S L M MANEKLAL INDUSTRIES LIMITED Vs. COMMISSIONER OF INCOME TAX
HIGH COURT OF GUJARAT
S.L.M. MANEKLAL INDUSTRIES LTD.
COMMISSIONER OF INCOME TAX
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(1.)THE Income tax Appellate Tribunal ("the Tribunal" for short) has at the instance of the assessee referred to us for our opinion the following question under S. 256(1)of the IT Act:
" Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that surtax is not deductible while computing the business income ? "
(2.)THE assessee is a public limited company and the assessment year under reference is 1971 72. In its appeal against the assessment made by the ITO filed before the AAC, the assessee made a
claim for deduction of surtax paid by it from its total income. In support of its claim, the assessee
relied on the decision of the Bombay Bench of the Tribunal in the case of Bennet Coleman & Co.
Ltd., Bombay vs. ITO, Central Bombay (ITA No. 3068 (Bom)/1972 73). The AAC, however, held
that surtax was leviable on chargeable profits after determining the total income and the tax
thereon. He, therefore, held that the assessee's claim of deduction of surtax was not admissible.
Being aggrieved by the decision of the AAC, the assessee went in appeal before the Tribunal. The
Tribunal, however, following the decision of its Special Bench in Amar Dye Chemicals Ltd. vs. ITO,
Company Circle II(3), Bombay (ITA No. 3643 (Bom) of 1974 75 decided on December 1, 1977),
confirmed the view taken by the AAC. It is in the background of the above facts that the question
set out above has been referred to us for our opinion.
Two contentions are raised on behalf of the assessee, namely, (i) that surtax is an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee and,
therefore, its deduction is admissible under S. 37 of the IT Act, and (2) that surtax is not a tax
levied on the profits or gains of business within the meaning of S. 40(a)(ii) of the IT Act and,
therefore, its deduction is not excluded.
(3.)THE question which we have to consider is whether the liability for surtax is allowable as business expenditure in computing the total income of the assessee under the IT Act. The assessee
contends that surtax is an expenditure laid out or expended wholly and exclusively for the purpose
of the business of the assessee and its deduction is allowable under S. 37 of the IT Act. Sub s. (1)
of S. 37, on which reliance is placed on behalf of the assessee, provides that any expenditure (not
being expenditure of the nature described in ss. 30 to 36 and S. 80VV and not being in the nature
of capital expenditure or personal expenditure of the assessee), laid out or expended wholly and
exclusively for the purposes of the business or profession shall be allowed in computing the income
chargeable under the head " Profits and gains of business or profession ". Under S. 40(a)(ii),
notwithstanding anything to the contrary in ss. 30 to 39, any sum paid an 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, is not allowable under the head " Profits and
gains of business or profession ". Therefore, deduction of expenditure falling under S. 37 will not be
allowable if it comes within the mischief of S. 40(a)(ii). The question of embargo under S. 40(a)(ii)
would arise only if the expenditure is an allowable deduction under S. 37. In other words, the
question whether the expenditure comes within the mischief of S. 40(a)(ii) would not arise for
consideration, if it is not an allowable deduction under S. 37.
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