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Commissioner of Income-tax, Karnataka Vs. International Instruments (P) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Judge
Reported in(1984)39CTR(Kar)182; [1983]144ITR936(KAR); [1983]144ITR936(Karn); [1984]16TAXMAN282(Kar)
ActsIncome Tax Act, 1961 - Sections 2(45), 5, 32, 35, 37, 40, 40A(5) 109 and 220(2)
AppellantCommissioner of Income-tax, Karnataka
Respondentinternational Instruments (P) Ltd.
Appellant AdvocateK. Srinivasan and ;H. Raghavendra Rao, Advs.
Respondent AdvocateG. Sarangan, Adv.
Excerpt:
.....business and on commercial expenditure and necessity for the preservation of business or the assets used in the business. in support of the contention, that the surtax cannot be considered as an additional tax on the profits and gains of business, counsel urged that the surtax is charged on the profits of both trading as well as non-trending companies......under the companies (profit) surtax act, 1964, was an inadmissible deduction in computing the total income of the assessee? (3) whether, on the facts and in the circumstances of the case, the interest payable under section 220(2) of the income-tax act, 1961, was a allowable deduction in computing the profits of the assessee (4) whether, on the facts and in the circumstances of the case, the section 40a(5) is applicable to the remuneration paid to directors of the assesses company ?' 2. question no. 1 is at the instance of the revenue and question nos. 2 to 4 are at the instance of the assesses company. 3. the assessee is a private limited company. for the assessment year 1975-76, the assessee claimed depreciation under s. 32 of the i. t. act in respect of capital assets purchased.....
Judgment:

Rajasekhara Murthy, J.

1. The following four question have been referred for opinion of this court by the Income-tax Appellate Tribune, Bangalore bench :

' (1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to deprecation on capital assets which were utilised for scientific research during the previous years relevant to the assessment year 1975-76, although such assets have been purchased and brought into use for scientific research in the earlier years and full deduction under section 35 had bene given in those years

(2) Whether, on e fact and in the circumstances of the case, the Tribunal was right in holding that surtax payable under the Companies (Profit) Surtax Act, 1964, was an inadmissible deduction in computing the total income of the assessee?

(3) Whether, on the facts and in the circumstances of the case, the interest payable under section 220(2) of the Income-tax Act, 1961, was a allowable deduction in computing the profits of the assessee

(4) Whether, on the facts and in the circumstances of the case, the section 40A(5) is applicable to the remuneration paid to directors of the assesses company ?'

2. Question No. 1 is at the instance of the revenue and question Nos. 2 to 4 are at the instance of the assesses company.

3. The assessee is a private limited company. For the assessment year 1975-76, the assessee claimed depreciation under s. 32 of the I. T. Act in respect of capital assets purchased and continued to be utilised for scientific research during the previous years. The ITO disallowed the claim. In the appeal preferred by the assessee, em the AAC allowed the assessee claim relying on an order of the Tribunal in the case of M/s. Indian Telephone Industries. Being aggrieved by the order of the aAC, the Department preferred an appeal before the Tribunal, The Tribunal following its order in the case of M/s. Indian Telephone Industries, upheld the order of the AAC. But, it may be mentioned that the relevant clause in s. 35 has since been amended with retrospective effect from April 1, 1962, by Finance (No. 2) Act, 1980 and as a consequence the assessee would not be entitled to any relief under s. 35 for the year subsequent to the data of purchase of the capital asset and utilised for scientific research. Question No. 1 has, therefore, to be answered in the negative and in favour of the Department.

4. Question No. 3 relates to the disallowance of interest paid under s. 220(2) of the I. T. Act, as an allowable deduction in computing the total income of the company. The ITO disallowed the claim and the AAc confirmed it, In further appeal by the assessee, the Tribunal also confirmed the disallowance.

5. The assessee's counsel has nothing much to say on this question, Apart from the decision of the Punjab & Haryana High Court in CIT v. Oriental Carpet . v. CIT : [1957]31ITR153(Bom) and Balmer Lawrie &B; Co Ltd. v. CIt : [1960]39ITR751(Cal) . There could, therefore, be not doubt, in view of the settled position in law, that the interest paid on account of delay in payment of tax cannot be regarded as having been incurred for business purposes. Question No. 3 must, therefor, e be answered against the assessee.

6. Question No. 4 is covered by the decision of this court in International Instrument (P.) Ltd. v. CIT : [1981]130ITR315(KAR) , and hence it is to be answered in favour of the assessee.

7. We are thus left with only question No. 2 namely, whether surtax payable under the Companies Profits (Surtax) Act, 1964 (hereinafter referred to as the 'Surtax Act') by the assesses company, is an admissible deduction in computing its business profits. The ITO disallowed that claim, but the AAC held it as an allowable deduction. The Tribunal has reversed e order of the AAc, and held that surtax in not a deductible item in computing the business profits of the assessee,. Aggrieved by the said decision of the Tribunal, the assessee has sought for the opinion of this court.

8. Sri. G. Sarangan learned counsel for the company, urged that surtax payable by the company is an expenses incurred for purposes of business and should, therefor, be allowed as a deduction in computing its total income. His alternative contention is that surtax is not a rate or tax levied on the profits and gains of any business or profession and hence the prohibition imposed by the statute under s. 40(c)(ii) of the ACt do4s not apply to surtax.

9. According to Sri Sarangan, surtax is levied as a special tax on the profit and gains of certain companies referred to in the surtax Act. That levy is imposed as provided in the Act on the chargeable profits of the company as computed under the provision of the Surtax Act. ITO is, therefore, a special tax levied under a separate statute and scheme independent of and different from the manner the profits and gains of business are brought to tax under the I. T. Act.

10. Sri. K. Srinivasan for the revenue, on the other hand, urged that surtax is a tax on the profits and gains of a business of the company and is similar to income-0tax in all its characteristics and the income-tax is not an allowable deduction at all and tax ia always a charge on the profits after it is earned. There is no dispute and indeed cannot be disputed that if the surtax is a tax on the profits and gains of business, it is not an allowable deduction under the Act. The Privy Council IN Ashton Gas Co. v. Attorney-General [1906] AC 10 observed :

'The income tax is a charge upon the profits, the thing which is taxed is the profits that is made, and you must ascertain what is the profit that is made before you deduct the tax-you have not right to deduct the income-tax before you ascertain what the profit is.'

11. and in Maharajadhiraj Sri Kameshwar Singh v. CIT : [1961]42ITR774(Patna) , the Patna High Court observed :

'... that the amount of income - tax paid by an assessee cannot be deducted as a business expenditure. The reason is that income-tax is not a deduction before you arrive at the net profits of the assessee... It is not an expenditure for the purposes of earning profits. It is, no the contrary, a case of application of profits after they have bene earned and not expenditure necessary to earn such profits.'

12. In order to appreciate the contention of the parties, we may now analysed, in broad outlines the provision of the Surtax Act.

13. Surtax is a tax levied on the profits of certain companies. Section 2(5) defines 'Chargeable profits' to mean the total income computed under the I. T. Act, 1961, as adjusted in accordance with the provision of the First Schedule.'total income' is defined in s. 2(45) of the I. T. Act to mean the total income referred to in s. 5 and computed in the manner laid down in the I. t. Act. Under s. 4, the charging section, surtax is charged in respect of so much of the chargeable profits of e previous years as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. Section 2(8) defines 'statutory deduction' as an amounts equal to ten per cent, of the capital of company as computed in accordance with the provision of the Second Schedule or an amount of two hundred thought rupees, whichever is grates.

14. Schedule I contains rules for computing chargeable profits of a company. For purposes of arriving at the chargeable profits under the Surtax Act, the total income of an assessee computed under the I. t. Act for any previous years and adjusted in accordance with the provisions of the First Schedule, constituted the basis or starting point for purposes of levy of surtax.

15. For computing the chargeable profits certain income enumerated in r. 1 of Sch, I are excluded from the total income. Under r. 2, the balance of the total income arrive at after making the exclusions mentioned in r. 1 is further reduced by various taxes payable by the company like the income-tax and other taxes mentioned therein. Under r. 3 the net amount of income calculated in accordance with r. 2 is increased by the aggregation of amounts referred to in sub-cls (1) and (2) thereunder.

16. Under Sch. II, rules are provided for computing the capital of a company of purposes of s. 2(8) which defines 'statutory deduction'. The components which should form the 'capital' of a company have been provided under Sch. II, Under r. 4 the capital of the company ascertained in accordance with rr. 1, 2 and 3 gets diminished by an amount which bears to that sum the same proposition as the amount of the aforesaid income, profits and gains bear to the total amount of its income, profits and gains.

17. The Third Schedule contains the rates of surtax livable under s. 4 on the amount by which the chargeable profits exceed the amount of statutory deduction as arrived at under the provision of the ACt.

18. it is thus seen from the above provisions that the surtax levied on the chargeable profits under the Surtax Act is nothing but an additional tax on the profit and gains of the assessee business. The total income computed under the I. t. Act undergoes a further process of computation under the Surtax Act to arrive at the chargeable profits, but none the less, the surtax remains ultimately a charge on the profits and gains of the companies.

19. The next contention urged by Sri Sarangan relates to the scope of s. 40(a)(ii) of the Act as to its applicability to surtax. Section 40 imposes a prohibition on the Amount referred to therein such as, (i) the interest chargeable under the Act,. (ii) any such paid on account of any rates or tax levied on profits and gains of any business out profession, and (iii) any sum paid on account of wealth-tax and other amounts, from being claimed as amounts eligible for deduction in computing the total income. Brief reference may not be made to some of the decision relied on by the learned counsel in this aspect of the matter. he cited the following amount other decisions. :

(i) CIT v. Gurupads Dutta [1946] 14 ITR 100 .

(ii) Jaipuria Samla Amalgamate Collieries Ltd. v. CIT : [1971]82ITR580(SC) .

(iii) CIT v. Malayalam Plantations Ltd. : [1964]53ITR140(SC) .

(iv) CIT v. Birla Cotton Spinning & Weaving Mills Ltd : [1971]82ITR166(SC) .

(v) Indian Aluminum Co. Ltd. v. CIT .

(vi) Mitsui Steamship Co. Ltd. v. CIT : [1975]99ITR7(SC) .

20. The principles that we could gather form these decision, may be summarized as follows :

(i) the income-tax/estate duty and other rates or xes paid or payable on the profits earned, is not an expense incurred for the purposes of earning profits and hence not liable to be deducted, and

(ii) Certain expenses like law charges or wealth-tax paid or municipal property tax levied on the business assets of the assessee are allowable as expenses which are incidental to business and on commercial expenditure and necessity for the preservation of business or the assets used in the business.

21. These decision are of no assistance to the case on hand in the views we have taken that the surtax levied or livable cannot be consideration as an admissible deduction in the compassion of the business profits of the company.

22. If the contention of Mr. Sarangan is accepted, then s. 15 of the Surtax Act becomes superfluous and the counsel also urged that it is superfluous, since it is already covered by clause (b) of s. 109(i) of the Act.

23. We do not think that we could accepts this contention. We should not proceed on the premise that the Legislature has enacted a superfluous or unnecessary provision. Chapter XI provides for levy of additional income-tax on undistributed profits of the company. Under s. 109 the total income of a company is reduce43d by the amount of any income-tax payable under s, 104 and other taxes and sums referred to therein in order to arrive at the 'distributable income'. On the other hand, s. 15 of the Surtax Act provides for deducting surtax in comporting the distributable income under the I. t. Act, notwithstanding anything contained in clause (i) of s. 109. this is an additional relief intended to be given to 'closely held companies' while computing the distributable income for the purposes of Chap XI-D of the act and not an unnecessary provision as contended for by the counsel.

24. One ancillary contention urged for the assessee may now be disposed of. In support of the contention, that the surtax cannot be considered as an additional tax on the profits and gains of business, counsel urged that the surtax is charged on the profits of both trading as well as non-trending companies. It seems us that it is unnecessary to decide this questions in the reference, since the income which is brought to tax in this case is entirely from the business of the assesses company.

25. In view of the forgoing conclusion, we are of the opinion that the assessee is not entitled to claim deduction of surtax payable from its business profits in computing its total income under the I. t. Act.

26. In the result out answer to the question are as follows :

(1) Question No. 1 is answered in the negative and in favour of the Department. It is held that the assessee is not entitled to depreciation on capital assets which were utilised for scientific research during the previous year in view of the amendment to s. 35 with retrospective effect, by Finance Act No. 2 of 1980.

(2) Questions No. 2 is answered in the affirmative and against the assessee and it is held that the assessee is not entitled to claim deduction of surtax payable by it, in computing its total income.

(3) Question No. 3 is answered in the negative and in favour of the Department and it is held that the interest payable under s. 220(2) of the I. T. Act is not an allowable deductions in computing the profits of e assessee.

(4) Question No. 4 is answered in the negative and in favour of the assessee.


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