Gujarat H.C : Whether, on the facts and in the circumstances of the case and scheme of Surtax Act, the Tribunal was justified in law in rejecting the claim of the appellant for deduction of interest charged under s. 271(1A) and s. 139(8) of the IT Act, 1961 as part of `Income-tax in computing net chargeable profits’ ?

Counsel Appeared

K.H. Kaji, for the Applicant : B.J. Shelat, i/b M.R. Bhatt of R.P. Bhatt & Co., for the Respondents

M.B. SHAH, J.:

The Tribunal has referred the following question for our opinion under s. 18 of the Companies (Profits) Surtax Act, 1964, r/w s. 256(1) of the IT Act, 1961 :

“Whether, on the facts and in the circumstances of the case and scheme of Surtax Act, the Tribunal was justified in law in rejecting the claim of the appellant for deduction of interest charged under s. 271(1A) and s. 139(8) of the IT Act, 1961 as part of `Income-tax in computing net chargeable profits’ ?”

2. The aforesaid question arises in the background of the fact that for the asst. yr. 1979-80, the assessee (Kashiram Textile Mills Pvt. Ltd.) inter alia claimed that in computing chargeable profits under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to an `Surtax Act’), deduction of interest payable under s. 217(1A) and s. 139 of the IT Act should be reduced as provided under r. 2 of the First Schedule to the Surtax Act. The assessee contended that as per r. 2, the amount of income-tax is required to be reduced and the amount of income-tax would include interest payable by the assessee on the same tax, as it was part of the tax or was in the nature of compensation for delay in payment of the tax. That claim was rejected by the ITO and in appeal by the CIT(A). The Tribunal confirmed the said decision and at the instance of the assessee the aforesaid question is referred.

3. For appreciating the contention, it is necessary to refer to r. 2 of the Rules for computing chargeable profits as provided in First Schedule to the Surtax Act, as under : “2. The balance of the total income arrived at after making the exclusions mentioned in r. 1 shall be reduced by— (i) the amount of income-tax payable by the company in respect of its total income under the provisions of the IT Act after making allowance for any relief, rebate or deduction in respect of income-tax to which the company may be entitled under the provisions of the said Act or the annual Finance Act and after excluding from such amount— (a) the amount of income-tax if any, payable by company in respect of any income referred to in cl. (i) or cl. (ii) or cl. (iii) or cl. (viii) of r. 1 included in the total income; (b) the amount of income-tax, if any, payable by the company under the provisions of the annual Finance Act with reference to the relevant amount of distributions of dividends by it. Explanation—In this sub-clause, the expression `the relevant amount of distributions of dividends’ has the meaning assigned to it in the Finance Act of the relevant year, (c) the amount of income-tax, if any, payable by the company under s. 104 of the IT Act. Explanation—In relation to the assessment year commencing on the 1st day of April 1964, the reference in this sub-clause to `income-tax’ shall be construed as a reference to `super-tax’. (ii) x x x Provided x x x”

4. Considering the rule as it is and its unambiguous language, in our view, there is no substance in the contentions raised by the assessee that the phrase “the amount of income-tax payable by the company in respect of its total income”would include interest payable by him on its delayed payment either under s. 217(1A) or s. 139 of the IT Act. Further, even if we consider this phrase in context of the Scheme of the Act and the Rules for computing the chargeable profits, in our view, the result would be the same. Sec. 4 of the Surtax Act provides that, subject to the provisions of the Act, on every company a tax in respect of so much of its chargeable profits of the previous year as exceed the statutory deduction shall be charged at the rates specified in the Third Schedule. In view of the aforesaid section, surtax is to be charged on the chargeable profits. The phrase `chargeable profits’ is defined under s. 2(5) of the Surtax Act to mean that the total income of an assessee computed under the IT Act, 1961 for any previous year and adjusted in accordance with the provisions of the First Schedule. The First Schedule provides rules for computing the chargeable profits and it provides that in computing the chargeable profits of a previous year, the total income computed for that year under the IT Act shall be adjusted as provided in rr. 1,2, and 3. Rule 1 provides for exclusion from the total income of specified income which are component part of the total income with which we are not concerned in the present reference. Rule 2 provides that the balance of the total income arrived at after making the exclusions mentioned in r. 1 shall be reduced inter alia by the amount of income-tax payable by the company in respect of its total income under the provisions of the IT Act after making allowances for any relief, rebate or deduction in respect of income-tax to which the company may be entitled under the provisions of the said Act and after excluding from such amount, the amount of income-tax as mentioned in cls. (a), (b) and (c) of sub-r. (1) of r. 2. Rule 3 of the First Schedule provides for increasing the net amount of income calculated in accordance with r. 2 upon the expenditure mentioned therein to the extent such expenditure, in the opinion of the Assessing Officer, is excessive having regard to the circumstances of the case. So, from the aforesaid scheme of the First Schedule, it appears that it extensively provides for adjustment of total income calculated under the IT Act for determining the amount which is exigible to tax for the purpose of charging surtax. Rule 1 provides for exclusion; r. 2 provides for reduction and r. 3 provides for increase by the disallowable expenditure. These rules are exhaustive which specifically provide of the amount mentioned therein for its exclusion or inclusion. In this context, if r. 2 is read, it is apparent that it provides for reduction of an amount of income-tax payable by the company in respect of its total income under the provisions of the IT Act after excluding the income-tax payable by it on the income as mentioned in cls. (a), (b) and (c) of r. 2. It is not provided that income-tax payable by the company should be increased by the amount of interest payable by it on the income-tax. Hence, it would be difficult to accept the contention of the learned counsel for the assessee that the amount of income-tax payable by the company would include the amount of interest payable by the company for the late payment of income-tax. The phrase “amount of income- tax”is clear and unambiguous.

It is true that the word `tax’ is not defined under the Surtax Act. However, sub-s. (9) of s. 2 of the Surtax Act provides that all other words and expressions used in the Act but not defined and defined in the IT Act shall have the meanings respectively assigned to them in the IT Act. Sub-s. 43 of s. 2 of the IT Act defines `tax’ inter alia to mean income-tax chargeable under the provisions of the Act. Sec. 4 provides that income-tax shall be charged for any assessment year at any rate or rates in respect of the total income as provided by the central enactment for the concerned previous year. Similarly, s. 2(28A) of the IT Act, inter alia, defines the word `interest’ to mean interest payable in any manner in respect of any moneys borrowed or debt incurred. From these definitions, it is apparent that the amount of `income-tax’ and the amount of `interest’ would be two different concepts. Hence, also it would be difficult to hold that the amount of income-tax would include the amount of interest payable by the assessee for delay in discharging the liability incurred to pay income-tax.

The learned counsel for the assessee submitted that in view of sub-s. (8) of s. 139 of the IT Act, the interest payable under s. 139(8) would be a component part of the tax. In our view, this submission is without any substance because sub-s. (8) of s. 139 specifically provides that where the return under sub-s. (1) or sub-s. (2) or sub-s. (4) for an assessment year is furnished after the specified date or is not furnished, then the assessee shall be liable to pay simple interest at 12% per annum reckoned from the day immediately following the specified date to the date of furnishing of the return or where no return has been furnished, the date of completion of the assessment under s. 144, on the amount of tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source. This, in our view, would indicate that concept of tax is totally different from the concept of interest. Further, under the proviso to the said sub-section, interest in such cases and under such circumstances can be waived by the ITO. For the income-tax payable by the assessee there is no question of waiver. Similarly under s. 156 of the IT Act, it has been specifically provided that for non-payment of tax, interest, penalty or any other sum which is payable in consequence of any order passed under the IT Act, the ITO shall serve upon the assessee a notice of demand specifying the sum so payable. This would also mean that concept of tax, interest on it, penalty, fine is different and it cannot be said that interest is a component part of tax. Similarly, under s. 217(1A) of the IT Act also, concept of income-tax and interest is quite different and it cannot be said that interest is a component part of tax. Similarly, under s. 217(1A) of the IT Act also, concept of income-tax and interest is quite different. Merely because the ITO is required to determine the amount by calculation as provided under s. 217 at the time of making regular assessment, it would not mean that the interest recoverable for the delayed payment of tax as provided in the said section would be a component part of the income-tax.

For advancing his contention, the learned counsel for the assessee referred to the decision of the Supreme Court in the case of C.A. Abraham vs. ITO (1961) 41 ITR 425 (SC), and submitted that in the aforesaid case the Supreme Court had rejected the contention that a proceeding for imposition of penalty and a proceeding for assessment of income-tax are matters distinct, and s. 44 may be resorted to for assessing tax due and payable by a firm business whereof has been discontinued, but an order imposing penalty under s. 28 of the Act cannot by virtue of s. 44 be passed. Rejecting the said contention, the Court had, inter alia, observed that by s. 28, the liability to pay `additional tax’ which is designated penalty is imposed in view of the dishonest contumacious conduct of the assessee. It is true that this liability arises only if the ITO is satisfied about the existence of the conditions which give him jurisdiction and the quantum thereof depends upon the circumstances of the case. The penalty is not uniform and its imposition depends upon the exercise of discretion by the taxing authorities; but it is imposed as a part of the machinery for assessment of tax liability. In our view, it is not possible to accept the contention raised by the learned counsel for the assessee that because the Supreme Court has used the phrase `additional tax’ for penalty, the penalty would be a component part of the income-tax. No where in the said case this question is considered by the Supreme Court. The Court was dealing with the contention whether penalty can be imposed on firm after dissolution and proceedings for imposing penalty under s. 28 of the Indian IT Act, 1922 can be continued against such a firm.

The aforesaid phrase used in the case of Abraham (supra), is clarified by the Supreme Court in the case of CIT vs. Bhikaji Dadabhai & Co. (1961) 42 ITR 123 (SC), wherein it is observed : “This Court regarded penalty as an additional tax imposed upon a person in view of his dishonest or contumacious conduct. It is true that under the Hyderabad IT Act, distinct provisions are made for recovery of tax due and penalty, but that in our judgment does not alter the true character of penalty imposed under the two Acts.”

The observations in the case of Abraham (supra) were further explained by the Supreme Court in the case of CIT vs. Anwar Ali (1970) 76 ITR 696 (SC), wherein the Court has held as under : “It is significant that in C.A. Abraham’s case (1964) 41 ITR 425 (SC) this Court was not called upon to determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional tax were made in a different context and for a different purpose.”

Lastly, learned counsel Mr. Kaji relied upon the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. vs. CIT (1980) 16 CTR (SC) 198 : (1980) 123 ITR 429 (SC), wherein the Court was required to deal with the question whether the interest paid on arrears of cess under s. 3(3) of the U.P. Sugarcane Cess Act, 1956 is permissible deduction under s. 10(2)(xv) of the IT Act, 1922. In the context of s. 3(3) of the U.P. Sugarcane Cess Act, 1956, the Court observed that interest payable on arrears of cess under s. 3(3) is in reality part and parcel of the liability to pay cess. It is an accretion to the cess. The arrears of cess carries interest. If the cess is not paid within the prescribed period, a larger sum will become payable as cess. The Court further held that it is not by way of penalty and in that context the Court held that interest paid under s. 3(3) of the U.P. Sugarcane Cess Act cannot be described as a penalty paid for an infringement of the law; as that was the only ground on which the Revenue resist the claim of the assessee to a deduction of the interest under s. 10(2)(xv) of the Indian IT Act, 1922, the assessee was entitled to succeed. The Court further observed that there was no dispute that the payment of interest represents expenditure laid out wholly or exclusively for the purpose of business and that it was in the nature of revenue expenditure. In our view, assuming that interest payable by the assessee is an accretion to income-tax, it would not be income-tax payable b y the assessee for the purpose of r. 2 of the First Schedule to the Surtax Act.

Payment of interest is totally different from tax liability. Question of paying interest would arise only if there is delayed payment of tax. Hence, both the concepts are totally different.

8. In this view of the matter, the Tribunal was justified in law in rejecting the claim of the assessee for reduction of interest charged under s. 217(1A) and s. 139(8) of the IT Act, 1961 as part of the income-tax in computing the net chargeable profits. Hence, the question is answered in the affirmative, i.e., in favour of the Revenue and against the assessee. The reference stands disposed of accordingly with no order as to costs.

[Citation :211 ITR 889]