance Act runs as follows :
'Notwithstanding anything contained in the provisions of Chapter VII or Chapter VIII-A or section 110 of the Income-tax Act or sub-section (5) of section 2 of this Act, in calculating any relief, rebate or deduction in respect of income-tax payable on the total income of an assessee which includes any income on which no income-tax is payable or in respect of which a deduction of income-tax is admissible under any of the aforesaid provisions, no account shall be taken of the additional surcharge.'
5. The relevant portion of the First Schedule to the said Finance Act shows that the additional surcharge is to be calculated at a particular percentage of the residual income, provided it exceeds Rs. 6,000. This provision is included in Para. A of the First Schedule to the said Finance Act. Section 81 of the said Act, namely, the I.T. Act, 1961, which has been deleted by the Finance (No. 2) Act of 1967, but which was in force during the relevant assessment year, inter alia, provided that no income-tax would be payable by a co-operative society in respect of the profits and gains of banking business carried on by it.
6. The submission of Mr. Joshi, learned counsel for the Revenue, is that the relevant provision of the said Finance Act set out above and particularly the provisions of s. 3 thereof, make it perfectly clear that the additional surcharge under the said Finance Act is to be levied irrespective of whether the income of an assessee is exempt from tax or not, provided the assessee has income which can be said to be residual income within the meaning of the term in the said Finance Act, and the assessee is liable to the levy of additional surcharge provided the residual income exceeds Rs. 6,000. The submission of Mr. Mehta, learned counsel for the assessee, on the other hand, is that in view of the fact that the entire income of the assessee was exempted from the payment of income-tax under the provisions of s. 81 of the said Act as it then stood, no additional surcharge could be levied on that income.
7. We find that the question before us is practically covered by the decision of the Supreme Court in Madurai District Central Co-operative Bank Ltd. v. Third ITO : 101ITR24(SC) . In that case, it has been held by the Supreme Court that the additional surcharge leviable under cl. (c) of Para. A of of Pt. I of the First Schedule to the Finance Act, 1963, read with s. 2(1)(a)(ii) of that Act is a distinct charge, not dependent for its leviability on the assessee's liability to pay income-tax or super-tax. The new charge under those provisions in the shape of additional surcharge can be levied even on a part of the income of a co-operative society engaged in the business of banking, which income is exempt from income-tax and super-tax under ss. 81(i)(a) and 99(1)(v) of the I.T. Act, 1961. Even if the surcharge is but an additional mode or rate for charging income-tax, the Finance Act, 1963, authorises by its terms the levy of additional surcharge on income which is so exempt from income-tax. It may be mentioned that in this judgment, the Supreme Court overruled the decision of the Allahabad High Court in the case of Allahabad District Co-operative Bank Ltd. v. Union of India : 83ITR895(All) , on which reliance was placed by the Tribunal and on which reliance has also been placed by Mr. Mehta before us. We may also mention that the decision of the Supreme Court in this case had been arrived at after taking into consideration the earlier decisions of the Supreme Court in CIT v. K. Srinivasan : 83ITR346(SC) , which was also, to some extent, relied upon by the Tribunal in coming to its conclusion. The only ground on which Mr. Mehta sought to distinguish the judgment in the case of Madurai District Central Co-operative Bank Ltd. : 101ITR24(SC) , was that in that case a part of the total income of the assessee, an amount of Rs. 51,763, was not exempt from income-tax, whereas, in the present case, the entire income of the assessee was exempt from income-tax by virtue of the provisions of s. 81 of the said Act. It was further urged by him that as the entire income of the assessee before us was exempt from the payment of income-tax, it was not possible to calculate additional surcharge at all and hence such surcharge could not be levied. In our view, both these contentions are unsound. The first contention of Mr. Mehta is answered by the said decision of the Supreme Court itself, where the Supreme Court has pointed out that the additional surcharge is a distinct charge, not dependent for its leviability on the assessee's liability to pay income-tax or super-tax. Such a qualification cannot be read into s. 2(1)(a)(ii) of the said Finance Act of 1963. As far as the second contention regarding the quantification of additional surcharge is concerned, as we have already pointed out, the relevant portion of Para. A of Pt. I of the First Schedule, makes it clear that the additional surcharge is not calculated at any percentage of income-tax which is payable or leviable but at a particular percentage of the residual income. The term 'residual income', as we have already pointed out, has been defined in the said Finance Act and it is not disputed that the income of the assessee on which additional surcharge was levied by the ITO, was residual income of the assessee within the meaning of that term in the said Finance Act. In view of this, we fail to see how there could be any difficulty in calculating the amount of surcharge payable by the assessee, and hence the second contention of Mr. Mehta must also be rejected.
8. It was sought to be contended by Mr. Mehta that even if additional surcharge was payable by the assessee, the order of the ITO passed under s. 154 of the said Act was bad in law, as there was no error apparent on the record in the original assessment order. In our view, it is not open at all to Mr. Mehta to take up this contention before us. No question in this regard has been referred to us and this contention has not been urged by way of a ground of appeal either before the AAC or before the Tribunal. At least, no such ground has been pointed out to us by Mr. Mehta. Mr. Mehta submits that it should be open to him to take up this ground when the matter goes back to the Tribunal for its decision in accordance with the answer which we give to the question referred. We are not concerned with the question as to whether it will be open to the assessee to take up this ground before the Tribunal at this stage. That will be for the Tribunal to decide.
9. In the result, the question referred to us is answered in the affirmative and against the assessee. The assessee to pay to the Commissioner the costs of this reference.