Case: Smith Kline &amp; French [India] Ltd.Etc Vs. Commissioner Of Income Tax

1. A common question arises in this batch of appeals. For the sake of convenience, we may refer to the question in Civil Appeal No. 455 of 1987 directed against a Full Bench judgment of the Kerala High Court A.V. Thomas and Co. Ltd. v. CIT. The following question was stated by the Income Tax Appellate Tribunal under Section 256(1) of the Income Tax Act for the consideration of the Kerala HighWhether Rs 76, 777 being the surtax liability is to be allowed as a deduction in computing the total income of the assessee for the Assessment Year 1976-77claim for the said deduction was disallowed by the Income Tax Officer on the basis of and with reference to sub-clause (ii) of clause (a) of Section 40 which read thus at the relevantNotwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession(a) in the case of any assessee -(i) * * *(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains."On appeal, the Appellate Assistant Commissioner allowed the assessees claim but on further appeal by the Revenue, the Tribunal upheld the Revenues contention and disallowed the claim for deduction on the basis of Section 40(a)(ii). The High Court has affirmed the view taken by the Tribunal.

Reasoning:
It is thus clear beyond any doubt that the surtax is levied on the profits of a company, i.e., on the profits above the prescribed limit. The mere fact that the tax is levied upon "chargeable profits" (which means the total income of the assessee computed under the Income Tax Act, 1961 adjusted in accordance with the provisions of the First Schedule) does not mean that the tax is not levied on the profits of business. In other words, the mere fact that the First Schedule provides for certain further deductions out of the total income computed in accordance with the provisions of the Income Tax Act, 1961, it cannot be said that the amount on which the surtax is levied cases to be the profits of the business. For this reason, it must be held that the surtax levied under the Surtax Act squarely falls within the mischief of sub-clause (ii) of clause (a) of Section 40 and cannot be allowed as a deduction while computing the business income of the assessee under the provisions of the Income Taxreading of the above provision makes it evident that its operation is confined to the computation of the distributable income of a company for the purposes of Chapter XI-D of the Income Tax Act. It cannot be extended to any other chapter or provision in theis not possible to agree with this contention either. The said decision was rendered with reference to sub-section (4) of Section 10 of the Income Tax Act, 1922 which corresponds to sub-clause (ii) of clause (a) of Section 40 of the presentis thus abundantly clear that the levy of the aforesaid cesses was upon the immovable properties and not on profits. It is no doubt true that the tax was measured with reference to the net profits of business but it is well settled by a series of decisions of this Court that the measure by which a tax is computed does not determine the character of the tax vide Union of India v. Bombay Tyre International Ltd. AIR 1984 SCC 420), and Goodricke Group Ltd. v. State of W.B. 1955 (1) Supp(SCC) 707). It is, therefore, idle to contend that the said decision helps the assessees case in any manner. The cesses considered in the said decision were not taxes "levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of any such profits or gains" within the meaning of Section 40(a)(ii) as explained hereinabove.We are unable to see as to how these observations help the assessees herein. Firstly, it may be mentioned, Section 10(4) of the 1922 Act or Section 40(a)(ii) of the present Act do not contain any words indicating that the profits and gains spoken of by them should be determined in accordance with the provisions of the Income Tax Act. All they say is that it must be a rate or tax levied on the profits and gains of business or profession. The observations relied upon must be read in the said context and not literally or as the provisions in a statute. But so far as the issue herein is concerned, even this literal reading of the said observations does not help the assessee. As we have pointed out hereinabove the surtax is essentially levied on the business profits of the company computed in accordance with the provisions of the Income Tax Act. Merely because certain further deductions (adjustments) are provided by the Surtax Act from the said profits, it cannot be said that the surtax is not levied upon the profits determined or computed in accordance with the provisions of the Income Tax Act. Section 4 of the Surtax Act read with the definition of "chargeable profits" and the First Schedule make the position abundantly clear8. We may mention that all the High Courts in the country except the Gauhati High Court have taken the view which we have taken herein. Only the Gauhati High Court has taken a country view in the decisions in Makum Tea Co. (India) Ltd. v. CIT (Gau)) and Doom Dooma Tea Co. Ltd. v. CIT (Gau)). The decision of the Gauhati High Court in Makum Tea Co. (India) Ltd. (Gau)) is under appeal before us in Civil Appeals Nos. 3976-77 of 1995. Similarly Civil Appeal No. 3246 of 1995 is preferred against the decision of the Gauhati High Court following the decision in Doom Dooma Tea Co. Ltd. (Gau)). (On enquiry, the office has informed that no special leave petition/civil appeal has been filed against the decision in Doom Dooma Tea Co. Ltd. (Gau))). For the aforesaid reasons, we cannot agree with the view taken by the Gauhati High Court in the aforesaid decisions