Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference Cases Nos. 109 and 110 of 1979

Judges

K. Jagannatha Shetty
S.R Rajasekhara Murthy, JJ.

Acts

COMPANIES PROFITS SURTAX ACT 1964
section 220(2) of the Income-tax Act, 1961,
Finance Act No. 2 of 1980.(2) Question
s. 15 of the Surtax Act
s. 220(2) of the I.T Act
s. 2(45) of the I.T Act
Finance (No. 2) Act, 1980
Schedule. Section 2(8)

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Smart Summary

Structured Summary of Court Opinion (Rajasekhara Murthy, J.)

Factual and Procedural Background

The Income-tax Appellate Tribunal, Bangalore Bench referred four questions to this Court concerning issues arising from the assessment of a private limited company for the assessment year 1975-76. The facts and procedural history as stated in the opinion are:

The assessee claimed depreciation under s. 32 of the Income-tax Act in respect of capital assets which were utilised for scientific research during the previous year relevant to assessment year 1975-76, although those assets had been purchased and brought into use for scientific research in earlier years and full deduction under s. 35 had been given in those earlier years. The ITO disallowed this claim; the AAC allowed it relying on a Tribunal order in Indian Telephone Industries; the Department appealed to the Tribunal which followed Indian Telephone Industries and upheld the AAC order. The Court noted that s. 35 had been amended retrospectively by the Finance (No. 2) Act, 1980, making the assessee not entitled to relief for the later year; Question No. 1 was therefore answered negatively in favour of the Department.
Question No. 3 concerned disallowance of interest paid under s. 220(2) of the Income-tax Act; the ITO disallowed, the AAC confirmed the disallowance, and the Tribunal also confirmed it.
Question No. 4 (applicability of s. 40A(5) to directors' remuneration) was found to be covered by a previous decision of this Court (International Instruments (P.) Ltd.), and therefore answered in favour of the assessee.
Question No. 2 (whether surtax payable under the Companies (Profits) Surtax Act, 1964 is an admissible deduction in computing business profits) remained for detailed consideration. The ITO disallowed the surtax deduction, the AAC treated it as allowable, and the Tribunal reversed the AAC, holding surtax not deductible. The assessee sought the opinion of this Court on this issue.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation on capital assets which were utilised for scientific research during the previous year relevant to the assessment year 1975-76, although such assets had been purchased and brought into use for scientific research in the earlier years and full deduction under section 35 had been given in those years?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that surtax payable under the Companies (Profits) Surtax Act, 1964, was an inadmissible deduction in computing the total income of the assessee?
Whether, on the facts and in the circumstances of the case, the interest payable under section 220(2) of the Income-tax Act, 1961, was an allowable deduction in computing the profits of the assessee?
Whether, on the facts and in the circumstances of the case, section 40A(5) is applicable to the remuneration paid to directors of the assessee-company?

Arguments of the Parties

Assessee's Arguments (Sri G. Sarangan)

Surtax payable by the company is an expense incurred for the purposes of business and therefore should be allowed as a deduction in computing total income.
Alternate submission: surtax is not a rate or tax levied on the profits and gains of any business or profession; therefore, the prohibition in s. 40(c)(ii) (referred to in the opinion as s. 40(a)(ii)) would not apply to surtax.
Submission that surtax is a special tax levied under a separate statute (the Surtax Act) on chargeable profits as computed under that Act, and hence is independent in its scheme from the Income-tax Act.
Submission (disposed of by the Court) that s. 15 of the Surtax Act would be superfluous if surtax were held to be covered by s. 109(i)(b) of the Income-tax Act.
An ancillary contention that surtax is charged on profits of both trading and non-trading companies; the Court deemed it unnecessary to decide this point for the facts at hand (where income is entirely from business).

Revenue's Arguments (Sri K. Srinivasan)

Surtax is a tax on the profits and gains of the company's business and is similar to income-tax in its characteristics; taxes on profits are not allowable deductions.
Cited authorities supporting the proposition that income-tax (and like taxes on profits) is not deductible as a business expense because tax is a charge on profits after they have been earned (quoting Ashton Gas Co. v. Attorney-General and Maharajadhiraj Sir Kameshwar Singh v. CIT).
If surtax is characterized as a tax on profits, it falls within the prohibition (s. 40(a)(ii)) on deductions for sums paid on account of any rates or tax levied on profits and gains of business or profession.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Indian Telephone Industries (Tribunal order)	Used by the AAC as authority to allow depreciation where assets used in scientific research had earlier given full deduction under s. 35.	The AAC relied on this Tribunal order to allow the assessee's claim; the Tribunal followed it. The Court observed that a subsequent retrospective amendment to s. 35 (Finance (No. 2) Act, 1980) rendered the assessee not entitled to relief for the later year regardless of that precedent.
CIT v. Oriental Carpet Manufacturers (India) P. Ltd. [1973] 90 ITR 373 (P&H HC)	Authority supporting that interest paid on account of delay in payment of tax cannot be regarded as incurred for business purposes (i.e., not deductible).	Quoted by the Tribunal and treated by this Court as part of settled position that interest on delayed tax payment is not allowable; used to answer Question No. 3 against the assessee.
Aruna Mills Ltd. v. Commr. of Income-Tax, Bombay [1957] 31 ITR 153 (Bom)	Held along with other High Court decisions that interest on tax delay is not an expense for earning profits.	Referred to by the Court as supporting the settled position that interest on account of delayed tax payment is not deductible; supported the negative answer to Question No. 3.
Balmer Lawrie & Co. Ltd. v. CIT [1960] 39 ITR 751 (Cal)	Same general proposition regarding non-deductibility of interest on tax delay.	Referred to by the Court in support of the conclusion on Question No. 3.
Ashton Gas Co. v. Attorney-General [1906] AC 10 (Privy Council)	Principle that income tax is a charge upon profits; one must ascertain profit before deducting the tax (tax not deductible to compute profits).	Quoted by the Court (via Revenue's argument) to illustrate that taxes on profits cannot be deducted before arriving at net profits; used in analysis of whether surtax is such a tax.
Maharajadhiraj Sir Kameshwar Singh v. CIT [1961] 42 ITR 774 (Patna HC)	Expressed that income-tax paid cannot be deducted as business expenditure since tax is an application of profits after they are earned.	Quoted by the Court to support the Revenue view that taxes on profits are not deductible; used in evaluating the nature of surtax.
International Instruments (P.) Ltd. v. Commissioner of Income-Tax, Karnataka [1981] 130 ITR 315	Decision relevant to the applicability of s. 40A(5) to directors' remuneration.	The Court held Question No. 4 was covered by this decision and therefore answered in favour of the assessee (i.e., s. 40A(5) not applicable to the remuneration paid to directors in the circumstances).
CIT v. Gurupada Dutta [1946] 14 ITR 100 (PC)	Listed among authorities concerning the treatment of taxes in computing business profits (taxes on profits not deductible).	Referred to in the opinion as part of the body of decisions forming the principles summarized in the opinion; used to outline general legal background although not decisive for the surtax conclusion.
Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580 (SC)	One of the Supreme Court decisions cited as illustrating principles about deductibility of taxes and business expenses.	Included in the survey of authority used to frame the general legal principles; the Court summarized principles from these decisions but stated they were of no assistance to the specific surtax issue decided.
CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC)	Supreme Court authority concerning treatment of taxes and allowable business deductions.	Referred to in the general compilation of authorities; the Court distilled general principles from these cases but found them not decisive to allow surtax as a deduction.
CIT v. Birla Cotton Spinning & Weaving Mills Ltd. [1971] 82 ITR 166 (SC)	Supreme Court authority included among cases on deductibility principles.	Referred to for background legal principles; the Court observed that those principles did not assist in its conclusion that surtax is not deductible.
Indian Aluminium Co. Ltd. v. CIT, West Bengal, Calcutta [1972] 84 ITR 735 (SC)	One of the Supreme Court authorities on taxes and deductible expenses.	Part of the body of precedent the Court examined to summarize legal principles; not treated as controlling for allowing surtax as a deduction.
Mitsui Steamship Co. Ltd. v. CIT, West Bengal II, Calcutta [1975] 99 ITR 7 (SC)	Supreme Court decision cited in the list of authorities about the nature of taxable income and deductions.	Included in the Court's review of authority; the Court summarized general principles from these decisions but concluded they did not support allowing surtax as a deduction.

Court's Reasoning and Analysis

The Court's analysis focused primarily on Question No. 2 (deductibility of surtax) but also addressed the other referred questions. The reasoning, as stated in the opinion, proceeded as follows:

Analytical approach to the Surtax Act:
- The Court examined the Surtax Act's scheme: the definitions (e.g., "chargeable profits" defined in s. 2(5) as total income computed under the Income-tax Act adjusted by the First Schedule), the charging provision (s. 4), the concept of "statutory deduction" (s. 2(8) and Second Schedule), and the rates in the Third Schedule.
- The Court noted that Schedule I contains rules for computing chargeable profits, starting from the total income computed under the Income-tax Act and then adjusted; rules exclude certain income and provide for reductions by various taxes (including income-tax) and later adjustments.
- The Court observed that although the Surtax Act uses the total income under the Income-tax Act as a starting point and adjusts it, the surtax imposed under the Surtax Act is ultimately an additional tax on the profits and gains of the assessee's business.
Characterisation of surtax:
- On the basis of the statutory scheme, the Court concluded that surtax is "an additional tax on the profits and gains" — it is a charge on profit, even though computed under a separate statute that uses the Income-tax Act's computations as a base.
- Accordingly, if surtax is a tax on profits it falls within the same conceptual category as income-tax (i.e., a charge on profits after they have been earned), which normally cannot be treated as an allowable business deduction.
Assessment of s. 40(a)(ii) scope and relevant authorities:
- The Court examined s. 40 (which prohibits deduction of certain amounts such as interest chargeable under the Act and sums paid on account of any rates or tax levied on profits and gains of any business) and considered authorities cited by the assessee.
- The Court summarized principles from a body of case law: (i) taxes on profits are not expenses incurred for earning profits and are not deductible; (ii) by contrast, certain expenses like law charges, wealth-tax paid, or municipal property tax on business assets may be allowable where they are incidental and necessary for preservation of business or assets.
- However, the Court said these decisions were of "no assistance to the case on hand" in light of its characterization that surtax is an additional tax on profits and therefore not an admissible deduction.
Reasoning on the contention that s. 15 of the Surtax Act is superfluous:
- The assessee argued that if surtax were disallowed as a deduction under the Income-tax Act, then s. 15 of the Surtax Act would be unnecessary or superfluous because s. 109(i)(b) of the Income-tax Act already dealt with related matters.
- The Court rejected the contention that the Legislature enacted a superfluous provision. It explained that s. 15 of the Surtax Act provides for deducting surtax in computing distributable income under the Income-tax Act notwithstanding clause (i) of s. 109, and that this is an additional relief intended for closely held companies when computing distributable income for Chapter XI-D. Thus s. 15 has a discrete purpose and is not redundant.
Other points:
- The Court declined to decide ancillary issues (such as whether surtax is charged on trading as well as non-trading companies) because they were unnecessary for resolving the matter where the income was wholly from business.
- For Question No. 1 the Court applied the factual circumstance of the retrospective amendment to s. 35 by Finance (No. 2) Act, 1980, to hold the assessee not entitled to depreciation for the later year.
- For Question No. 3 the Court relied on the established position in case law that interest on delayed tax payment is not incurred for business purposes and therefore is not deductible.
- For Question No. 4 the Court accepted that the matter was governed by a prior decision of this Court (International Instruments) and answered in favour of the assessee.

Holding and Implications

Holding (core rulings):

Question No. 1: Answered in the negative and in favour of the Department. It is held that the assessee is not entitled to depreciation on capital assets which were utilised for scientific research during the previous year in view of the retrospective amendment to s. 35 by Finance (No. 2) Act, 1980.
Question No. 2: Answered in the affirmative and against the assessee. It is held that surtax payable by the assessee under the Companies (Profits) Surtax Act, 1964 is not an admissible deduction in computing its total income under the Income-tax Act.
Question No. 3: Answered in the negative and in favour of the Department. It is held that interest payable under s. 220(2) of the Income-tax Act is not an allowable deduction in computing the profits of the assessee.
Question No. 4: Answered in the negative and in favour of the assessee. The Court held that s. 40A(5) is not applicable to the remuneration paid to the directors of the assessee-company in the circumstances covered by the cited authority.

Implications and immediate effects:

Direct consequences for the parties: the assessee cannot claim (a) depreciation for the later year in respect of the research capital assets affected by the retrospective amendment to s. 35, (b) deduction for surtax payable under the Surtax Act when computing total income under the Income-tax Act, and (c) deduction for interest paid under s. 220(2) for delayed tax payments. The assessee does, however, benefit on Question No. 4 because of applicable precedent.
The Court interpreted the Surtax Act to characterise surtax as an additional tax on profits; accordingly surtax falls within the conceptual category of taxes on profits that are not allowable as business deductions under the Income-tax Act.
The opinion explains why s. 15 of the Surtax Act is not redundant when compared to provisions of the Income-tax Act (s. 109), noting that s. 15 operates to afford a specific relief in computing distributable income for closely held companies.
No express statement is made in the opinion that a new broad precedent altering existing law is being laid down; the Court primarily applied statutory interpretation and existing authorities to the facts and concluded as above. The decision resolves the referred questions for the parties and clarifies the characterization of surtax for the purposes of the issues before the Court.

This summary is prepared strictly from the material contained in the provided opinion. No facts or legal propositions beyond those expressly stated in the opinion have been added.

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Commissioner Of Income-Tax, Karnataka v. International Instruments (P.) Ltd.

Rajasekhara Murthy, J.:— The following four questions have been referred for opinion of this court by the Income-tax Appellate Tribunal, Bangalore Bench;

“(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to depreciation on capital assets which were utilised for scientific research during the previous year relevant to the assessment year 1975-76, although such assets had been purchased and brought into use for scientific research in the earlier years and full deduction under section 35 had been given in those years?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that surtax payable under the Companies (Profits) Surtax Act, 1964, was an inadmissible deduction in computing the total income of the assessee?

(3) Whether, on the facts and in the circumstances of the case, the interest payable under section 220(2) of the Income-tax Act, 1961, was as allowable deduction in computing the profits of the assessee?

(4) Whether, on the facts and in the circumstances of the case, the section 40A(5) is applicable to the remuneration paid to directors of the assessee-company?”

2. Question No. 1 is at the instance of the Revenue and questions Nos. 2 to 4 are at the instance of the assessee-company. The assessee is a private limited company. For the assessment year 1975-76, the assessee claimed depreciation under s. 32 of the I.T Act in respect of capital assets purchased and continued to be utilised for scientific research during the previous year. The ITO disallowed the claim. In the appeal preferred by the assessee, the AAC allowed the assessee's claim relying on an order of the Tribunal in the case of Indian Telephone Industries. Being aggrieved by the order of the AAC, the Department preferred an appeal before the Tribunal. The Tribunal following its order in the case of Indian Telephone Industries, upheld the order of the AAC. But, it may be mentioned that the relevant clause in s. 35 has since been amended with retrospective effect from April 1, 1962, by Finance (No. 2) Act, 1980 and as a consequence the assessee would not be entitled to any relief under s. 35 for the year subsequent to the date of purchase of the capital asset and utilised for scientific research. Question No. 1 has, therefore, to be answered in the negative and in favour of the Department.

3. Question No. 3 relates to the disallowance of interest paid under s. 220(2) of the I.T Act, as an allowable deduction in computing the total income of the company. The ITO disallowed the claim and the AAC confirmed it. In further appeal by the assessee, the Tribunal also confirmed the disallowances.

4. The assessee's counsel has nothing much to say on this question. Apart from the decision of the Punjab & Haryana High Court in CIT v. Oriental Carpet Manufacturers (India) P. Ltd., [1973] 90 ITR 373, relied upon by the Tribunal, the High Courts of Bombay and Calcutta also have taken a similar view in Aruna Mills Ltd., Ahmedabad…Applicant; v. Commr. Of Income-Tax, Bombay,…., [1957] 31 ITR 153 (Bom) and Balmer Lawrie & Co. Ltd. v. CIT, [1960] 39 ITR 751 (Cal). There could, therefore, be no doubt, in view of the settled position in law, that the interest paid on account of delay in payment of tax cannot be regarded as having been incurred for business purposes. Question No. 3 must, therefore, be answered against the assessee.

5. Question No. 4 is covered by the decision of this court in International Instruments (P.) Ltd. v. Commissioner Of Income-Tax, Karnataka, [1981] 130 ITR 315, and hence it is to be answered in favour of the assessee.

6. We are thus left with only question No. 2, namely, whether surtax payable under the Companies Profits (Surtax) Act, 1964 (hereinafter referred to as the “Surtax Act”) by the assessee-company, is an admissible deduction in computing its business profits. The ITO disallowed this claim, but the AAC held it as an allowable deduction. The Tribunal has reversed the order of the AAC and held that surtax is not a deductible item in computing the business profits of the assessee. Aggrieved by the said decision of the Tribunal, the assessee has sought for the opinion of this court.

7. Sri. G. Sarangan, learned counsel for the company, urged that surtax payable by the company is an expense incurred for purposes of business and should, therefore, be allowed as a deduction in computing its total income. His alternate contention is that surtax is not a rate or tax levied on the profits and gains of any business or profession and hence the prohibition imposed by the statute under s. 40(c)(ii) of the Act does not apply to surtax.

8. According to Sri Sarangan, surtax is levied as a special tax on the profits and gains of certain companies referred to in the Surtax Act. That levy is imposed as provided in the Act on the chargeable profits of the company as computed under the provisions of the Surtax Act. It is, therefore, a special tax levied under a separate statute and scheme independent of and different from the manner the profits and gains of business are brought to tax under the I.T Act.

9. Sri. K. Srinivasan for the Revenue, on the other hand, urged that surtax is a tax on the profits and gains of a business of the company and is similar to income-tax in all its characteristics and the income-tax is not an allowable deduction at all and tax is always a charge on the profits after it is earned. There is no dispute and indeed cannot be disputed that if the surtax is a tax on the profits and gains of business, it is not an allowable deduction under the Act. The Privy Council in Ashton Gas Co. v. Attorney-General, [1906] AC 10 at p. 12 observed:

“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.”

and in Maharajadhiraj Sir Kameshwar Singh v. CIT, [1961] 42 ITR 774, at p. 777, the Patna High Court observed:

“…that the amount of income-tax paid by an assessee cannot be deducted as a business expenditure. The reason is that income-tax is not a deduction before you arrive at the net profits of the assessee… It is not an expenditure for the purpose of earning profits. It is, on the contrary, a case of application of profits after they have been earned and not expenditure necessary to earn such profits.”

10. In order to appreciate the contention of the parties, we may now analyse, in broad outlines the provisions of the Surtax Act.

11. Surtax is a tax levied on the profits of certain companies. Section 2(5) defines “chargeable profits” to mean the the total income computed under the I.T Act, 1961, as adjusted in accordance with the provisions of the First Schedule. “Total income” is defined in s. 2(45) of the I.T Act to mean the total income referred to in s. 5 and computed in the manner laid down in the I.T Act. Under s. 4, the charging section, surtax is charged in respect of so much of the chargeable profits of the previous years as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. Section 2(8) defines “statutory deduction” as an amount equal to ten per cent, of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees, whichever is greater.

12. Schedule I contains rules for computing chargeable profits of a company. For purposes of arriving at the chargeable profits under the Surtax Act, the total income of an assessee computed under the I.T Act for any previous year and adjusted in accordance with the provisions of the First Schedule, constitutes the basis or starting point for purposes of levy of surtax.

13. For computing the chargeable profits certain income enumerated in r. 1 of Sch. I are excluded from the total income. Under r. 2, the balance of the total income arrived at after making the exclusions mentioned in r. 1 is further reduced by various taxes payable by the company like the income-tax and other taxes mentioned therein. Under r. 3 the net amount of income calculated in accordance with r. 2 is increased by the aggregation of amounts referred to in sub-cls. (1) and (2) thereunder.

14. Under Sch. II, rules are provided for computing the capital of a company for purposes of s. 2(8) which defines “statutory deduction”. The components which should form the “capital” of a company have been provided under Sch. II. Under r. 4 the capital of the company ascertained in accordance with rr. 1, 2 and 3 gets diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bear to the total amount of its income, profits and gains.

15. The Third Schedule contains the rates of surtax leviable under s. 4 on the amount by which the chargeable profits exceed the amount of statutory deduction as arrived at under the provisions of the Act.

16. 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.

17. The next contention urged by Sri Sarangan relates to the scope of s. 40(a)(ii) of the Act as to its applicability to surtax. Section 40 imposes a prohibition on the amounts referred to therein such as, (i) the interest chargeable under the Act, (ii) any sum paid on account of any rates or tax levied on profits and gains of any business or profession, and (iii) any sum paid on account of wealth-tax and other amounts, from being claimed as amounts eligible for deduction in computing the total income. Brief reference may now be made to some of the decisions relied on by the learned counsel in this aspect of the matter. He cited the following among other decisions:

(i) CIT v. Gurupada Dutta, [1946] 14 ITR 100 (PC).

(ii) Jaipuria Samla Amalgamated Collieries Ltd. v. CIT, [1971] 82 ITR 580 (SC).

(iii) CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140 (SC).

(iv) CIT v. Birla Cotton Spinning & Weaving Mills Ltd., [1971] 82 ITR 166 (SC).

(v) Indian Aluminium Co. Ltd. v. Cit, West Bengal, Calcutta ., [1972] 84 ITR 735 (SC).

(vi) Mitsui Steamship Co. Ltd. v. Cit, West Bengal Ii, Calcutta, [1975] 99 ITR 7 (SC).

18. The principles that we could gather from these decisions, may be summarised as follows:

(i) The income-tax/estate duty and other rates or taxes paid or payable on the profits earned, is not an expense incurred for the purpose of earning profits and hence not liable to be deducted, and

(ii) Certain expenses like law charges or wealth-tax paid or municipal property tax levied on the business assets of the assessee are allowable as expenses which are incidental to business and on commercial expediency and necessary for the preservation of business or the assets used in the business.

19. These decisions are of no assistance to the case on hand in the view we have taken that the surtax levied or leviable cannot be considered as an admissible deduction in the computation of the business profits of the company.

20. If the contention of Mr. Sarangan is accepted, then s. 15 of the Surtax Act becomes superfluous and the counsel also urged that it is superfluous, since it is already covered by cl. (b) of s. 109(i) of the Act.

21. We do not think that we could accept this contention. We should not proceed on the premise that the Legislature has enacted a superfluous or unnecessary provisions. Chapter XI provides for levy of additional income-tax on undistributed profits of the company. Under s. 109 the total income of a company is reduced by the amount of any income-tax payable under s. 104 and other taxes and sums referred to therein in order to arrive at the “distributable income”. On the other hand, s. 15 of the Surtax Act provides for deducting surtax in computing the distributable income under the I.T Act, notwithstanding anything contained in cl. (i) of s. 109. This is an additional relief intended to be given to “closely held companies” while computing the distributable income for the purpose of Chap. XI-D of the Act and not an unnecessary provision as contended for by the counsel.

22. One ancillary contention urged for the assessee may now be disposed of in support of the contention, that the surtax cannot be considered as an additional tax on the profits and gains of business, counsel urged that the surtax is charged on the profits of both trading as well as non-trading companies. It seems to us that it is unnecessary to decide this question in this reference, since the income which is brought to tax in this case is entirely from the business of the assessee-company.

23. In view of the foregoing conclusions, we are of the opinion that the assessee is not entitled to claim deduction of surtax payable from its business profits in computing its total income under the I.T Act. In the result our answers to the questions are as follows:

(1) Question No. 1 is answered in the negative and in favour of the Department. It is held that the assessee is not entitled to depreciation on capital assets which were utilised for scientific research during the previous year in view of the amendment to s. 35 with retrospective effect, by Finance Act No. 2 of 1980.

(2) Question No. 2 is answered in the affirmative and against the assessee and it is held that the assessee is not entitled to claim deduction of surtax payable by it, in computing its total income.

(3) Question No. 3 is answered in the negative and in favour of the Department and it is held that the interest payable under s. 220(2) of the I.T Act is not an allowable deduction in computing the profits of the assessee.

(4) Question No. 4 is answered in the negative and in favour of the assessee.

Commissioner Of Income-Tax, Karnataka v. International Instruments (P.) Ltd.

Structured Summary of Court Opinion (Rajasekhara Murthy, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (Sri G. Sarangan)

Revenue's Arguments (Sri K. Srinivasan)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax, Karnataka v. International Instruments (P.) Ltd.

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