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.