Satish Chandra, C.J.
1. The Upper Doab Sugar Mills Ltd., the assessee, was liable under the Companies (Profits) Surtax Act, 1964. For the assessment year 1967-68, the I.TO proceeded to compute the chargeable profits of the assessee by taking the total income as assessed under the I.T. Act.
2. It appears that in the assessment under the I.T. Act the amounts claimed as deductible allowances on account of entertainment expenses, advertisement and commission had been disallowed. The total income assessed included the claimed expenses under these three heads. The ITO,while computing the chargeable profits, did not make any additions under Rule 3(ii) of the First Schedule to the Act.
3. The assessee felt aggrieved, and went up in appeal. It claimed relief of Rs. 8,505 on account of entertainment expenses, Rs. 3,288 on account of advertisement, and Rs. 12,000 on account of commission. It was urged on behalf of the assessee that since these amounts stand included in the computation of chargeable profits without previous approval of the IAC, they should be deducted.
4. The AAC repelled the submission. He held that since the expenditure under these three heads was disallowed under the I.T. Act, there was no question of the applicability of Rule 3. Rule 3 applies only if an expenditure had earlier been allowed under the I.T. Act while computing the total income.
5. The assessee went up to the Tribunal. In para. 6 of the Tribunal's order, the contention on behalf of the assessee has been put as follows:
'And lastly the assessee asserts that the two amounts of Rs. 8,505 out of entertainment expenses and Rs. 12,000 out of commission expenses which were disallowed at the income-tax assessment stage should have been added in the aggregate of 'chargeable profits '.'
6. In our opinion, the argument, as put, makes no sense because if these amounts are added, the liability to surtax would increase. We feel that the argument was that these amounts should not have been added.
7. The Tribunal agreed with the assessee. It observed :
'We, however, find that the position of law in this respect is not free from ambiguity. The benefit of this can, therefore, be availed by the assessee. Under the Income-tax Act, there is no prerequisite of sanction from the Inspecting Assistant Commissioner before disallowance of any commission or entertainment expenses which are considered excessive. The Companies (Profits) Surtax Act, 1964, however, makes the same incumbent. There is no clarification that it has essentially reference to additions over and above those already made at the income-tax assessment stage. We would, therefore, allow this ground raised by the assessee relating to the amount of Rs. 8,505 and Rs. 12,000.
There was another small amount of Rs. 3,288 which the assessee did not press before us as it was claimed that the necessary relief has already been granted in appeal at the income-tax stage.'
8. At the instance of the revenue, the Tribunal has solicited our opinion on the following question of law :
'Whether, on the facts and in the circumstances of the case, and on a true interpretation of the Rules framed under the First Schedule of 'the Companies (Profits) Surtax Act, 1964, prior approval of the Inspecting Assistant Commissioner of Income-tax was necessary before the expenditure on entertainment and commission amounting to Rs. 8,505 and Rs. 12,000, respectively, could be treated as excessive in arriving at chargeable profits ?'
9. It seems that the expenditure under the three heads, which were claimed by the assessee were in fact disallowed in the assessment under the I.T. Act, and that disallowance was upheld even in appeal in respect of entertainment expenses and commission expenses, while the amount of Rs. 3,288 claimed on account of advertisement was, in appeal, held to be an allowable deduction on the income-tax side.
10. Section 4 of the C.(P.)S.T. Act, 1964, charges tax on so much of chargeable profits as exceed the statutory deduction at the rates specified in the Third Schedule. Section 2(8) of the Act defines 'statutory deduction'. The First Schedule to the Act provides the rules for computing chargeable profits. According to it, 'In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows :--' Rule 1 then provides that ' Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income '. There are twelve clauses in Rule 1. All amounts falling within those clauses have to be excluded from the total income assessed under the I.T. Act. Rule 2 then provides that ' The balance of the total income arrived at after making the exclusions mentioned in Rule 1 shall be reduced by..,' Then follow several more clauses. Under this rule, the amounts paid by way of income-tax, etc., are to be excluded.
11. Rule 3 then provides:
'3. The net amount of income calculated in accordance with Rule 2 shall be increased by the aggregate of-
(i) the amount of any interest payable by the company in respect of the debentures referred to in Clause (iv) or moneys referred in Clause (v) of Rule 1 of the Second Schedule for the previous year relevant to the assessment year allowed as a deduction in computing its total income;
(ii) any expenditure incurred on account of commission, entertainment and advertisement, to the extent such expenditure, in the opinion of the Income-tax Officer, is excessive having regard to the circumstances of the case :
Provided that the previous authority of the Inspecting Assistant Commissioner is obtained for holding such expenditure to be excessive.'
12. It will be seen that the method of computing the chargeable profits is to commence the calculation by taking the total income assessed under the I.T. Act. To that income certain adjustments, as mentioned in Rules 1 and 2, are to be made, and to the net amount so obtained, after making the adjustments, the amounts mentioned in Rule 3 are to be added.
13. Rule 3 covers two specific categories. Sub-rule (i) relates to interest, while Sub-rule (ii) relates to expenditure on account of commission, entertainment and advertisement. Under Rule 3 (ii) the ITO has the discretion to add so much of expenditure under these heads as he considers excessive, having regard to the circumstances of the case. If the ITO considers any amount of expenditure to be excessive, he has to obtain the sanction of the IAC. Then alone he can hold such expenditure to be excessive and add it to the net amount of income.
14. In the present case the ITO did not make any additions at all under Rule 3(ii). A perusal of the assessment order shows that he increased the net amount of income calculated in accordance with Rule 2 by the amount of interest which could be added under Sub-rule (i) of Rule 3. He, in fact, did not make any addition under Sub-rule (ii) under the head 'expenditure incurred on account of commission, entertainment and advertisement '.
15. On behalf of the assessee it was stressed that the total income, as assessed under the I.T. Act, included the expenditure incurred by the assessee on account of commission, entertainment and advertisement, because the assessment order under the I.T. Act had disallowed the expenditure under these heads. Since the amount had been included in the total income, the assessee was entitled to relief to the extent to which the ITO did not consider the expenses to be excessive.
16. The argument went on that it was incumbent upon the ITO to view the expenses from this point of view and record a finding. It was also stressed that he ought to have obtained prior sanction of the IAC before arriving at any conclusion.
17. The arguments seek only to confuse the issue. Under Rule 3 the ITO is not entitled to reconsider or vary the total income assessed under the I.T. Act. Even for purposes of computation of the chargeable profits under the First Schedule to the Act, the total income computed under the I.T. Act has to be taken without anyone having the authority to tinker with it, or in any respect vary the figures. If in a case the expenditure on account of commission, entertainment or advertisement had been claimed as allowable deductions but had been disallowed, there is no occasion for the ITO to consider the applicability of Rule 3(ii), because the question of any expenditure being excessive would arise only if a deduction had been allowed on the income-tax side. If no part of the claimed expenditure had, in fact, been allowed as deductible, the result is that the entire expenditure has been disallowed. There is no question then of considering if any part of that expenditure can be held to be excessive. The whole purpose of recording a finding that any part of the expenditure was excessive, is to add that amount to the net amount of income calculated in accordance with Rules 1 and 2. If the ITO does not proceed to add any amount under Sub-rule (ii) ofRule 3, the assessee cannot contend that, since the entire expenditure had already been disallowed under the I.T. Act, for purpose of computing the chargeable profits under the C.(P.)S.T. Act, the ITO must reconsider the matter. This is tantamount to asking the ITO, while acting under the C.(P.) S.T. Act, to reopen the assessment under the I.T. Act. Plainly, he has no such jurisdiction.
18. The occasion to act under Sub-rule (ii) of Rule 3 would arise only if any expenditure incurred on account of commission, entertainment and advertisement had, in fact, been allowed as a deduction on the income-tax side. Then Rule 3(ii) authorises the ITO to consider if any part of such allowed expenditure was excessive. If he prima facie comes to that conclusion, he has to obtain the previous sanction of the IAC, and then alone he can hold any part of the allowed expenditure to be excessive, with a view to add such amount to the net amount of income.
19. The question as framed presupposes that any part of the expenditure was treated as excessive in arriving at chargeable profits. As we have shown, this was an erroneous view. No amount was sought to be added under Rule 3(ii) of the First Schedule.
20. We, therefore, answer the question referred to us in the negative, in favour of the department and against the assessee. The department will be entitled to costs, which are assessed at Rs. 200.