Madurai Distt. Central Cooperative
Bank Ltd. Vs. The Third Income-Tax Officer, Madurai  INSC 144 (28 July
SARKARIA, RANJIT SINGH GUPTA, A.C.
CITATION: 1975 AIR 2016 1976 SCR (1) 136 1975
SCC (2) 454
CITATOR INFO :
D 1981 SC1562 (17)
Constitution of India-Article 246(1)-7th
Schedule List 1 Entry 82- Income-Tax ,Act 1961-Sec. 2(8), 4 & 81(i)(a)-
Finance Act 1963-Sec. 2(1) (a). 2(8), 3, Part 1, First Schedule-Whether tax can
exceed taxable income- Finance Act- Nature and scope of-Whether can impose
fresh charge- Harshness of a taxing statute if a ground for challenge- Business
income of a cooperative society doing banking- Whether additional surcharge a
tax-Whether additional surcharge Can be levied on income exempted from payment
The appellant is a Cooperative Society
engaged in the business of banking According to section 8] (i) (a) of the
Income 'Tax Act, 1961, a Cooperative Society engaged in the business of banking
is not liable to pay income tax on its business income. The Finance Act, 1963,
however, by section 2(i) (a), 2(8), 3, paragraph A(ii) of Part I of the First
Schedule and clause of that portion of Part I called surcharge on Income Tax
provides for levy of additional surcharge for the purposes of the Union
calculated on the amount of the residual income at the rates mentioned therein.
The total income of the appellant for the assessment year 1963-64 was Rs.
10,00,098. Out of this Rs. 9,48,335 was its business income. 'The tax amounting
to Rs. 23,845 was charged on Rs. 51,763 Applying the Finance Act of 1963, the
residual income of the appellant was computed at Rs. 5.39,386 and a surcharge
thereon was levied of Rs. 52,828 Thus, the total tax imposed on the appellant
came to Rs. 76,674.
The assessment order passed by the Income Tax
officer levying the tax as aforesaid was challenged by the appellant in the
High Court by a Writ Petition. The main grievance of the appellant before the
High Court was that whereas its taxable income was only Rs. 51,763, a tax of
Rs. 76,674 was imposed on it. The relevant provisions of the Finance Act were
challenged as invalid on the ground that(i) they imposed additional surcharge
on income which was exempt from tax under the provisions of the Income Tax Act
and that (ii) the additional surcharge was intended as additional levy on the
income tax and had no independent existence apart from it The High Court
rejected these contentions.
On an appeal by certificate, dismissing the
appeal, HELD :
1. It is indisputable that the appellant is
not required to pay income tax on the banking income. In view of section 81. It
is also not liable to pay surcharge on its business income in view of section
2. The, grievance of the appellant that the
tax levied upon it exceeds its taxable income can afford no true guide to the
construction of the relevant provisions of the Income Tax Act or the Finance
Act. Harshness of a taxing statute, apart from a possible challenge to it under
Art. 13 of the Constitution cannot be an invalidating circumstance. But, the
grievance-on this score is misconceived. It assumes what has to be examined
that no part of the income exempted from Income Tax and Super Tax under the
Income Tax Act can be brought to tax by a Finance Act, [140G-H]
3. The concession of the counsel for the
appellant giving up challenge to the power. of the Parliament to impose a new
charge by Finance Act was Properly made. Under Art. 246(11) of the
Constitution, Parliament has the exclusive power to make laws with respect ''o
any of the matters in List of the Seventh Schedule. Entry 82 in List I relates
to tax on income other than agricultural income. The Income Tax Act, 1961 and
the annual Finance Acts are enacted by the Parliament in exercise of the powers
conferred by Art 246(1) read with entry 82 of List I. Once the Parliament has
the legislative competence to enact a law with respect to certain subject
matter, the limits of 136 that competence cannot be judged further by the form
or manner in which that power is exercised. Exigencies of the Financial year
determine the scope and nature of the provisions of the Finance Act. The
primary purpose of the Finance Act is to describe the rates at with the Income
Tax will be charged under the Income Tax Act but that does not mean that new
and distinct tax cannot be charged under Finance Act. Therefore, what is not
income under the Income Tax Act can be made income by the Finance Act. An
exemption granted by the Income Tax A, t can be withdrawn by the Finance Act or
the efficacy of that exemption may be reduced by the imposition of a new
charge. [141D-E; G-H]
4. The contention of the appellant that
surcharges are nothing but income tax and, therefore, expression income tax
occurring in Sec. 4 and 81 of the Act includes surcharges and AS such exempted
cannot be accepted. The case of the C.I.T. Kerala vs. K. Srinivasan
distinguished. There the essential point for determination was whether
surcharge is additional mode or rate for charging income tax. The Court held
there that it was so. The question before us is whether even if the surcharge
is an additional mode or rate for charging income to the Finance Act of 1963
authorises by its terms the levy of additional surcharge on income which is
exempt from income tax under the Income Tax, Act, 1961. The residual income as
defined by the 1963 Finance Act is not the same as the business income of a
Cooperative Bank which is exempted under see. 81. The additional surcharge is a
distinct charge not dependent for its leviability on the assessee's liability
to pay income tax or Super Tax. The decision of Allahabad High Court in
Allahabad District Co- operative Bank Ltd vs. Union of India over-ruled.
5. The additional surcharge though levied by
the Finance Act 1963 independently of the Income Tax Act is but a mode of
levying tax on a portion of the assessee's income computed in accordance with
the definition in section 2(8) of the Finance Act 1963. [147F] ARGUMENTS For
1. Under section 81 read with section 4 of
the Income- tax Act, 1961, income tax is not payable by the appellant. a
Co-operative Society, in respect of its income from banking business. Similarly
super-tax is not payable under section 99(i)(v) read with section 4.
2. The primary purpose of the annual Finance
Acts as envisaged by section 4 of the Income-tax Act is to prescribe the rates
of income-tax on the total income of an assessee, and this function as
contemplated by section 4 is to be "subject to the other provisions of this
Act", namely, the Income-tax Act, 1961, which would include, inter alia,
3. The history of Indian income-tax shows
that surcharges by way of increase to the amount of income-tax, which are added
to the basic amount, in view of article 271 of the Constitution of India, are
nothing other than income- tax and a part of income-tax alone. Therefore the
expression 'income-tax' in section 4 and 81 of the Income-tax Act, 1961, and
section and Schedule I, Part 1 of the Finance Act, 1953, includes surcharges.
4. Section 2 of the Finance Act, 1963, and
Schedule I, Part I, Paragraph A all clearly contemplate that the surcharge.
special surcharge and additional surcharge are all only by way of increase of
the amount of income-tax and not only partake of the character of income-tax
but are actually a part of income tax. They are merely rates of income-tax. The
main part of section 2(1) (a) says that "Income-tax shall be charged at
the rates specified in Part I of the First Schedule" and clause (ii) of
that section provides in the ease referred to therein that income-tax
"shall further be increased by an additional surcharge for the purpose of
the Union calculated in the manner provided in the First Schedule. Similarly in
Paragraph A of Part I of the First Schedule the heading to the provisions
prescribing rates of surcharge is "surcharges on income-tax" in the
plural. The main part in the heading also provides that "the amount of 137
income-tax... shall be increased by the aggregate of the surcharges calculated
as under " Clause (c) thereafter provides for the additional surcharge for
the purpose of the Union. Paragraph A also therefore clearly indicates that the
three surcharges are only of the same nature and that all the three surcharges
are only by way of increase of the amount of income-tax; in other words part of
Is either section 2 nor paragraph A of Part I
of the First Schedule can even remotely be said to contemplate any separate
levy of additional surcharge other than income-tax.
5. From the assessment order it is seen that
the following have been charged only on the real taxable income of the
appellant namely Rs. 51,763: (i) income tax (ii) surcharge on income tax (iii)
special surcharge on income- tax (iv) super-tax and (v) surcharge on super-tax.
These items have not been charged on the total income of Rs. 10,00,098, because
income-tax is not payable on the balance of the total income under section 81.
The Income-tax officer has sought to impose only additional surcharge under
clause (c) in respect to the total income of Rs. 10,00,098. In view of section
81 no additional surcharge is payable on the total income of Rs. 10,00,098. It
is payable only on the taxable income of Rs. 51,763.
6. Section 2 read with Paragraph A Part I of
Schedule I to the Finance Act merely purports to lay down the method of
computation where income-tax is payable. It does not either dire thy or by
implication make any amendment or modification in section 81.
7. Section 3 of the Finance Act ]963 also
applies to a stage of computation only and in regard to relief, rebate etc. It
does not impose any liability or any tax. It operates only where additional
surcharge is payable and not otherwise, and where relief, rebate etc. is to be
given from the tax payable by the assessee, e.g. deduction of tax based on life
insurance premia provident fund contribution.
donations to charitable institution etc.
Section 81 does not provide for any such relief or rebate.
8. Section 2(8) of the Finance Act, 1963,
defining "residual income" which requires deduction from the total
income of income-tax, surcharge and special surcharge to ascertain residual
income also does not have the effect of imposing any liability or any tax but
merely provides for computation. In a taxing Act one has to look merely at what
is clearly said. There is no room for any intendment. There is no equity about
a tax. There is no presumption as to tax.
Nothing is to be read in, nothing is to be
implied." "In a case of reasonable doubt. the construction most
beneficial to the subject is to be adopted." The court will be very slow
in reading an implied amendment in a tax law because there is no intendment.
9. Income-tax is one tax, not several taxes
on several heads or several items of income:
For the Respondent
1. It is open to the Parliament to pass an
Act relating to more than one topic or field of operation, covered by the
Entries in List 1. It is not as if there must be as many Enactments as the
topics which the enactment covers.
2. The legislature has a wide range of
selection and freedom in appraisal not only in the subjects of taxation and the
manner of taxation but also in the determination of the rate or rates
applicable. If production were always to be taken into account there will have
to be a settlement for every year and the tax will become a kind of income-tax.
The burden of proving discrimination is
always heavy and heavier still when a taxing statute is under attack. The
burden is on the person complaining of discrimination. The burden is proving
not possible 'inequality' but hostile 'unequal' treatment. This is more so when
uniform taxes are levied. The State cannot be asked to demonstrate equality.
3. Income which is exempt from taxation is
income which is assessable to tax and therefore liable to tax but tax is not
imposed on account of the exemption. This exemption can by subsequent
legislation be wholly or partially withdrawn both as regards items of income
and levies imposed for the purpose of taxation. Thus where the Income-tax Act
1961 says that business income of a co- operative society will be exempt from
income-tax it would be open to the Parliament by enactment of the Finance Act
of 1963 to say that this exemption shall be partially withdrawn as regards
residual income and this partial exemption will operate only for the purpose of
income-tax but not surcharge on residual income. The net result of the partial
withdrawn of the exemption would mean that though the business income of a
co-operative society will be exempt from tax the residual income which is only
a part of the exempted business income could be subjected to surcharge on
income- tax only.
4. Income-tax and surcharge on income-tax are
two different levies though the computation of the latter is based upon a percentage
of the former. The two are inclusive for the purpose of imposing tax but they
are not one levy only.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1795 of 1970.
From the Judgment and order dated the 15th
October, 1968 of the Madras High Court in Writ Petition No. 2252 of 1965.
S. T. Desai and T. A. Ramachandran, for the
N. D. Karkhanis and S. P. Nayar, for the
The Judgment of the Court was delivered by
CHANDRACHUD,J.-The appellant filed a writ petition in the High Court of Madras
under Article 226 of the Constitution to challenge an assessment order dated
August 22, 1963 made by the respondent, levying additional surcharge on its
residual income. The High Court dismissed the writ petition by its judgment
dated October IS, 1968 but it has granted to the appellant a certificate to
file an appeal to this Court under Articles 133(a) and (c) of the Constitution.
The appellant is a co-operative society
engaged in the business of banking. Its total income for the assessment year 1963-64
was computed by the respondent at Rs. 10,00,098. Out of this, Rs. 9,48,335 was
its business income while Rs. 51,763 was its income from other sources. Since,
under section 81(i)(a) of the Income-tax Act, 1961 a co- operative society
engaged in the business of banking is not liable to pay income-tax on its
business income the tax amounting to Rs. 23,845.47 was charged on Rs. 51,763
only though for the purposes of rate the income was taken at Rs.
9,48,335 in view of section 110 of the Act.
Applying the Finance Act, XIII of 1963, the respondent computed the residual
income of the appellant at Rs. 5,39,386 and levied on it an additional
surcharge of Rs. 52,828.60. Thus the total tax levied on the appellant came to
Rs. 23,845.47 plus Rs. 52,828.60 i.e., Rs. 76,674.07.
The main grievance of the appellant before
the High Court was that whereas its taxable income was only Rs.
51,763, a tax of Rs. 76,674.07 was imposed on
it. The relevant provisions of the Finance Act were accordingly said to be
invalid as they could not subject to additional surcharge an income which was
exempt from tax under the provisions of the Income-tax Act. The additional
surcharge, it was contended, was intended as an additional levy on the income
139 tax and had no independent existence apart from it. These contentions were
rejected by the High Court and hence this appeal.
Section 81 of the Income-tax Act, 1961 was
deleted by the Finance Act, XX of 1967, with effect from April 1, 1968 but its
provisions were incorporated by the same Finance Act in section 80P. Section 81
(i)(a) read thus:
"81. Income of co-operative
societies.-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;" It is indisputable that by reason of this
provision, the tanking income of the appellant amounting to Rs. 9,48,335 is
exempt from income tax. It is equally clear that by reason of section 99(1)(v)
of the Act of 1961, the appellant is not liable to pay super tax on its
business income. That section provides that where the assessee is a
co-operative society, super-tax shall not be payable by it on any income in
respect whereof no income-tax is payable by it by virtue of the provisions of
The dispute really centers round the
provisions of Finance Act, VIII of 1963. The provisions of that Act which are
relevant for our purpose are sections 2(1)(a), 2(8), 3, Paragraph A(ii) of Part
I of the First Schedule, and clause (c) of that` portion of Part 1, called
`'Surcharges on Income Tax." Section 2(1)(a) of the Finance Act, 1963
2. Income-tax and super-tax-(1) Subject to
the provisions of sub-section (2), (3), (4) and (5), for the assessment year
commencing on the 1st day of April, 1963,- (a) income-tax shall be charged at
the rates specified in Part I of the First Schedule and,- (i) in the cases to
which paragraphs A,C,C and E of that Part apply, shall be increased by a
surcharge for purposes of the Union and, except in the cases to which the said
paragraph applies a special surcharge, calculated in either case in the manner
provided therein; and (ii) in the cases to which paragraphs A and of the aforesaid
Part apply, shall further be increased by an additional surcharge for purposes
of the Union (hereinafter referred to as additional surcharge) calculated in
the manner provided in the said Schedule;" Section 2 (8) provides that:
For the purposes of paragraphs A and of Part
I of the First Schedule, the expression "residual income" means the
amount of the total income as reduced by- 140 (a) the amount of the capital
gains, if any, included therein; and (b) the amount of tax (exclusive of
additional surcharge) which would have been chargeable on such reduced total
income if it had been the total income no part of which had been exempt from
tax and on no portion of which deduction of tax had been admissible under any
provisions of the Income-tax Act or this Act." Section 3 provides that:
"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." The First Schedule of the Finance Act, 1963 consists of three
parts out of which we are only concerned with Part I.
Part I which is called "Income-tax and
surcharges on income- tax" consists of Paragraphs A, B, C, and out of
which we are concerned with Paragraph A only. Clause (ii) of Paragraph A
prescribes rate of income-tax for incomes accruing, inter alia, to
"association of persons". Since a co-operative society is an
association of persons, Paragraph A of Part I would apply to the case of the
appellant for`the purposes of section 2(1)(a)(ii) of the Finance Act oil 1963,
though not for the purpose of bringing its exempted business income to
That portion of Part I, Paragraph A, called
"Surcharges on Income Tax" provides: "The amount of income-tax
computed at the rates hereinbefore specified shall be increased by the
aggregate of the surcharges calculated as under". Clause (a) provides for
a surcharge for the purposes of the Union at the rates mentioned in sub-clauses
(i), (ii) and (iii).
Clause (b) provides for the levy of a special
Clause (c) with which we are concerned
provides for the levy of "an additional surcharge for the purposes of the
Union calculated on the amount of the residual income" at the rates mentioned
The grievance of the appellant, which appears
to have been pressed before the High Court with some earnestness, that the tax
levied upon it exceeds its taxable income can afford no true guide to the
construction of the relevant provisions of the Income tax Act or the Finance
Harshness of a taxing statute, apart from a
possible challenge to it under Article 13 of the Constitution, cannot be an
invalidating circumstance. But the grievance on this score is basically
misconceived. It assumes, what has to be examined, that no part of the income
exempted from income- tax and super-tax under the Income-tax Act can be brought
to tax by a Finance Act. The total income of the appellant was computed 141 at
Rs. 10,00,098. By reason of sections 81 (i) (a) and 99 (1) (v) of the
Income-tax Act, 1961 the appellant enjoys an exemption from income tax and
super-tax in respect of its business income which amounts to Rs. 9,48,335. The
balance, viz. Rs. 51,763 which was the appellant's income from other sources
was alone taxable under the Act of 1961 and a tax of Rs. 23,845.47 was imposed
on that income; The Finance Act of 1963 subjects 'residual income' to certain
charges and such income was computed, admittedly correctly, at Rs.
5,39,386. An additional surcharge of Rs.
52,828.60 was levied on the residual income. Thus on the assumption that the
Finance Act, validly-and on a true interpretation, imposes the additional
surcharge on residual income, the tax imposed on the appellant is Rs. 23,845.47
52,828.60. The total tax of Rs. 76,674.07
thus imposed is far less than the. appellant's total taxable income arrived at
by the addition of its non-business income and the residual income. That leads
to the inquiry first as regards the scope of a Finance Act and then as regards
the interpretation of the Finance Act of 1963.
Learned counsel for the appellant, during the
course of his arguments, gave up the challenge to the power of the Parliament
to impose a new charge by a Finance Act. This concession was properly made. By
Article 246(1) of the Constitution, Parliament has the exclusive power to make
laws with respect to any of the matters in List I of the Seventh Schedule.
Entry 82 in List I relates to "taxes on income other than agricultural income".
The Income-tax Act, 1961 and the annual Finance Acts are enacted by the
Parliament in exercise of the power conferred by Article 246(1) read with Entry
82 of List I. Once the Parliament has the legislative competence to enact a law
with respect to a certain subject-matter, the limits of that competence cannot
be judged further by the form or manner in which that power is exercised.
Accordingly, though it would be unconventional for the Parliament to amend a
taxing statute by incorporating the amending provision in an Act of a different
pith and substance, such a course would not be un- constitutional.
Much more so can the Parliament introduce a
charging provision in a Finance Act. True, as said in Kesoram Industries and
Cotton Mills Ltd v. Commissioner of Wealth Tax, (Central) Calcutta(1), that the
Income-tax Act is a permanent Act v. while the Finance Acts are passed every
year and their primary purpose is to prescribe the rates at which the
income-tax will be charged under the Income tax act. But that does not mean
that a new and distinct charge cannot be introduced under the Finance Act.
Exigencies of the Financial year determine the scope and nature of its
provisions. If the Parliament has the legislative competence to introduce a new
charge of tax, it may exercise that power either by incorporating that charge
in the Income-tax Act or by introducing it in the Finance Act or for the matter
of that in any other Statute. The alternative in this regard is generally
determined by the consideration whether the new charge is intended to be more
or less of a permanent nature or whether its introduction is dictated by the
financial exigencies of the particular year. Therefore, what is not 'income'
under 142 the Income-tax Act can be made 'income' by a Finance Act, an
exemption granted by the Income-tax Act can be withdrawn by the Finance Act or
the efficacy of that exemption may be reduced by the imposition of a new
charge. Subject to constitutional limitations, additional tax revenue may be
collected either by enhance the rate or by the levy of a fresh charge. The
Parliament, through the medium of a Finance Act, may as much do the one as the
other. In McGregor and Balfour Ltd., Calcutta v. C.I.T., West Bengal(1), which
was affirmed by this Court in 36 I.T.R. 65.
Chakravartti C.J. delivering the judgment of
a Division Bench observed that the Finance Acts though annual Acts are not
necessarily temporary Act for they may and often do contain provisions of a
general character which are of a permanent operation.
In Hari Krishna Bhargav v. Union of India and
Anr.(2) an assessee challenged the scheme of Annuity Deposits of the ground
that the Parliament has no competence to incorporate ill the Income tax Act a
provision which was substantially one relating to borrowings by the Central
Government from a class of tax-payers. That scheme was introduced by Finance
Act 5 of 1964 which incorporated Chapter XXII-A containing section 28-A to
section 28-X in the Income tax Act, 1961.
The challenge was repelled by this Court on
the ground that if the parliament had the legislative competence to pass an Act
for collecting Annuity Deposits from tax-payers, nothing contained in the
Constitution disentitled it "as a matter of legislative arrangement to
incorporate the provisions relating to borrowing from tax-payers in the
Income-tax Act or any other statute".
This discussion became necessary in spite of
the appellant's concession on the Parliament's legislative competence because
for a proper understanding of the provisions of the Finance Act 1963, it is
essential to appreciate that a Finance Act may not only prescribe rates but
also introduce a new charge.
We will now proceed to consider the
provisions of the Finance Act, 1963 under which the respondent has levied
additional surcharge on the appellant's residual income. The question for
consideration is whether clause (c) of the portion "Surcharges on Income
Tax" occurring in Paragraph A of Part I introduces a new charge in the
shape of additional surcharge so that the said charge, can be levied even on a
part of the appellant's income which is exempt from income- tax and super-tax
under sections 81(i)(a) and 99(1)(v) of the Act of 1961.
The history of Indian income-tax, according
to appellant's counsel, shows that surcharges by way of increase in the amount
of income-tax are nothing but income- tax and therefore the expression
"income-tax" occurring in sections 4 and 81 of the Act of 1961 and in
section 2 and the First Schedule of the Finance Act, 1963 includes surcharges.
To put it differently, the argument is that the exemption granted by section
81(i)(a) extends to surcharges also as a result whereof a co-operative society
engaged in the business of banking is neither liable to pay income-tax nor any
of the surcharges on its business income.
143 In C.I.T., Kerala v. K. Srinivasan(1) on
which the appellant relies, this Court has traced the history of the concept of
'surcharge' in tax laws of our country. After considering the report of the
Committee on Indian Constitutional Reforms, the provisions of the Government of
India Act, 1935, the provisions of Articles 269, 270 and 271 of the
Constitution and the various Finance Acts, this Court held, differing from the
High Court, that the word "income- tax" in section 2(2) of the Finance
Act, 1964 includes surcharges and the additional surcharge.
This case does not touch the point before us.
In that case, the assessee's income for the accounting year ending March 30,
1964 consisted mainly of his salary. Section 2(2)(a) of the Finance Act, 1964
did not by itself refer to any surcharge but it provided that in making the
assessment for the assessment year commencing on April 1, 1964 the
"income-tax" payable by the assessee on his salary-income shall be an
amount bearing to the total amount of "income- tax" payable according
to the rates applicable under the operation of the Finance Act, 1963 on his
total income, the same proportion as the salary income bears t the total
income. The question which arose for consideration was under the total income. The
question which arose for consideration was whether the words "income-tax
payable according to the rates applicable under the operation of the Finance
Act, 1963" included surcharges which were leviable under the Act of 1963.
The question was answered by this Court in the affirmative. As the judgment
shows, "the essential point for determination" was whether surcharge
is an additional mode or rate for charging income tax" (p. 351). The Court
held that it was. The question before us is whether, even if the surcharger is
but an additional mode or rate for charging income-tax, the Finance Act of 1963
authorises by its terms the levy of additional surcharge on income which is
exempt from income-tax under the Income-tax Act, 1961 In K. Srinivasans case
the Court declined to express any opinion on the distinction made by the High
Court that surcharges are levied under the Finance Act while income tax was
levied under the Income-tax Act (p. 351). In the instant case it is not
disputed by the-revenue that a surcharge partakes of the essential
characteristics of income-tax and is an increase in income-tax. What we have to
determine is whether the Act of 1963 provides for the levy of additional
Granting that the word "income-tax"
includes surcharges, it may be arguable that the exemption from the payment of
income-tax under section 81 (i) (a) of the 1961 Act would extend to surcharges.
But the matter does not rest with what section 81 (i)(a) says. Even if that
section were to grant an express exemption from surcharges on business income
the Parliament could take away that exemption or curtail the benefit available
under it by making an appropriate provision in the Finance Act. If while
legislating on a matter within its competence the Parliament can grant an
exemption, it is surely competent to it to withdraw that exemption in exercise
of the self-same power.
The Finance Act, 1963, like its annual
counterparts, contains provisions not only prescribing rates of taxation but
making extensive and important modifications in the Income-tax Act itself. By
sections 4 to 144 20 of the Act of 1963, various provisions of the income-tax
Act have been amended. By these amendments, some of which are given
retrospective effect, old provisions are deleted, new ones are added and indeed
new concepts of taxation altogether are introduced. Such innovations fall
within the legitimate scope of Finance Acts. Section 11 (14) of the Indian
Finance Act, 1946 made in the amount of excess profits tax repaid under section
28 of the U.K. Finance Act, 1941, "income" for the purpose of the
Indian Income tax Act and further provided that "income shall be treated
for purposes of assessment to income tax and super-tax as the income of the
previous year. It was held by this Court in McGregor and Balfour Ltd. v. C.I.T.
West Bengal(1) that section 11(14) charged the amount with a liability to tax
by its own force. It was further held that the particular provision, framed as
it was, applied to subsequent assessment years just as it applied to the assessment
Having seen the nature and scope of Finance
Acts, the specific question which we have to consider is whether, as contended
by the appellant, section 2 read with Paragraph A, Part I of the First schedule
of the Finance Act, 1963 merely lays down a method of computation in cases
where income-tax is in fact payable or whether, as contended by the revenue,
the Finance Act provides for the levy of a new and independent charge.
According to the appellant, these provisions of the Finance Act do not,
directly or indirectly, bring about any amendment to section 81(i)(a) of the
Income-tax Act but merely prescribe that in cases where the income-tax is
payable, "The amount of income tax....
shall be increased by the aggregate of the
surcharges". The heading "Surcharges on income tax" under which
provision is made in the Finance Act for the calculation of a surcharge, a
special surcharge and an additional surcharge is also said to bear out the
contention that the levy of additional surcharge on the residual income cannot
be disassociated from the main charge of income-tax.
We are unable to accept this contention
Article 269(1) of the Constitution provides that the duties and taxes mentioned
therein shall be levied and collected by the Government of India but shall be
assigned to the States in the manner provided in clause (2). Article 270(1)
provides that Taxes on income other than agricultural income shall be levied
and collected by the Government of India and distributed between the Union and
the States in the manner provided in clause (2). By Article 271,
notwithstanding anything in Articles 269 and 270, Parliament may increase any
of the duties or taxes referred to in those Articles by a surcharge for
purposes of the Union. Surcharges leviable under section 2(1) of the Finance
Act. 1963 are relatable to Article 271 of the Constitution.
Section 2(1)(a)(ii) of that Act provides, in
so far as relevant, that for the assessment year commencing on April 1, 1963
income-tax shall be charged at the rates specified in Part I of First Schedule
and in cases to which Paragraph A of Part I applies, the income-tax shall
further 145 be increased by an additional surcharge for purposes of the Union
calculated in the manner provided in the First Schedule. `Clause (c) of
Paragraph prescribes the manner in which the additional surcharge is to be
calculated. It provides that additional surcharge for purposes of the Union
shall be calculated "on the amount of the residual income'.
at the rates mentioned in that clause. Thus
both the purpose and concept of the additional surcharge are different from
those of income-tax. The additional surcharge is leviable exclusively for
purposes of the Union so that the entire proceeds of such surcharge may under
Article 271 of the Constitution, from part of the Consolidated Fund of India.
taxes and duties mentioned in Article 269(1),
though levied and collected by the Government, have to be assigned to the
States in the manner provided in clause (2) of that Article.
Then again, the additional surcharge levied
for purposes of the Union is to be calculated not on total income like the
income-tax but it is to be calculated on the residual income. Section 2(8) of
the Act of 1963 defines residual income as total income reduced by (a) capital
gains, if any, included in that total income and (b) the amount of tax
(exclusive of additional surcharge) which would have been chargeable on such
reduced total income if it had been the total income no part of which had been
exempt from tax and on no portion of which deduction of tax had been
In order that the exemption granted to
co-operative banks by section 81 (i) (a) may not lose its meaning and content,
section 2(8) of the Finance Act introduces the concept of residual income on which
alone the additional surcharge is payable. The residual income is not the same
as the business income of a co-operative bank, which is exempt under section
81(i)(a) from income tax. For ascertaining the residual income the total income
is reduced by the amount of capital gains and further by the amount of tax
(other than additional surcharge) which would have been charged on such reduced
total income on the assumption that the whole of it was liable to be brought to
Thus in the instant case the additional
surcharge is not levied on the appellant's business income of Rs.
9,48,335 which is exempt from income-tax and
super-tax. It is levied on the residual] income of Rs. 5,39,386 which is
arrived at after deducting Gross taxes (exclusive of additional surcharge)
amounting to Rs. 4,60,712 from the assessee's gross income of Rs. 10,00,098. By
section 3 of the Finance Act of 1963 no account can be taken of the additional
surcharge 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. Section 3, by its terms, has precedence over anything
contained in Chapter VII or Chapter VIII A or in section 110 of the Income-tax
Act or section 2(5) of the Finance Act itself. Additional surcharge is treated
in this way as falling in a separate category.
Thus, additional surcharge is a district
chargenot dependent for its leviability on the assessee's liability to pay
income-tax or super-tax. Such a qualification cannot be read into section
2(1)(a)(ii) of the Act of 1963 as argued by the appellant. That section uses
the language that "income-tax....shall further be increased by an additional
surcharge", not for making the assessability to surcharge dependent upon
Assessability to income tax but for the simple reason that if an assessee`s
total income includes income on which no tax is payable, tax has all the same
to be computed for purposes of rate Section 110 of the Income- tax Act, 1961
provides that where there is included in the total income of an assessee any
income on which no income- tax is payable, the assessee shall be entitled to
deduction, 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. The
income-tax computed at a certain rate is by section 2(1)(a)(ii) to be further
increased by an additional surcharge for purposes of the Union. This becomes
clearer still from the language of Paragraph A, under the heading ..Surcharges
on Income Tax".
It says: "The amount of income-tax
computed at the rate hereinbefore specified shall be increased by the aggregate
of the surcharges,". If the intention was to limit the liability to pay
additional surcharge to income which can be brought to income tax, appropriate
language could have been used to convey that simple sense.
The weakness of the appellant's contention
becomes manifest when it is realised that were the contention right, the
appellant would not be liable to pay additional surcharge even on that portion
of its non-business income which is contained in the residual income. By the
definition in section 2(8) of the Act of 1963, residual income means the total
income as reduced and therefore, the non business income which is chargeable to
income-tax must form a component of the residual income. Concededly, the
appellant is liable to pay additional surcharge on its non-business income.
This is so not because additional surcharge is payable by law on non-business
income but because it is payable on residual income and residual income, by
definition, includes non business income as reduced. In fact, it consists of
the amount of total income as reduced by the amounts mentioned in clauses (a)
and (b) of section 2(8).
Relying on United Commercial Bank Ltd. v.
Commissioner of Income-tax, West Bengal(1), East India Housing and Land Development
Trust Ltd. v. Commissioner of Income-tax West Bengal(2), and K. V. Al. M.
Ramanathan Chettiar v. Commissioner of Income-tax, Madras(3), the appellant's
counsel urged that income-tax is a single levy, that it is one tax and not so
many taxes separately levied on several heads of income. This partly is the
same argument in a different disguise that an assessee who is not liable to pay
income-tax cannot be made liable to pay additional surcharge under the Finance
Act, 1963. We have rejected that contention. Partly, the argument is designed
to establish correlation with section 146 of the income tax Act, 1961 by which,
when any tax, interest, penalty, fine or any other sum is payable in
consequence of any order passed under the Act, the Income-tax office has to
serve upon the assessee a notice of demand in the prescribed form specifying
the sum so payable. This provision presents no 147 difficulty for, if an
assessee is liable to pay additional surcharge but no income-tax or super tax,
the notice of demand will mention the particular amount payable as tax due. The
appellant being liable to pay tax on its non- business income and additional
surcharge on its residual income, the demand notice will call for payment of
the total amount due from the appellant by way of tax.
The interpretation put by us on the Finance
Act, 1963 does no violence to section 4 of the Income-tax Act, 1961 under which
income-tax at the rates prescribed by the Finance Act is to be charged "in
accordance with, and subject to the provisions of." the Income-tax Act.
The Income-tax Act exempts the assessee's business income from income tax and
super-tax. The Finance Act brings to tax its residual income.
The decision of the Allahabad High Court in
Allahabad District Co-operative Bank Ltd. v. Union of India and Ors.(1) is
directly in favour of the appellant and naturally, learned counsel for the
appellant relies on it very strongly. But that case, in our opinion, is
incorrectly decided. The learned Judges were in error in holding that section 2
of the Finance Act, 1963 does not provide for the levy of a tax other than
income-tax" and that therefore additional surcharge is not payable to the
extent of the income which is exempt under section 81 of the Income-tax Act.
One of the difficulties which the learned Judges felt in accepting the
revenue's contention was that if "the additional surcharge mentioned in
the Finance Act of 1963 was 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". The very assumption of this observation is falacious
because additional surcharge indubitably partakes of the nature and essential
characteristics of income-tax. It is a tax on residual income and by reason of
the definition contained in section 2(8) of the Act of 1963, "residual
income" would include non-business income which under the Income-tax Act
is charge able to income-tax. Thus, the additional surcharge, though levied by
the Finance Act, 1963 independently of the Income-tax Act, is but a mode of
levying tax on a portion of the assessee's income computed in accordance with
the definition in section 2(8) of the Act of 1963. Therefore, the notice of
demand under section 156 of the Income-tax Act can lawfully call for the
payment of amount due from an assessee by way of additional surcharge.
For these reasons, we confirm the judgment of
the High Court but in the circumstances there will be no order as to costs.
P.H.P. Appeal dismissed.