Smith
Kline & French India Ltd. Vs. Commissioner of Income Tax [1996] INSC 556
(16 April 1996)
Jeevan
Reddy, B.P. (J) Jeevan Reddy, B.P. (J) Thomas K.T. (J)
CITATION:
JT 1996 (4) 231 1996 SCALE (3)562
ACT:
HEAD NOTE:
O R D
E R
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 [159 I.T.R.431]. 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 High Court:
(1)
"Whether 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
1976-77?" The claim 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 relevant time:
40.
Notwithstanding anything to the contrary in Section 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 of 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 assessee's claim but on further appeal by the
Revenues, 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.
The
only question before us is whether the tax levied under the Companies Profits
(Surtax) Act, 1964 is "a 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", as contemplated by the said Section 40
opens with a non-obstante clause "notwithstanding anything to the contrary
in Sections 30 to 39", which means that even if any amount is entitled to
deduction under any of the provisions contained in Sections 30 to 39, it will
be disallowed if it falls inter-alia within sub-clause (ii) of clause (a) of
Section 40. The question, therefore, is whether the tax levied under the
Companies Profits (Surtax) Act, 1964 falls within the mischief of said
sub-clause. We think it does.
The
preamble to the Surtax Act says that it is "an Act to impose a surtax on
the profits of certain companies".
Indeed,
the statement of objects and reasons appended to the Bill makes the said
intention clear. It says "the object of this Bill is to impose a special
tax on companies (other than those which have no share capital) on their excess
profits, namely, the amount by which the total income of a company as reduced
by certain types of income and certain sums and the income-tax and super-tax
payable by it exceeds a sum of ten per cent of the capital reserves and certain
borrowed moneys or a sum of Rs.2 lakhs, whichever is higher..." Section 4
is the charging Section. It says "subject to the provisions contained in
this Act, there shall be charged on every company for every assessment year
commencing on and from the first day of April, 1964, a tax (in this Act
referred to as the surtax) in respect of so much of its chargeable profits of
the previous year or previous years, as the case may be, as exceed the
statutory deduction, at the rate or rates specified in the Third
Schedule." The expression "chargeable profits" is defined in
clause 5 of Section 2. It reads: "Chargeable profits" means the total
income of an assessee computed under the Income- tax Act, 1961 for any previous
year or years, as the case may be, and adjusted in accordance with the
provisions of the First Schedule." 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 amount on which
the surtax is levied ceases to be the profits of the business. For this
reasons, 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-tax Act.
The
learned counsel for the assessee sought to rely upon Section 15 of the Surtax
Act in support of their contention that surtax does not fall within the four
corners of Section 40(a)(ii). Section 15 of the Surtax act reads as follows:
"Notwithstanding anything contained in clause (i) of Section 109 of the
Income tax Act, in computing the distributable income of a company for the
purposes of Chapter XI-D of that Act, the surtax payable by the company for any
assessment year shall be deductible from the total income of the company
assessable for that assessment year," A reading 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 the
Act.
The
learned counsel for the appellants placed strong reliance upon the decision of
this Court in Jaipuria Samla Amalgamated Collieries Ltd. v.. commissioner of
Income-Tax.
West
Bengal, (82 I.T.R. 580) to contend that a tax has to be computed in accordance
with the provisions of Income-tax Act to fall within the mischief of Section
40(a)(ii). Inasmuch as the surtax is computed on a basis different from the
basis prescribed in the Income-tax Act, it is contended, it cannot fall within
the four corners of Section 40(a)(ii). It is not possible to agree with this
contention either. The said decision was rendered with reference to sub-section
(4) of Section 10 of the Indian Income-tax Act, 1922 which corresponds to
sub-clause (ii) of clause (a) of Section 40 of the present Act. The question
therein was whether the amount payable as (i) road and public works cess levied
under the Bengal Cess Act, 1880 and (ii) the education cess levied under the Bengal (Rural) Primary Eduction Act, 1930
fall within the mischief of Section 10(4). This Court held that they do not. A
perusal of the decision shows that the road and public works cess was levied on
immovable property to provide for construction and maintenance of roads and
other works of public utility. Under Section 5 of the Act (Bengal Cess Act,
1880) all immoveable property, with certain exceptions, was subjected to
payment of road cess and public works cess. Section 6 provided that the said cesses
shall be assessed on the annual value of lands and, until provision to the
contrary was made by Parliament, on the annual net profits from mines,
quarries, tramways, railways and other immovable property at such rates as were
to be determined in the manner prescribed. Similarly the education cess was
also levied under Section 29 of the Bengal (Rural) Primary Education Act, 1930,
on immovable property on which the road and public works cesses were assessed.
The rate at which the education cess was to be levied depended upon the
character of the property; in respect of miner and quarries, it was leviable at
the rate of three and a half pice on each rupee of annual net profits. It is
thus abundantly clear that the levy of 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 decisions 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 vs. Bombay Tyre
International.(A.I.R 1994 S.C.420) and Goodricke Tea Company v. State of West
Bengal,(1995 (1) suppl.S.C.C.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. The learned counsel, however, relied upon the following
observations in the said decision: "the words "profits and gains of
any businesss profession or vocation" which are employed in section 10(4)
cans, in the context, have reference only to profits or gains as determined
under section 10 and cannot cover the net profits or gains arrived at or
determined in a manner other than that provided by section 10. The whole
purpose of enacting sub-section (4) of section 10 appears to be to exclude from
the permissible deductions under clause (ix) and (xv) of sub-section (2) such cesss,
rate or tax which is levied on the profits or gains of any business, profession
or vocation or is assessed at a proportion or on the basis of such profits or
gains. In other words, sub- section (4) was meant to exclude a tax or a cess or
rate the assessment of which would follow the determination or assessment of
profits or gains of any business, profession or vocation in accordance with the
provisions of section 10 of the Act.... These profits arrived at according to
the provisions of the two Cess Acts can by no stretch of reasoning be equated
to the profits which are determined under section 10 of the Act. It is not
possible to see, therefore, how section 10(4) could be applicable at all in the
present case." The learned counsel pointed out that this Court has in the
said decision approved the decision of the Privy Council in Commissioner of
Income-tax vs. Gurupada Dutta, (14 I.T.R.100) and has further observed that the
Parliament must be deemed to have accepted the view taken by the Privy Council
by not changing the language of the relevant provision in the 1961 Act [Section
40(a)(ii)].
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. Bat so for 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 clear.
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 contrary view in the decisions in Makum Tea company [India] Limited & Anr.V. Commissioner
of Income Tax [178 I.T.R.453] and Doom Dooma Tea Company Limited V.
Commissioner of Income Tax [180 I.T.R.126]. tax. The decision of the Gauhati
High Court in Mukum Tea Company [India] Limited is under appeal before us in Civil Appeal 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 Company
Limited. (On enuiry, the office has informed that no Special Leave
petition/Civil Appeal has been filed against the decision in Doom Dooma Tea
Company Limited.) For the aforesaid reasons, we can not agree with the view
taken by the Gauhati High Court in the aforesaid decisions.
We
agree with view taken by the High Courts of Calcutta (Molins [India] Limited V.
Commissioner of Income Tax, West Bengal-III [144 I.T.R.317]) and Brooke Bond
[India] Limited V. Commissioner of Income Tax [193 I.T.R.390), Bombay (Lubrizol
[India] Limited V. Commissioner of Income Tax [187 I.T.R. 25] followed in
several other decisions of that Court), Karnataka (Commissioner of Income Tax,
Karnataka V.
International
Instruments Private Limited [144 I.T.R.936), Madras (Sundaram Industries
Limited V. Commissioner of Income Tax [159 I.T.R.646]), Andhra Pradesh (Vazir
Sultan Tobacco Company Limited V. Commissioner of Income Tax [169 I.T.R.35]),
Rajasthan (Associated Stone Industries Company Limited V. Commissioner of
Income Tax [170 I.T.R.653]), Gujarat (S.L.M.Maniklal Industries Limited V.
Commissioner of Income Tax [172 I.T.R.176] followed in several cases
thereafter), Allahabad (Himalyan Drug Company Private Limited V. Commissioner
of Income Tax [218 I.T.R.346]) and Punjab Haryana High Court (Hiqhway Cycle
Industries Limited V. Commissioner of Income Tax [178 I.T.R.601]) Accordingly,
the appeals preferred by the assessees are dismissed with costs assessed at
Rupees two thousand in each appeal, while the two appeals preferred by the
Revenue are allowed with costs of Rupees two thousand in each appeal.
Before
parting with this case, it may be mentioned that when this batch of appeals was
posted before us, it included an appeal preferred against a judgment of the
Andhra Pradesh High Court rendered by a Bench comprising one of us (B.P.Jeevan Reddy,J.).
The said decision merely followed an early decision of that Court. Accordingly
with the consent of the counsel for the parties, the said appeal was deleted
from the batch and the remaining appeals in the batch taken up for hearing.
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