The Judgment of the Court was delivered by

Chandurkar, J.:— The following question has been referred to this court under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee:

“Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,69,218 being the surtax paid under the Companies (Profits) Surtax Act, 1964, is an admissible deduction in computing the assessee's income from business?”

2. The assessment year in question is 1971–72 relevant to the accounting year ended on March 31, 1971. For this assessment year, the company claimed a deduction of Rs. 2,69,218 representing the amount of surtax paid by it in the computation of its profits liable for income-tax. The admissibility of this deduction by an additional ground was raised before the Appellate Assistant Commissioner who negatived the claim on the ground that the surtax paid was not expenditure incidental to the carrying on of the business. The matter was taken to the Tribunal. A similar question was already before the Tribunal in an appeal filed by Messrs. Industrial Chemicals Ltd., Madras. The Tribunal had already taken the view in the case of Industrial Chemicals Limited that the liability to pay tax becomes an allowable deduction only if the payment is made for the purpose of the business and if the expenditure is laid out by the assessee as owner-cum-trader and if it is really incidental to the carrying on of the business. It was found that the surtax was in a sense a surcharge levied on the assessee in addition to the income-tax paid by the assessee and computed in accordance with the formula laid down in the Act and surcharge was also a tax on the chargeable profits, the basis of which is the total income as worked out for income-tax purposes. Applying the ratio of the decision of the Supreme Court in CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140, the Tribunal took the view that the tax payable on the total income of the company could not be claimed as a deduction from the business income included in the total income and consequently the surtax paid or payable also could not be deducted from the business income or the total income of the assessee. The learned Accountant Member of the Tribunal who delivered the main judgment held that in view of the earlier finding, it was not necessary to consider whether the deductibility of surtax was excluded by the provisions of section 40(a)(ii) of the Income-tax Act, 1961. However, he was inclined to take the view that surtax was not calculated on the profits and gains of a business or profession or referable to it and it was based on the total income of the assessee being a company and even in a case where the assessee has no business income or a business loss, surtax might become payable if its total income was such as to give rise to chargeable profits. The learned Accountant Member, therefore, took the view that the main condition necessary for the applicability of section 40(a)(ii), namely, relation of the tax or rate to a business or profession was completely absent and section 40(a)(ii) may not, therefore, be fatal to the assessee's claim. The learned Judicial Member who agreed with the view of the Accountant Member that the surtax paid or payable cannot be deducted from the business income or the total income of the assessee did not think it necessary to consider the question as to whether in the event of the surtax paid or payable being held as allowable either under section 37 or section 28 of the Income-tax Act, 1961, the same had to be disallowed under section 40(a)(ii). The Tribunal in the case of the present assessee followed this decision and rejected the claim for deduction made by the assessee. That is how the question reproduced above has been referred to this court for opinion. In the case of Industrial Chemicals Limited, Madras, also the same question has been referred in T.C No. 287 of 1979. The question being common, we have heard Mr. S.V Subramaniam for the assessee also.

3. Mr. Swaminathan who has appeared for the assessee has contended that the payment of surtax must be treated as incidental to the carrying on of the business and unless there was a prohibition made expressly by the statute, the liability for surtax must be treated as business expenditure. Heavy reliance has been placed before us on the decision of the Supreme Court in Indian Aluminium Co. Ltd. v. CIT, [1972] 84 ITR 735, in which it was held that the wealth-tax paid by the assessee which was a trading company on assets held by it for the purpose of its business was deductible as a business expense in computing the assessee's income from business. Some decisions were cited by way of illustration to indicate that taxes paid are permissible deductions under section 37 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). In that context, reference was made to the decision in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT, [1971] 82 ITR 580 (SC), Dehra Dun Tea Co. Ltd. v. CIT, [1973] 88 ITR 197 (SC) and Mitsui Steamship Co. Ltd. v. CIT, [1975] 99 ITR 7 (SC). In the case of Jaipuria Samla Amalgamated Collieries Ltd., the question was whether the cess paid under the Bengal Cess Act, 1880, and education cess under the Bengal (Rural) Primary Education Act, 1930, in relation to the coalmines which the assessee company had taken on lease was deductible or whether such deduction was prohibited under section 10(4) of the Indian Income-tax Act, 1922. The Supreme Court held that the profits arrived at according to the provisions of the two Cess Acts could not be equated to the profits which were determined under section 10 of the Act and, therefore, section 10(4) was not attracted; and the cesses paid by the assessee were allowable as deductions in computing its business profits. In the same decision, while considering the provision under section 10(4) of the Indian Income-tax Act, 1922, the Supreme Court held that the words “profits and gains of any business, profession or vocation” in section 10(4) can, in the context, have reference only to profits or gains as determined under section 10 and could not cover the net profits or gains arrived at or determined in a manner other than that provided by section 10. Section 10(4) was construed as excluding only a tax or 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. This part of this decision would really become relevant when we come to the question of construction of section 40(a)(ii) of the Income-tax Act, 1961. In Dehra Dun Tea Co. Ltd. v. CIT, [1973] 88 ITR 197, the Supreme Court held that the tax paid by the appellants, tea companies, on their tea garden lands under the U.P Large Land Holdings Tax Act, 1957, was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922, in computing their business income and such tax was not a wealth-tax or any of the other taxes referred to in the Explanation to sub-clause (iia) inserted in section 40(a) of the Income-tax Act, 1961, by section 2 of the Income-tax (Amendment) Act, 1972. The Supreme Court relied on the ratio of the decision in Indian Aluminium, Company Limited v. CIT, [1972] 84 ITR 735 in which it was held that if the expenditure laid out by the assessee is as an owner-cum-trader and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business and held that the lands owned by the assessee companies were its business assets and the tax paid thereon under the U.P Act XXXI of 1957 was an item of expenditure laid out by the assessee companies as traders and as incidental to their business. The same principle was applied in the Mitsui Steamship Company's case, [1975] 99 ITR 7 (SC), where the assessee which was a Japanese shipping company had to pay municipal property tax on their vessels which was held to be allowable as a deduction under section 10(2)(xv) of the Income-tax Act, 1922.

4. The substantial argument of the learned counsel for the assessee in this case is that if payment of tax is to be treated as incidental to the business, then by the very terms of section 37 of the Income-tax Act, 1961, the expenditure so incurred must be treated as wholly and exclusively for the purpose of business. In pointing out the meaning of the word “incidental”, the learned counsel has referred us to the observations of Griffith C.J in Moffatt v. Webb, [1913] 16 CLR 120, which had been cited with approval by the Supreme Court in the Indian Aluminium Company Ltd.'s case, [1972] 84 ITR 735. The observations are as follows (p. 743):

“‘The possession of land is necessarily incidental to carrying on the business of a grazier; the payment of land tax is a necessary consequence of the possession of land of taxable value, whether the land is freehold or leasehold; the payment of land tax is therefore a necessary incident of carrying on the business of grazing. The case, therefore, seems to me to come within the exact words of the first paragraph of section 9.’ (Section 9 is substantially similar to section 10(2)(xv) of the Indian Income-tax Act, 1922).”

5. The learned counsel, therefore, pointed out that having regard to these observations, the liability to pay surtax must be treated as incidental to the carrying on of business and, therefore, by virtue of section 37, the amount must be permitted as deductible. The learned counsel also contended that the ratio of the decision of the House of Lords in British Insulated and Helsby Cables Ltd. v. Atherton, [1925] 10 TC 155, that in order to claim deduction, it is enough to show that the money was expended “not of necessity” and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on the business, has been approved by the Supreme Court in Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal, [1951] 20 ITR 1 (SC) and in CIT v. Chandulal Keshavlal & Co., [1960] 38 ITR 601 (SC). The argument, therefore, was that surtax which is a statutory exaction had to be paid by the assessee, so as to facilitate the carrying on of the business by the assessee. It must be said in fairness to the learned counsel for the assessee that he has himself brought to our notice two decisions which take a view contrary to his contentions. In Molins Of India Ltd. v. Commissioner Of Income-Tax, West Bengal-Iii., [1983] 144 ITR 317, the Calcutta High Court held that the tax imposed by the Companies (Profits) Surtax Act, 1964, was essentially of the same character as income-tax or excess profits tax and liability to pay this tax depends upon whether profits are made or not. It was held that taxes such as these are not paid for the purposes of earning profits of the trade, but they are an application of those profits after they have been earned. The Division Bench of the Calcutta High Court also held that surtax was not also allowable in view of the provisions of section 40(a)(ii) of the Income-tax Act, 1961, and the term “tax” in the said provision could not be understood to mean only income-tax. It was held that the tax sought to be imposed on a company by the Companies (Profits) Surtax Act comes within the mischief of section 40(a)(ii). The other decision is CIT v. International Instruments P. Ltd., [1983] 144 ITR 936 (Kar). The Division Bench of the Karnataka High Court held that the surtax levied on the chargeable profits under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the “Surtax Act”) was nothing but an additional tax on the profits and gains of an assessee's business and since surtax was a charge on the profits and gains of the business of companies, the company was not entitled to claim deduction of surtax payable by it in computing its total income under the Income-tax Act. This decision does not refer to the decision of the Calcutta High Court and the conclusions have been independently arrived at.

6. Mr. Subramaniam who appeared in the other tax case has adopted the arguments of Mr. Swaminathan on the question whether the surtax liability was deductible under section 37 of the Act but submitted with regard to the construction of section 40(a)(ii) of the Act that the word “tax” is defined in section 2(43) and it must have the same meaning in section 40(a)(ii). According to him, since “tax” as defined in section 2(43) of the Act, in so far as the year of assessment in the instant case is concerned, meant “income-tax chargeable under the provisions of this Act”, the scope of section 40(a)(ii) must be restricted only to income-tax and section 40(a)(ii) cannot be invoked by the Revenue to contend that surtax is not deductible in view of the provisions of section 40(a)(ii) of the Act. The learned counsel appearing on behalf of the Revenue has pointed out that the Income-tax Act is an all India statute and since the question of deductibility of surtax under section 37 has already been construed by two High Courts against the assessees, this court should accept the same construction and reference has been made to the decision-of the Bombay High Court in CIT v. T. Maneklal Mfg. Co. Ltd., [1978] 115 ITR 725, to which one of us was a party. The Bombay High Court has taken the view that the Income-tax Act being an all India statute, uniformity in the construction of its statutory provisions is eminently desirable and the considered opinion of any other High Court should be followed unless there are overriding reasons for taking a divergent view. Apart from this decision of the Bombay High Court, there are a large number of decisions which take this view to which reference has been made in Kanga and Palkhivala's Law and Practice of Income Tax, seventh edition, volume 1, page 5 in foot-note (iv). The learned counsel for the Revenue has also relied on the two decisions of the Calcutta and Karnataka High Courts referred to above and has contended that these two decisions are well-considered decisions. Even otherwise, according to the learned counsel, when an assessee carries on a business, that business is carried on for the purpose of profit and not for payment of tax and consequently, the tax paid cannot be treated as expenditure incurred wholly and exclusively for the purpose of business and reference was made to the decision in East India Pharmaceutical Works Ltd. v. CIT, [1978] 114 ITR 591 (Cal). In that decision, while dealing with the concept of “business expenditure”, it was pointed out that an expenditure cannot be allowed as a business expenditure under section 37(1) of the Income-tax Act, 1961, unless it was incurred or laid out directly or indirectly by the assessee wholly and exclusively for the purpose of his business. The Division Bench observed that a trader carries on the business for the purposes of earning profits and not for the purposes of paying income-tax and though the earning of profits and the payment of taxes are not isolated and independent activities of a business, yet the expenditure incurred or laid out for the purpose of the payment of income-tax would not fall within the scope of the expression “for the purpose of the business”.

7. With reference to the definition of “tax” in section 2(43), it was contended that the definition section commences with the usual phraseology “unless the context otherwise requires”. Thus, according to the learned counsel for the Revenue, the term “tax.” must be given a wide meaning and should not be restricted to mean only “income-tax”.

8. It is now an accepted principle in the matter of construction of an Indian statute that as far as possible, there must be uniformity of construction and if the provisions of law which fall for consideration before the court have already been construed by another High Court or High Courts, unless there are compelling reasons to depart from that view, normally that construction should be accepted. Therefore, before we consider the arguments elaborately advanced by Mr. Swaminathan, it becomessnecessary to consider in detail the decision of the Calcutta High Court in Molins Of India Ltd. v. Commissioner Of Income-Tax, West Bengal-Iii., [1983] 144 ITR 317. The question involved in that case is identical to the one that is before us. One of the arguments advanced in that case on behalf of the assessee was that the surtax liability was a statutory charge on the income of the company and the income of the assessee had been statutorily diverted at source. This argument was rejected. We are in this case not concerned with this argument because no such argument has been advanced before us and indeed rightly so. The Calcutta High Court on a construction of the scheme of the Surtax Act took the view that it was basically an additional tax levied on the income of the company and the court took the view that the computation of income for the purpose of the Income-tax Act must precede an assessment under the Surtax Act. At page 332, the Division Bench observed as follows:

“The computation of income for the purpose of I.T Act must precede an assessment under C. (P.) S.T Act. The total income under the I.T Act must be calculated, the tax payable under the I.T Act has to be determined and then only the question of computation of chargeable profits of the company will arise. In computing the chargeable profits, the amount of income-tax has to be deducted. There is no provision similar to s. 12 of the Excess Profits Tax Act or s. 10 of the Business Profits Tax Act wherein it was specifically provided that these two taxes will be deductible from the total income for the purpose of computation of income-tax.”

9. The Calcutta High Court referred to the decision of the Supreme Court in Indian Aluminium Company's Ltd. case, [1972] 84 ITR 735 (SC), and posed the question at page 335 of 144 ITR as follows:

“The real question is whether a tax which has been imposed on the total income of a company after some adjustments can be allowed as a deduction in computing total income of that company under the I.T Act. Is it a business expenditure of the company?”

10. The Calcutta High Court referred to the judgment of Beg J., as he then was, in the Indian Aluminium Company Ltd.'s case, [1972] 84 ITR 735 (SC), in which the distinction between income-tax and wealth-tax was pointed out as follows at p. 335 of 144 ITR:

“In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to meet such taxes cannot be deducted. But, where the tax was levied, as it was in Harrods' case ([1964] 41 TC 450 (CA)], on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits.”

11. At page 338, the Calcutta High Court dealt with the argument-advanced on behalf of the assessee that the earning of profit and payment of taxes are not isolated and independent activities and those activities are continuous and take place from year to year and since the liability to pay income-tax and surtax arises because a person is carrying on the business by which he earns profits, the liability to pay the tax is an incidence of carrying on of the business through which he earns profits. Negativing this argument, the Calcutta High Court observed as follows (at page 338 of 144 ITR):

“The question in this case is whether a tax imposed on the profits of a company is allowable as deduction in computing the total income of the company. The subject-matter of the tax is profits. Whatever profits the company has made are being brought to the charge of surtax. The tax will be calculated according to the amount of profits that the assessee has earned. It is very difficult to see how the tax proposed to be levied on the profits can be deducted from the profits as expenditure wholly and exclusively laid out for business. Without an express provision to that effect, there is no scope for deducting the estimated amount of surtax from the profits for the purpose of arriving at the taxable income.”

12. With regard to the construction of section 40(a)(ii), the Calcutta High Court pointed out that the preamble of the Surtax Act stated that the Act was to impose a special tax on the profits of certain companies. It was held that the surtax imposable has to be calculated on the basis of the total income of the assessee-company after making statutory adjustments and if the tax that is sought to be imposed is not on the profits or gains of the business of the assessee, it is certainly levied on the basis of the profits or gains made by the assessee-company in its business and, therefore, it could not be said that the tax sought to be imposed by the Surtax Act will not come within the mischief of section 40(a)(ii) of the Income-tax Act. The decision of the Calcutta High Court is a well considered decision. The Calcutta High Court also negatived the argument which is advanced before us now by Mr. Subramaniam that the definition of “tax” in section 2(43) must be read in section 40(a)(ii) of the Act. The relevant observations are as follows (p. 328 of 144 ITR):

“We are unable to accept the contention that ‘tax’ in s. 40(a)(ii) must be understood to mean only income-tax. The definition given in s. 2(43) only will apply ‘unless the context otherwise requires’. The expression ‘any rate or tax’ in s. 40(a)(ii) means any rate or any tax and not income-tax only. That the section is not confined to income-tax only is made clear by the words ‘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;”

13. The decision of the Calcutta High Court is a well-considered decision and unless it is shown that the view taken by the Calcutta High Court is not at all possible to be taken, we would normally accept that view. The decision of the Karnataka High Court in CIT v. International Instruments P. Ltd., [1983]-144 ITR 936, also takes a similar view. The Karnataka High Court referred to the observations of the Privy Council in Ashton Gas Co. v. Attorney-General, [1906] AC 10 (HL) (at p. 12), which were as follows (p. 940):

“The income-tax is a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax—you have no right to deduct the income-tax before you ascertain what the profit is.”

14. After referring to the provisions of the Surtax Act, the Division Bench of the Karnataka High Court observed as follows (p. 941):

“It is thus seen from the above provisions that the surtax levied on the chargeable profits under the Surtax Act is nothing but an additional tax on the profits and gains of the assessee's business. The total income computed under the I.T Act undergoes a further process of computation under the Surtax Act to arrive at the chargeable profits, but, none the less, the surtax remains ultimately a charge on the profits and gains of the companies.”

15. Though the argument with regard to the provisions of section 40(a)(ii) of the Act was noticed by the Division Bench, the argument has been rejected. But the rejection of the argument seems to be mainly on the ground that the Bench had already taken the view that the surtax levied or leviable could not be considered as an admissible deduction in the computation of the business profits of the company and if that argument was accepted, then section 15 of the Surtax Act would become superfluous.

16. Apart from the fact that the decision of the Calcutta High Court appears to us to lay down the correct law, even on merits, it is difficult for us to accept the contention of the learned counsel for the assessee that the surtax should be treated as a permissible deduction under section 37 of the Act. Since the matter has been exhaustively argued by the learned counsel for the assessee in reference, we will deal with his arguments. The Surtax Act, 1964, is described in the preamble as an Act to impose a special tax on the profits of certain companies. The charging provision is in section 4 which reads as follows:

“Charge of tax.—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.”

17. The charging provision will show that the subject-matter of the charge is so much of the chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction and the rate at which the charge is levied is specified in the Third Schedule. Chargeable profits are defined in section 2(5) as follows:

“‘chargeable profits’ means the total income of an assessee computed under the Income-tax Act, 1961 (XLIII of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule;”

18. Reading the definition of “chargeable profits” and the charging provision, the subject-matter of the charge on which surtax is levied is clearly the total income of an assessee computed under the Income-tax Act, 1961. That income has to be adjusted in accordance with the provisions of the First Schedule. In the First Schedule, a procedure is laid down for computing the chargeable profits. Adjustments as indicated in the First Schedule are to be made but those adjustments are to be made in “the total income computed for that year under the Income-tax Act Rule 1 refers to certain exclusions. Rule 2, which operates after rule 1 is given effect to, deals with certain further deductions. Under rule 3, the net amount of income calculated in accordance with rule 2 has to be increased as indicated therein. It is, therefore, clear that the Act is expressly intended to impose a special tax on the profits of certain companies and chargeable profits for the purpose of surtax have to be determined primarily with reference to the total income of the assessee-company computed under the Income-tax Act, 1961. It is difficult to see why the surtax cannot be considered as an additional tax imposed on the subject-matter of the charge which is to be computed taking the total income of an assessee computed under the Income-tax Act, 1961, as the basis.

19. Undoubtedly, the liability to pay tax arises on the determination of the profits in accordance with the provisions of the Income-tax Act. When such is the position, it is difficult to see how for the purpose of determination of profits which are the subject matter of the tax to be levied, the surtax should itself be deducted. The observations of Buckley J. in Ashton Gas Company's case, [1904] 2 Ch 621 (CA) and of Lord Halsbury made in the House of Lords [1906] AC 10, when the same case went up in appeal are, in our view, very instructive. In Ashton Gas Company's case, Buckley J., observed as follows (at p. 624):

“The profits are not arrived at after deducting income-tax. The income-tax is part of the profits—namely, such part as the Revenue is entitled to take out of the profits. A sum which is an expense which must be borne whether profits are earned or not, may no doubt be deducted before arriving at profit. But a proportionate part of the profits payable to the Revenue is not a deduction before arriving at, but a part of, the profits themselves.”

20. In appeal, Lord Halsbury observed in [1906] AC 10 (HL) at p. 12 as follows:

“Profit is a plain English word; that is what is charged with income-tax The income-tax is a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax—you have no right to deduct the income-tax before you ascertain what the profit is. I cannot understand how you can make the income-tax part of the expenditure. I share Buckley J.'s difficulty in understanding how so plain a matter has been discussed in all the courts at such extravagant length.”

21. These observations, in our view, apply with full force to the case before us. The surtax is a tax on chargeable profits. Therefore, what must be determined is the chargeable profit and the chargeable profits are determined only with reference to the profits determined in accordance with the Income-tax Act. The surtax is, therefore, a part of the profits which, in addition to the income-tax, the Revenue claims by virtue of a statutory provision. Surtax cannot, therefore, be an item which becomes deductible even before the profits are determined.

22. The argument based on the phraseology to be found in section 37 does not seem to be of much assistance to the assessee. The phraseology “expenditure………laid out or expended wholly and exclusively for the purpose of such business, profession or vocation” in section 10(2)(xv) of the Indian Income-tax Act, 1922, is identical to the phraseology used in section 37 of the Income-tax Act, 1961. This phraseology was originally considered by the Supreme Court in CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140 (SC). Undoubtedly, in that decision, the Supreme Court observed that the expression “for the purpose of the business” is wider in scope than the expression “for the purpose of earning profits”. At page 150 of that decision, the observations are as follows:

“The aforesaid discussion leads to the following result: The expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business.”

23. It is important to point out that notwithstanding the wide scope of the words “for the purpose of the business”, the Supreme Court also laid down that, however wide the meaning of the expression may be, its limits are implicit in it. The limit of the scope of the said expression is laid down by the purpose for which the expenditure is incurred and that purpose, as the Supreme Court points out, shall be “for the purpose of the business”, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. The question, therefore, which falls for consideration is, where a statutory tax is paid, can it, by any stretch of imagination, be considered as an expenditure incurred for the carrying on of the business? Undoubtedly, in the Indian Aluminium Company Ltd.'s case, [1972] 84 ITR 735, the Supreme Court has observed that the observation made in the decision in the Travancore Titanium's case, [1966] 60 ITR 277 (SC), that “to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e, between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business” needed to be qualified by stating that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. These observations have to be understood in the light of the question which fell for consideration before the Supreme Court, namely, whether wealth-tax in respect of property which constituted the assets of the business was paid as owner or as trader and it is in that context the observations of Griffith C.J in Moffatt v. Webb, [1913] 16 CLR 120, on which reliance has been placed, were referred to by the Supreme Court. The land in respect of which tax was paid in Moffatt v. Webb, [1913] 16 CLR 120, was the land which was put to use for the purpose of business as a grazier. Indeed, that was the sole use as will appear from the observations of Barten J., which are reproduced by the Supreme Court at page 743. They are as follows:

“……the sole use to which the appellant puts the land is for the purposes of his business as a grazier. He needs a large area of land for that purpose, and this area of about 18,000 acres is applied to his business needs. It seems too much altogether to say that he would have to pay the federal tax on this land if he did not carry on the grazing business. Somebody would be taxed, no doubt, but would it be the appellant? It cannot be predicated that he would own the land at all if he carried on any other business. It is scarcely an inference from the case to say that he holds the land simply as an instrument essential to the proper conduct of his business: I think it is the fair meaning of the first paragraph at which we can arrive without inserting anything not imported by the words. If I am right there, then is the land tax payment a disbursement or expense wholly and exclusively laid out or expended for the puposes of the business? It may not be so if the criterion is whether the business could be carried on without payment of the tax. But, I do not think that is the criterion. Is the payment wholly and exclusively incidental to the carrying on of the business? Well, it is only by reason of the necessity of land for his business that he holds this land, and it is only because of his holding it for his business that he necessarily pays the tax, for without the business it cannot be said that he would hold the land at all. In view, then, of the particular facts, I think the payment is incidental to the conduct of his business, and that it is money wholly and exclusively expended for the purposes of his trade.”

24. The concluding observations of Barten J. will show that the concept of payment being incidental to the conduct of the business was made on account of the fact that the land was a business asset and that it was only by reason of the necessity of land for his business that he holds the land and because of his holding it for his business, the assessee had paid the tax. What is important is the further observation that “without the business, it cannot be said that he would hold the land at all.” The word “incidental” used in the context of “conduct of his business” must, therefore, be understood in that context. In Indian Aluminium Company Ltd.'s case, [1972] 84 ITR 735, the Supreme Court observed as follows (p. 747):

“In our view, the test adopted by this court in Travancore Titanium's case, [1966] 60 ITR 277 that to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e, between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business' needs to be qualified by stating that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business.”

25. It appears to us that these observations have to be read as indicating that the payment became incidental to the business because the tax was paid as owner-cum-trader in respect of the assets of the business. These observations, cannot be read, in our view, with respect, as meaning that surtax required to be paid only after determination of profits will be a payment incidental to the business. This aspect is highlighted in the judgment of Beg J., as he then was, in which the learned Judge observed as follows (p. 749 of 84 ITR):

“The Court of Appeal quoted passages from the opinions of the law Lords in Rushden Heel Co.'s case, [1948] 30 TC 298 (HL) and Smith's Potato Estate's case, [1948] 30 TC 267 (HL) to show that the ratio decidendi of these two decisions confined the principle applied there to cases where taxes, like the income-tax and excess profits tax, had to be paid upon and after a calculation of profits and did not extend to other cases. In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to meet such taxes cannot be deducted. But, where the tax was levied, as it was in Harrods' case, [1964] 41 TC 450 (CA), on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits.”

26. The decision in Indian Aluminium Company Ltd.'s case, [1972] 84 ITR 735 (SC) must, therefore, be read as merely laying down that where capital or assets used for the purpose of earning the profits are taxed, then payment of such tax was a permissible deduction in calculating profits. If that was the ground on which wealth-tax was held to be a permissible deduction, that analogy cannot be made applicable to a case where the subject matter of the tax is the profits themselves and not the assets which are necessary for the earning of the profits. The three Supreme Court decisions in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT, [1971] 82 ITR 580, Dehra Dun Tea Co. Ltd. v. CIT, [1973] 88 ITR 197 and Mitsui Steamship Co. Ltd. v. CIT, [1975] 99 ITR 7 are, in our view, illustrations of the tax being levied either on the assets which are to be used for the purpose of trade or business or by way of payment to be made before the business can legally be started. We are, therefore, not inclined to accept the submission that surtax is a deduction permissible under section 37 of the Income-tax Act. Strictly speaking, this is enough to answer the question against the assessee. However, since the question as to whether section 40(a)(ii) bars such a deduction has also been argued, we will proceed to consider that argument.

27. Section 40(a)(ii) reads as follows:

“40. Notwithstanding 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—……

(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;”

28. Our attention has been invited to the decision in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT, [1971] 82 ITR 580 (SC), where a similar provision contained in section 10(4) of the Indian Income-tax Act, 1922, was considered by the Supreme Court. That was a case in which the assessee was carrying on business of raising coal from coal mines and selling it. He had paid road and public works cess under the local State Cess Act as well as education cess under the local State Cess Act in relation to the coal mines which had been taken on lease. The cess was leviable under the respective statutes on the annual net profits which had to be calculated on the average of the annual net profits for the last three years for which accounts had been made up. The question was whether the deduction of these payments was prohibited by section 10(4) of the Indian Income-tax Act, 1922. In that context, the Supreme Court held that the profits arrived at according to the provisions of the two local statutes could not be equated to the profits which were determined under section 10 of the Act and, therefore, section 10(4) was not attracted; and the cesses paid by the assessee were allowable as deductions in computing its business profits. The Supreme Court construed the words “profits and gains of any business, profession or vocation” in section 10(4) as having 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 Supreme Court held that section 10(4) excluded only a tax or 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. Relying on this provision it was contended by Mr. Swaminathan that the surtax is not levied on the profits or gains of any business or profession as assessed under the Income-tax Act because unless the chargeable profits are determined in accordance with the Surtax Act, surtax cannot be levied at all. Therefore, according to the learned counsel, the deductibility of surtax is not covered by section 40(a)(ii). This argument, in our view, overlooks the fact that for determination of chargeable profits, the total income of an assessee computed under the Income-tax Act, 1961, is the basic figure. Merely because the basic figure of total income of the assessee computed in accordance with the Income-tax Act is modified by certain adjustments, the surtax will not cease to be a tax which is levied on the basis of such total income of the assessee. What is really applicable in the instant case is the residuary part in sub-clause (ii) of section 40(a). That clause, in so far as the facts of the present case are concerned, will read as follows:

“Notwithstanding 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—……

(ii) any sum paid on account of any rate or tax levied on the basis of, any such profits or gains;”

29. It is true that the word “tax” has been defined in section 2(43) as already indicated. But haying regard to the purpose and the context in which that word is used in section 40, it is obvious that the words “any rate or tax levied” must be read as “any rate or any tax levied The word “any” will, therefore, qualify both “rate” and “tax” and once we hold that the word “any” will qualify “tax” also, then “any tax” will necessarily take in taxes other than the tax under the Income-tax Act also. It is also true that the Legislature by a specific amendment brought in by the Income-tax (Amendment) Act, 1972, made wealth-tax also non-deductible by adding a new clause after clause (a) in section 40 as follows:

“(iia) any sum paid on account of wealth-tax………” (“Explanation” is not relevant for our purpose).

30. This amendment has given rise to an argument that where the Legislature contemplated that certain taxes should not be deducted for the purpose of computation of total income, which has been specifically so enacted, and since reference is made only to wealth-tax, the other taxes, if any, must necessarily be considered as deductible. The argument cannot be accepted because we have to construe section 40(a) and its clauses harmoniously and if in view of the general provision in section 40(a)(ii) it would not be permissible to allow surtax to be deducted, merely because wealth-tax alone is mentioned by an amendment, the scope of the general provision in section 40(a)(ii) cannot in any way be restricted. Having considered the arguments of the learned counsel for both the assessees, we must, therefore, hold that the amount of surtax paid or payable by the assessee-company was not deductible under section 37 and further that section 40(a)(ii) also prohibited such a deduction. The question referred to us is, therefore, answered in the negative and against the assessee. The assessee will pay the costs of this reference Rs. 500.

31. T.C No. 287 of 1979: The question referred at the instance of the assessee in this reference is as follows:

“Whether, on the facts and in the circumstances of the case, the sum of Rs. 52,765, provision for surtax, was a proper deduction in computing the total income under the Income-tax Act, 1961, for the year under appeal?”

32. In view of our decision rendered just now in T.C No. 636 of 1978 in which we have also heard the counsel for the assessee, the question has to be answered in the negative and against the assessee. Assessee to pay the costs of this reference—Rs. 500.