Gujarat H.C : Whether the Tribunal was, on the facts and in the circumstances of the case, right in law in holding that special surcharge should be levied on the basis of net unearned income and not on the basis of gross unearned income ?

Counsel Appeared

K. H. kaji, for the Assessee : B. J. Shelat, i/b R. P. Bhatt & Co., for the Revenue

R. C. MANKAD, ACTG. C. J.:

The assessee is an individual and the assessment years under reference are 1967-68 and 1968-69. The ITO determined the total income of the assessee at Rs. 1,34,967 for the asst. yr. 1967-68. While determining the above total income, the ITO allowed set off of business loss amounting to Rs. 1,30,947 and deduction of expenses of Rs. 16,283 against the income from interest, dividend, property, etc., amounting, in all, to Rs. 3,10,757. So far as the asst. yr. 1968-69 is concerned, the ITO determined the assessee’s total income at Rs. 1,32,827. While determining the said income, the ITO allowed set off of business loss of Rs. 1,11,334 and deduction of expenses of Rs. 15,574 against the income from dividend.

2. The ITO levied surcharge on unearned income of the total income of Rs. 1,34,967 for the asst. yr. 1967-68 and Rs. 1,32,827 for the asst. yr. 1968-69 in accordance with the provisions contained in Part I of the First Schedule to the Finance (No. 2) Act, 1967 (“the Finance Act” for short). Thereafter, on verification of the records of the assessment proceedings for the assessment years under reference, the ITO was of the view that a mistake was committed in computing surcharge, which was leviable on unearned income. According to him, the unearned income included in the total income was Rs. 2,94,988 for the asst. yr. 1967-68 and Rs. 2,85,883 for the asst. yr. 1968-69. He, therefore, called upon the assessee to show cause as to why assessment for the assessment years under reference should not be rectified under s. 154 of the IT Act, 1961 (“the Act” for short). The assessee resisted the proposed action of the ITO on the ground that the total income was correctly computed after setting off the losses and allowing statutory deductions, and, therefore, surcharge levied on the basis of the total income as computed in the assessment years was correct. The assessee, therefore, contended that there was no case for rectifying the assessment orders for both the years under reference. The assessee further contended that dividend income which was included in his total income should be treated as earned income as the assessee was a dealer in shares. The ITO held that, for the purpose of levy of surcharge, the unearned income included in the total income should be segregated in accordance with the provisions contained in the Finance Act and since the unearned income included in the total income for the asst. yr. 196768 was Rs. 2,94,988 and for the asst. yr. 1968-69 was Rs. 2,85,883, the ITO held that the said unearned income was to be treated as the total income for the purpose of levy of surcharge. The ITO further held that the dividend income was treated as unearned income while making the assessment and, consequently, there was no question of treating the said income as earned income while exercising powers of rectification under s. 154 of the Act, as urged on behalf of the assessee. In this view of the matter, the ITO rectified the orders for both the assessment years under reference and levied surcharge on unearned income of Rs. 2,94,988 for the asst. yr. 196768 and on Rs. 2,85,883 for the asst. yr. 1968-69.

Being aggrieved by the orders of rectification passed by the ITO, the assessee carried the matter in appeal before the AAC. It was contended before the AAC that the ITO could not have rectified the mistake alleged to have been committed by him while framing the assessments under the provisions of s. 154 of the Act. The AAC, however, rejected this contention, holding that a mistake which was apparent on the face of the record could be rectified

under s. 154 of the Act. On merits, the AAC, however, held that, in no case, could income which was exigible to surcharge, exceed the total income, which was assessed for the assessment years under reference. In this view of the matter, he held that the levy of surcharge on unearned income of Rs. 1,34,867 for the assessment year 1968-69, while framing the assessments, was justified. The AAC rejected the assessee’s contention that income from dividend should be treated as earned income since he was a dealer in shares.

Being aggrieved by the order passed by the AAC, the Revenue carried the matter in appeal before the Tribunal (“the Tribunal” for short). The assessee filed cross-objections in these appeals to contend that income from dividend should have been treated as earned income. The Tribunal held that the question of levy of surcharge on unearned income required interpretation of the expression “amount of unearned income included in the total income” and, therefore, it could not be said that the matter was free from argument and debate, and, consequently, rectification proceedings under s. 154 of the Act were bad in law. On merits, the Tribunal, for the reasons recorded in its order, upheld the view of the AAC. The Tribunal also rejected the assessee’s contention that income from dividend should be treated as earned income. In the result, the Tribunal dismissed the Revenue’s appeal and the assessee’s cross- objections. The Revenue, being aggrieved by the order of the Tribunal, at its instance, the following questions have been referred to us for our opinion : “

(1) Whether the Tribunal was, on the facts and in the circumstances of the case, right in law in holding that special surcharge should be levied on the basis of net unearned income and not on the basis of gross unearned income ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the view that the ITO was not justified in not taking into consideration the permissible deductions before determing the amount liable to surcharge on unearned income ?

(3) Whether the Tribunal was right in law in holding that, since the question of levy of surcharge on unearned income required interpretation of the expression `amount of unearned income included in the total income’, it cannot be said that the matter was free from argument and debate and consequently rectification proceedings were bad in law ?”

In order to appreciate the rival contentions, it is necessary to read the relevant provision contained in Paragraph A

of Part I of the First Schedule to the Finance Act, which are as follows : “Surcharges on Income-tax :

5. The amount of income-tax computed in accordance with the preceding provisions of this Paragraph shall be increased by the aggregate of surcharges for purposes of the Union calculated as specified hereunder :— (a) where— (i) in the case of an individual or an HUF, the amount of unearned income, not being income by way of interest on any security of the Central or State Government or income received in respect of units from the Unit Trust of India, established under the Unit Trust of India Act, 1963 (52 of 1963), included in the total income, or (ii) in any other case, the amount of unearned income included in the total income, exceeds Rs. 15,000. The limit has been increased to Rs. 30,000 w.e.f. 1st April, 1967. a surcharge calculated on the difference between the amount of income-tax computed in respect of the income referred to in sub- cl. (i) or, as the case may be, sub-cl. (ii), if such income had been the total income and the amount of income-tax computed in respect of an income of Rs. 15,000*, if it had been the total income, at the following rate, namely :— (1) where the amount of the differ-20 per cent. of the amount of ence does not exceed Rs. 14,500such difference ; (2) where the amount of the differ- Rs. 2,900 plus 25 per cent. of the ence exceeds Rs. 14,500 amount by which the difference aforesaid exceeds Rs.14,500″.

6. The provisions preceding the aforesaid provisions provided for the rates of income-tax on total income. It is not disputed that, for the purpose of applying the appropriate rates, total income means the total income as computed under the provisions of the Act. In other words, the total income for the purpose of applying the appropriate rates means the total income which is determined after allowing all the admissible deductions, losses, etc. It is only after determing the total income in accordance with the provisions of the Act that the appropriate rate or rates of tax have to be applied and income-tax payable by an assessee is to be computed. The provisions regarding surcharge on income-tax, which are reproduced above, lay down that the amount of income-tax computed in accordance with the preceding provisions of Paragraph A shall be increased by the aggregate of surcharge for purposes of the Union calculated as specified therein. We are concerned with the case of an individual assessee. It is provided that where in the case of an individual, the amount of unearned income, not being income by way of interest on any security of the Central or State Government or income received in respect of units from the Unit Trust of India, established under the Unit Trust of India Act, 1963, included in the total income, exceeds Rs. 15,000, a surcharge calculated in the manner laid down in the said provisions is to be added to the income-tax payable on the total income of the assessee. It is clear that the surcharge, which is leviable under the said provision is to be levied on the unearned income, which is included in the total income on which the income-tax is levied in accordance with the specified rates. Therefore, in order to determine surcharge which is leviable, we have first to find out what is the total income on which income- tax is levied. The next step would be to find out what is the unearned income which is included in this total income. In other words, what is required to be found out is the unearned income component in the total income determined for the purpose of levy of income-tax. The component of total income obviously cannot exceed the total income, otherwise it would cease to be a component thereof. In other words, the unearned income which is to be deemed to be the total income for the purpose of levy of surcharge cannot exceed the total income on which the income-tax is levied. In the instant case, what the Revenue seeks to do is to levy surcharge on the unearned income of Rs. 2,94,983 against the total income of Rs. 1,34,967 computed for the levy of income- tax for the asst. yr. 1967-68 and Rs. 2,85,883 against the total income of Rs. 1,32,827 determined for the levy of income-tax for the assessment year 1968-69. In both the years, according to the Revenue, the unearned income exceeds the total income determined for the levy of income-tax. This, in our opinion, on a true and correct interpretation of the provisions for the levy of surcharge, is not permissible. As observed above, unearned income which is to be deemed to be total income for the purpose of computation of surcharge has to be a component of the total income determined for the levy of income-tax. Such unearned income can either be less than or equal to but never more than the total income for the levy of income- tax. If the view canvassed on behalf of the Revenue is correct, it might lead to the strange result of levying surcharge even in case where there is no total income on which income-tax could be levied.

We are in full agreement with the view taken by the Tribunal that, in any case, the question which is raised by the Revenue is debatable or it would require long drawn arguments in order to come to the conclusion that there is a mistake in the computation of surcharge. Therefore, as held by the Supreme Court in T. S. Balaram, ITO vs. Volkart Brothers (1971) 82 ITR 50 (SC), the mistake cannot be said to be a mistake apparent on the face of the record so that it could be rectified in exercise of the powers under s. 154 of the Act.

In the result, we answer the questions which are referred to us in the affirmative and against the Revenue. Reference answered accordingly with no order as to costs.

[Citation : 201 ITR 451]