H.N. Seth, J.
1. This is a petition under Article 226 of the Constitution of India. The petitioner is a co-operative society registered under the Cooperative Societies Act. It carries on banking business and has various co-operative credit societies as its members. During the assessment year 1963-64, it derived income from various sources, viz., banking business, property, interest on securities and dividends. By his order dated January 13, 1964, the Income-tax Officer computed the petitioner's total income under various heads as follows :
Interest on securities
From cheque supplied back
2. The Income-tax Officer directed that the amount of Rs. 2,02,477, which represented the petitioner's income from banking business, was to be included in its total income for rate purposes only. Subsequently, he issued a notice under Section 154/155 of the Income-tax Act, 1961, stating that the order dated January 30, 1964, was to be rectified as the petitioner was liable to pay additional surcharge, amounting to Rs. 11,260.13, which ought to have been charged but was not so charged. The petitioner appeared before the Income-tax Officer and denied his liability for the additional surcharge. The Income-tax Officer, thereafter, issued a notice of demand for a sum of Rs. 8,010.09 as additional surcharge computed under Section 3 of the Indian Finance Act, 1963. The petitioner complains thatthe notice of demand was not accompanied by the order of the Income-tax Officer, rectifying the earlier assessment order. By means of a letter dated March 21, 1967, the petitioner requested the Income-tax Officer to supply to it a copy of the order in pursuance of which the demand in question had been raised, but the same was not supplied. As the period of limitation for filing an appeal was about to expire, the petitioner filed an appeal before the Appellate Assistant Commissioner, annexing a copy of the notice of demand dated March 15, 1964. Even after filing the appeal, the petitioner continued its efforts for obtaining a copy of the order by which the original assessment order dated January 13, 1964, was rectified. Ultimately, on June 21, 1968, the Income-tax Officer informed the petitioner that there was no order passed under Section 154 of the Income-tax Act, 1961, copy of which could be supplied to it. The Appellate Assistant Commissioner, thereafter, dismissed the appeal filed by the petitioner on October 9, 1968, holding that so long as no order under Section 154 of the Act was passed on the application of the assessee, no appeal lay. The petitioner then went up in revision before the Commissioner of Income-tax. The Commissioner of Income-tax by his order dated August 13, 1970, dismissed the revision application. He found that, as a matter of fact, the Income-tax Officer did make an order under Section 154 of the Act on January 30, 1967, to the following effect:
' Certain mistakes in calculation of tax have come to notice which are rectified as per this form by charging additional surcharge.'
3. It was under some misapprehension and confusion that the copy of the orders was not supplied to the petitioner. The Commissioner further held that the petitioner was liable to pay additional surcharge which had been levied with reference to residual income. In its opinion the levy of additional surcharge was quite distinct and different from the levy of income-tax, and exemption conferred on the business income of co-operative societies from payment of income-tax was not available in respect of additional surcharge.
4. The petitioner then filed an application dated August 28, 1970, before the Appellate Assistant Commissioner for rectifying' its appellate order dated October 9, 1968, on the ground that it suffered from a manifest error inasmuch as it proceeded to decide the appeal on a wrong assumption that no order rectifying the assessment order dated January 13, 1964, had been passed. Another application dated September 1, 1970, for rectifying the revisional order of the Commissioner of Income-tax dated August 13, 1970, was also filed. It was claimed that the Commissioner of Income-tax had not decided the real issue involved in the case. In this writ petition no averments about the fact of these two applications has been made.
5. By this petition, the petitioner prays for the quashing of the order made by the Income-tax Officer, dated January 30, 1969, and notice of demand issued in pursuance of it, as also of the appellate and revisional orders passed by the Appellate Assistant Commissioner and the Commissioner of Income-tax dated October 9, 1968, and August 13f 1970,
6. One of the grounds urged by the petitioner in support of its prayer lor quashing the orders passed by the Appellate Assistant Commissioner and the Commissioner of Income-tax is that the Appellate Assistant Commissioner misconceived the proceedings and passed an order dismissing the appeal under a wrong impression that an application for rectifying the original assessment order dated January 13, 1964, had been moved on behalf of the petitioner and that no orders on that application had been passed. It was contended that the proceedings for rectification were initiated by the Income-tax Officer suo motu and an order for rectification had been made. Learned counsel for the petitioner contended that the Income-tax Officer did not supply copy of the order rectifying the original assessment and thereby he deprived the petitioner of an effective right of appeal. It is true that an irregularity was committed by the Income-tax Officer when he did not supply a copy of the order rectifying the original assessment order. The Appellate Assistant Commissioner decided the appeal on an erroneous assumption that an application for rectifying the assessment order dated January 13, 3964, had been moved on behalf of the petitioner and that no orders on the same had been passed. The order dated January 13, 1964, rectifying the assessment, however, was brought to the notice of the petitioner during the hearing of the revision by the Commissioner of Income-tax. The Commissioner of Income-tax went into the merits of the objection, raised by the petitioner, to the demand of additional surcharge and rejected the same. In the circumstances, it will not be desirable to interfere with orders passed by income-tax authorities unless it is found that the contention that the Income-tax Officer has no jurisdiction to demand additional surcharge has substance.
7. Section 4 of the Income-tax Act, 1961, provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of the Income-tax Act, 1961, in respect of the total income of the previous year or previous years, as the case may be, of every person. The rates and conditions for computation of income-tax are provided in the various Finance Acts which are passed by the Central Legislature from time to time.
8. Relevant portion of Section 81 of the Income-tax Act, 1961, runs as follows:
' Income-tax shall not be payable by a co-operative society-
(i) in respect of the profits and gains of business carried on by it, if it is-
(a) a society engaged in carrying on the business of banking or providing credit facilities to its members ;....:
Provided that in the case of a co-operative society which is also engaged in activities other than those mentioned in this clause, nothing contained therein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds Rs. 15,000.'
9. It is not disputed that the petitioner before us is a co-operative society engaged in carrying on banking business and that during the assessment year in question its income from sources other than banking did not exceed Rs. 15,000. The petitioner is, therefore, clearly entitled to claim exemption from payment of income-tax as provided in Section 81 of the Act in respect of its total income for the assessment year 1963-64.
10. Learned counsel for the petitioner argued that the additional surcharge payable under the Finance Act, 1963, is nothing but income-tax. According to Section 81 of the Income-tax Act, 1961, the petitioner-society is exempt from payment of income-tax and as such the respondents have no jurisdiction to demand any additional surcharge from the petitioner.
11. Learned counsel appearing for the revenue, however, urged that a perusal of the various provisions of the Finance Act shows that the legislature treated the imposition of ' additional surcharge ' as a levy distinct and separate from ' income-tax '. He urged that income-tax is chargeable on the total income of an assessee whereas the additional surcharge is chargeable with respect to the residual income of the assessee. Residual income, as defined in the Finance Act, is something different from ' total income ' as defined in the Income-tax Act. He further invited the attention of the court to the heading ' surcharge on income-tax ', as contained in the First Schedule to the Finance Act of 1963, under which the additional surcharge was being computed. He contended that the heading shows that the surcharge was being levied on income-tax and that it was not a tax on total income, i.e., income-tax. Additional surcharge levied under the Finance Act of 1963, not being income-tax as contemplated by Section 81 of the Income-tax Act, 1961, the petitioner is not exempt from paying it.
12. In order to resolve this controversy it becomes necessary to examine the relevant provisions of the Constitution of India which authorizes levying of surcharge and the relevant provisions of the Finance Act, 1963, and the Income-tax Act, 1961.
13. Article 269 of the Constitution provides that certain taxes and duties mentioned therein are to be levied and collected by the Government ofIndia, but they are to be assigned to the States in the manner provided in that article.
14. So far as income-tax is concerned, Article 270 of the Constitution provides that it is to be levied and collected by the Government of India and distributed between the Union and the States in the manner provided in its Sub-clause (2).
15. Article 271 of the Constitution however, provides that, notwithstanding anything in Articles 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those articles by a surcharge for purposes of the Union and the whole proceeds of such surcharge shall form part of the consolidated fund of India.
16. The language of Article 271 makes it quite clear that whenever a duty or tax is increased by a surcharge, the total increased amount retains the character of the duty or tax so increased. The amount of surcharge by which the tax is increased instead of being distributed between the Union and the States, goes to the consolidated fund of India, to be utilised only by the Union. According to Section 4 of the Income-tax Act, 1961, the Central Legislature has to pass a separate Act providing for charge of income-tax for any assessment year at the rate or rates mentioned therein. It is in pursuance of this provision that the Central Legislature enacts Finance Acts from time to time. Section 2 of the Finance Act of 1963, which is the relevant Finance Act for our purposes, provides for the charge of income-tax at the rates specified in Part 1 of the First Schedule. It further provides that in certain cases the income-tax is to be increased by a surcharge for the purposes of the Union calculated in the manner provided therein. The language used in Section 2 is that the income-tax is to be increased by the aggregate of the surcharges. In other words, the section provides that the total income-tax payable by an assessee would be that calculated at rates specified in Part I plus the surcharges calculated in the manner provided in that part. This section does not provide for the levy of a tax other than income-tax. Section 2 of the Finance Act, 1963, clearly indicates that the total amount computed in the manner provided therein after adding the surcharge and the additional surcharge, is the total amount of income-tax that is payable by an assessee. This section provides for the mode of calculating total income-tax payable by an assessee. The fact that under the First Schedule the additional surcharge is calculated and worked out on the basis of residual income does not mean that additional surcharge is a tax on residual income and not a tax on total income. Section 2 of the Finance Act purports to charge only income-tax and provides how the income-tax is to bo computed. The basic method of computing income-tax provided in Section 2 is to work out the tax at the rate specified in Part I of the First Schedule and thereafter increase it by the addition ofsurcharges calculated in the manner specified in the Schedule. Particular method provided for calculating additional surcharge does not mean that what is being charged is not a part of income-tax but is something else.
17. Moreover, under the Income-tax Act, 1961, provision has been made for raising of demands an4 recovering only income-tax and no other tax. If the contention on behalf of the revenue is accepted and it is held that the additional surcharge mentioned in the Finance Act of 1963 does not partake of the nature of income-tax, it will not be possible to demand and realise it under the provisions of the Income-tax Act, and the notice of demand and recovery proceedings would be vitiated on that account. It is clear that while providing for the charge of additional surcharge in the Finance Act, 1963, the legislature did not contemplate that the charge would be a tax distinct from income-tax and would not be recoverable under the provisions of the Income-tax Act.
18. We are, therefore, of opinion that the additional surcharge calculated in the manner provided in the First Schedule to the Finance Act of 1963 is nothing but an amount which goes to constitute the entire income-tax which is payable by an assessee. Such income-tax is not payable to the extent it is exempted by Section 81 of the Income-tax Act, 1961.
19. Next question that arises for consideration is as to how the exemption granted under Section 81 of the Act is to be worked out. Section 81 of the Act falls in Chapter VII. The heading of this Chapter is ' Incomes forming part of the total income on which no tax is payable ', as distinguished from the heading in Chapter III of the Act, which provides for incomes which do not form part of total income of a person. Under Chapter III while computing the total income of the previous years of any person the incomes of the types mentioned in Section 10 of the Act are not to be included No such provision has been made in Section 81 of the Act. The heading of the Chapter in which Section 81 falls, on the other hand, shows that the types of income mentioned therein are to be included in the assessee's total income, but the assessee will not be required to pay the tax in respect of it. How the exemption of the nature contemplated by Section 81 of the Act is to be worked out has been laid down in Section 110 of the Income-tax Act, which runs as follows :
'Where there is included in the total income of an assessee any income on which no income-tax or, as the case may be, no super-tax is payable under the provisions of this Act, the assessee shall be entitled to a deduction-
(a) from the amount of income-tax with which he is chargeable on his total income of an amount equal to the income-tax calculated at the average rate of income-tax on the amount on which no income-tax is payable, and
(b) from the amount of super-tax with which he is chargeable on his total income, of an amount equal to the super-tax, calculated at the average rate of super-tax, on the amount on which no super-tax is payable,'
20. It will thus be seen that the only effect of making a provision like that of Section 81 of the Act is that the income-tax authorities will have to compute the income-tax in respect of the total income of the petitioner (including surcharge and the additional surcharge calculated in the manner provided in the Finance Act of 1963) and from that an amount equal to the income-tax calculated at the average rate of income-tax on the amount of which no income-tax is payable will have to be deducted. The petitioner would be required to pay only the balance which is arrived at under Section 110 of the Act as income-tax. As, in this case, the income of the petitioner from activities other than banking business did not exceed Rs. 15,000 the whole of its income amounting to Rs. 2,10,519 was exempt from payment of income-tax under Section 81 of the Act. In the circumstances, when calculation of tax, which includes surcharge and additional surcharge, is made under the provisions of Section 110 of the Income-tax Act, it will be found that nothing is due from the petitioner as income-tax. If the income, profits and gains of the petitioner from activities other than the banking business had exceeded Rs. 15,000, the petitioner would have been liable to pay some amount of tax calculated in the manner provided in Section 110.
21. In the circumstances, we are of opinion that the notice of demand issued by the Income-tax Officer in pursuance of his order dated January 30, 1969, is clearly erroneous and without authority, In the result, we allow this petition with costs and quash the order of the Income-tax Officer dated January 30, 1969, the appellate order of the Assistant Commissioner dated 9th October, 1969, and the revisional order of the Commissioner of Income-tax dated 13th August, 1970.