Full Judgment Text
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PETITIONER:
MADURAI DISTT. CENTRAL COOPERATIVE BANK LTD.
Vs.
RESPONDENT:
THE THIRD INCOME-TAX OFFICER, MADURAI
DATE OF JUDGMENT28/07/1975
BENCH:
CHANDRACHUD, Y.V.
BENCH:
CHANDRACHUD, Y.V.
SARKARIA, RANJIT SINGH
GUPTA, A.C.
CITATION:
1975 AIR 2016 1976 SCR (1) 136
1975 SCC (2) 454
CITATOR INFO :
D 1981 SC1562 (17)
ACT:
Constitution of India-Article 246(1)-7th Schedule List
1 Entry 82- Income-Tax ,Act 1961-Sec. 2(8), 4 & 81(i)(a)-
Finance Act 1963-Sec. 2(1) (a). 2(8), 3, Part 1, First
Schedule-Whether tax can exceed taxable income- Finance Act-
Nature and scope of-Whether can impose fresh charge-
Harshness of a taxing statute if a ground for challenge-
Business income of a cooperative society doing banking-
Whether additional surcharge a tax-Whether additional
surcharge Can be levied on income exempted from payment of
tax.
HEADNOTE:
The appellant is a Cooperative Society engaged in the
business of banking According to section 8] (i) (a) of the
Income ’Tax Act, 1961, a Cooperative Society engaged in the
business of banking is not liable to pay income tax on its
business income. The Finance Act, 1963, however, by section
2(i) (a), 2(8), 3, paragraph A(ii) of Part I of the First
Schedule and clause of that portion of Part I called
surcharge on Income Tax provides for levy of additional
surcharge for the purposes of the Union calculated on the
amount of the residual income at the rates mentioned
therein. The total income of the appellant for the
assessment year 1963-64 was Rs. 10,00,098. Out of this Rs.
9,48,335 was its business income. ’The tax amounting to Rs.
23,845 was charged on Rs. 51,763 Applying the Finance Act of
1963, the residual income of the appellant was computed at
Rs. 5.39,386 and a surcharge thereon was levied of Rs.
52,828 Thus, the total tax imposed on the appellant came to
Rs. 76,674.
The assessment order passed by the Income Tax officer
levying the tax as aforesaid was challenged by the appellant
in the High Court by a Writ Petition. The main grievance of
the appellant before the High Court was that whereas its
taxable income was only Rs. 51,763, a tax of Rs. 76,674 was
imposed on it. The relevant provisions of the Finance Act
were challenged as invalid on the ground that(i) they
imposed additional surcharge on income which was exempt from
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tax under the provisions of the Income Tax Act and that (ii)
the additional surcharge was intended as additional levy on
the income tax and had no independent existence apart from
it The High Court rejected these contentions.
On an appeal by certificate, dismissing the appeal,
^
HELD :
1. It is indisputable that the appellant is not
required to pay income tax on the banking income. In view of
section 81. It is also not liable to pay surcharge on its
business income in view of section 99(1)(v). [139C]
2. The, grievance of the appellant that the tax levied
upon it exceeds its taxable income can afford no true guide
to the construction of the relevant provisions of the Income
Tax Act or the Finance Act. Harshness of a taxing statute,
apart from a possible challenge to it under Art. 13 of the
Constitution cannot be an invalidating circumstance. But,
the grievance-on this score is misconceived. It assumes what
has to be examined that no part of the income exempted from
Income Tax and Super Tax under the Income Tax Act can be
brought to tax by a Finance Act, [140G-H]
3. The concession of the counsel for the appellant
giving up challenge to the power. of the Parliament to
impose a new charge by Finance Act was Properly made. Under
Art. 246(11) of the Constitution, Parliament has the
exclusive power to make laws with respect ’’o any of the
matters in List of the Seventh Schedule. Entry 82 in List I
relates to tax on income other than agricultural income. The
Income Tax Act, 1961 and the annual Finance Acts are enacted
by the Parliament in exercise of the powers conferred by Art
246(1) read with entry 82 of List I. Once the Parliament has
the legislative competence to enact a law with respect to
certain subject matter, the limits of
136
that competence cannot be judged further by the form or
manner in which that power is exercised. Exigencies of the
Financial year determine the scope and nature of the
provisions of the Finance Act. The primary purpose of the
Finance Act is to describe the rates at with the Income Tax
will be charged under the Income Tax Act but that does not
mean that new and distinct tax cannot be charged under
Finance Act. Therefore, what is not income under the Income
Tax Act can be made income by the Finance Act. An exemption
granted by the Income Tax A, t can be withdrawn by the
Finance Act or the efficacy of that exemption may be reduced
by the imposition of a new charge. [141D-E; G-H]
4. The contention of the appellant that surcharges are
nothing but income tax and, therefore, expression income tax
occurring in Sec. 4 and 81 of the Act includes surcharges
and AS such exempted cannot be accepted. The case of the
C.I.T. Kerala vs. K. Srinivasan distinguished. There the
essential point for determination was whether surcharge is
additional mode or rate for charging income tax. The Court
held there that it was so. The question before us is whether
even if the surcharge is an additional mode or rate for
charging income to the Finance Act of 1963 authorises by its
terms the levy of additional surcharge on income which is
exempt from income tax under the Income Tax, Act, 1961. The
residual income as defined by the 1963 Finance Act is not
the same as the business income of a Cooperative Bank which
is exempted under see. 81. The additional surcharge is a
distinct charge not dependent for its leviability on the
assessee’s liability to pay income tax or Super Tax. The
decision of Allahabad High Court in Allahabad District Co-
operative Bank Ltd vs. Union of India over-ruled. [143D-E]
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5. The additional surcharge though levied by the
Finance Act 1963 independently of the Income Tax Act is but
a mode of levying tax on a portion of the assessee’s income
computed in accordance with the definition in section 2(8)
of the Finance Act 1963. [147F]
ARGUMENTS
For The Appellant
1. Under section 81 read with section 4 of the Income-
tax Act, 1961, income tax is not payable by the appellant. a
Co-operative Society, in respect of its income from banking
business. Similarly super-tax is not payable under section
99(i)(v) read with section 4.
2. The primary purpose of the annual Finance Acts as
envisaged by section 4 of the Income-tax Act is to prescribe
the rates of income-tax on the total income of an assessee,
and this function as contemplated by section 4 is to be
"subject to the other provisions of this Act", namely, the
Income-tax Act, 1961, which would include, inter alia,
section 81.
3. The history of Indian income-tax shows that
surcharges by way of increase to the amount of income-tax,
which are added to the basic amount, in view of article 271
of the Constitution of India, are nothing other than income-
tax and a part of income-tax alone. Therefore the expression
’income-tax’ in section 4 and 81 of the Income-tax Act,
1961, and section and Schedule I, Part 1 of the Finance Act,
1953, includes surcharges.
4. Section 2 of the Finance Act, 1963, and Schedule I,
Part I, Paragraph A all clearly contemplate that the
surcharge. special surcharge and additional surcharge are
all only by way of increase of the amount of income-tax and
not only partake of the character of income-tax but are
actually a part of income tax. They are merely rates of
income-tax. The main part of section 2(1) (a) says that
"Income-tax shall be charged at the rates specified in Part
I of the First Schedule" and clause (ii) of that section
provides in the ease referred to therein that income-tax
"shall further be increased by an additional surcharge for
the purpose of the Union calculated in the manner provided
in the First Schedule. Similarly in Paragraph A of Part I of
the First Schedule the heading to the provisions prescribing
rates of surcharge is "surcharges on income-tax" in the
plural. The main part in the heading also provides that "the
amount of
137
income-tax... shall be increased by the aggregate of the
surcharges calculated as under " Clause (c) thereafter
provides for the additional surcharge for the purpose of the
Union. Paragraph A also therefore clearly indicates that the
three surcharges are only of the same nature and that all
the three surcharges are only by way of increase of the
amount of income-tax; in other words part of the income-tax.
Is either section 2 nor paragraph A of Part I of the First
Schedule can even remotely be said to contemplate any
separate levy of additional surcharge other than income-tax.
5. From the assessment order it is seen that the
following have been charged only on the real taxable income
of the appellant namely Rs. 51,763: (i) income tax (ii)
surcharge on income tax (iii) special surcharge on income-
tax (iv) super-tax and (v) surcharge on super-tax. These
items have not been charged on the total income of Rs.
10,00,098, because income-tax is not payable on the balance
of the total income under section 81. The Income-tax officer
has sought to impose only additional surcharge under clause
(c) in respect to the total income of Rs. 10,00,098. In view
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of section 81 no additional surcharge is payable on the
total income of Rs. 10,00,098. It is payable only on the
taxable income of Rs. 51,763.
6. Section 2 read with Paragraph A Part I of Schedule I
to the Finance Act merely purports to lay down the method of
computation where income-tax is payable. It does not either
dire thy or by implication make any amendment or
modification in section 81.
7. Section 3 of the Finance Act ]963 also applies to a
stage of computation only and in regard to relief, rebate
etc. It does not impose any liability or any tax. It
operates only where additional surcharge is payable and not
other wise, and where relief, rebate etc. is to be given
from the tax payable by the assessee, e.g. deduction of tax
based on life insurance premia provident fund contribution.
donations to charitable institution etc. Section 81 does not
provide for any such relief or rebate.
8. Section 2(8) of the Finance Act, 1963, defining
"residual income" which requires deduction from the total
income of income-tax, surcharge and special surcharge to
ascertain residual income also does not have the effect of
imposing any liability or any tax but merely provides for
computation. In a taxing Act one has to look merely at what
is clearly said. There is no room for any intendment. There
is no equity about a tax. There is no presumption as to tax.
Nothing is to be read in, nothing is to be implied." "In a
case of reasonable doubt. the construction most beneficial
to the subject is to be adopted." The court will be very
slow in reading an implied amendment in a tax law because
there is no intendment.
9. Income-tax is one tax, not several taxes on several
heads or several items of income:
For the Respondent
1. It is open to the Parliament to pass an Act relating
to more than one topic or field of operation, covered by the
Entries in List 1. It is not as if there must be as many
Enactments as the topics which the enactment covers.
2. The legislature has a wide range of selection and
freedom in appraisal not only in the subjects of taxation
and the manner of taxation but also in the determination of
the rate or rates applicable. If production were always to
be taken into account there will have to be a settlement for
every year and the tax will become a kind of income-tax.
The burden of proving discrimination is always heavy
and heavier still when a taxing statute is under attack. The
burden is on the person complaining of discrimination. The
burden is proving not possible ’inequality’ but hostile
’unequal’ treatment. This is more so when uniform taxes are
levied. The State cannot be asked to demonstrate equality.
3. Income which is exempt from taxation is income which
is assessable to tax and therefore liable to tax but tax is
not imposed on account of the exemp-
138
tion. This exemption can by subsequent legislation be wholly
or partially withdrawn both as regards items of income and
levies imposed for the purpose of taxation. Thus where the
Income-tax Act 1961 says that business income of a co-
operative society will be exempt from income-tax it would be
open to the Parliament by enactment of the Finance Act of
1963 to say that this exemption shall be partially withdrawn
as regards residual income and this partial exemption will
operate only for the purpose of income-tax but not surcharge
on residual income. The net result of the partial withdrawn
of the exemption would mean that though the business income
of a co-operative society will be exempt from tax the
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residual income which is only a part of the exempted
business income could be subjected to surcharge on income-
tax only.
4. Income-tax and surcharge on income-tax are two
different levies though the computation of the latter is
based upon a percentage of the former. The to are inclusive
for the purpose of imposing tax but they are not one levy
only.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1795 of
1970.
From the Judgment and order dated the 15th October,
1968 of the Madras High Court in Writ Petition No. 2252 of
1965.
S. T. Desai and T. A. Ramachandran, for the appellant.
N. D. Karkhanis and S. P. Nayar, for the respondent.
The Judgment of the Court was delivered by
CHANDRACHUD,J.-The appellant filed a writ petition in
the High Court of Madras under Article 226 of the
Constitution to challenge an assessment order dated August
22, 1963 made by the respondent, levying additional
surcharge on its residual income. The High Court dismissed
the writ petition by its judgment dated October IS, 1968 but
it has granted to the appellant a certificate to file an
appeal to this Court under Articles 133(a) and (c) of the
Constitution.
The appellant is a co-operative society engaged in the
business of banking. Its total income for the assessment
year 1963-64 was computed by the respondent at Rs.
10,00,098. Out of this, Rs. 9,48,335 was its business income
while Rs. 51,763 was its income from other sources. Since,
under section 81(i)(a) of the Income-tax Act, 1961 a co-
operative society engaged in the business of banking is not
liable to pay income-tax on its business income the tax
amounting to Rs. 23,845.47 was charged on Rs. 51,763 only
though for the purposes of rate the income was taken at Rs.
9,48,335 in view of section 110 of the Act. Applying the
Finance Act, XIII of 1963, the respondent computed the
residual income of the appellant at Rs. 5,39,386 and levied
on it an additional surcharge of Rs. 52,828.60. Thus the
total tax levied on the appellant came to Rs. 23,845.47 plus
Rs. 52,828.60 i.e., Rs. 76,674.07.
The main grievance of the appellant before the High
Court was that whereas its taxable income was only Rs.
51,763, a tax of Rs. 76,674.07 was imposed on it. The
relevant provisions of the Finance Act were accordingly said
to be invalid as they could not subject to additional
surcharge an income which was exempt from tax under the
provisions of the Income-tax Act. The additional surcharge,
it was contended, was intended as an additional levy on the
income
139
tax and had no independent existence apart from it. These
contentions were rejected by the High Court and hence this
appeal.
Section 81 of the Income-tax Act, 1961 was deleted by
the Finance Act, XX of 1967, with effect from April 1, 1968
but its provisions were incorporated by the same Finance Act
in section 80P. Section 81 (i)(a) read thus:
"81. Income of co-operative societies.-Income-tax
shall not be payable by a co-operative society-
(i) in respect of the profits and gains of business
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carried on by it, if it is-
(a) a society engaged in carrying on the business
of banking or providing credit facilities to
its members;"
It is indisputable that by reason of this provision, the
tanking income of the appellant amounting to Rs. 9,48,335
is exempt from income tax. It is equally clear that by
reason of section 99(1)(v) of the Act of 1961, the appellant
is not liable to pay supertax on its business income. That
section provides that where the assessee is a co-operative
society, super-tax shall not be payable by it on any income
in respect whereof no income-tax is payable by it by virtue
of the provisions of section 81.
The dispute really centers round the provisions of
Finance Act, VIII of 1963. The provisions of that Act which
are relevant for our purpose are sections 2(1)(a), 2(8), 3,
Paragraph A(ii) of Part I of the First Schedule, and clause
(c) of that‘ portion of Part 1, called ‘’Surcharges on
Income Tax."
Section 2(1)(a) of the Finance Act, 1963 provides that:
2. Income-tax and super-tax-(1) Subject to the
provisions of sub-section (2), (3), (4) and (5), for
the assessment year commencing on the 1st day of April,
1963,-
(a) income-tax shall be charged at the rates
specified in Part I of the First Schedule
and,-
(i) in the cases to which paragraphs A,C,C
and E of that Part apply, shall be
increased by a surcharge for purposes of
the Union and, except in the cases to
which the said paragraph applies a
special surcharge, calculated in either
case in the manner provided therein; and
(ii) in the cases to which paragraphs A and
of the aforesaid Part apply, shall
further be increased by an additional
surcharge for purposes of the Union
(hereinafter referred to as additional
surcharge) calculated in the manner
provided in the said Schedule;"
Section 2 (8) provides that:
For the purposes of paragraphs A and of Part I of
the First Schedule, the expression "residual income"
means the amount of the total income as reduced by-
140
(a) the amount of the capital gains, if any, included
therein; and
(b) the amount of tax (exclusive of additional
surcharge) which would have been chargeable on
such reduced total income if it had been the total
income no part of which had been exempt from tax
and on no portion of which deduction of tax had
been admissible under any provisions of the
Income-tax Act or this Act."
Section 3 provides that:
"Notwithstanding anything contained in the
provisions of Chapter VII or Chapter VIII-A or section
110 of the Income tax Act or sub-section (5) of section
2 of this Act, in calculating any relief rebate or
deduction in respect of income-tax payable on the total
income of an assessee which includes any income on
which no income-tax is payable or in respect of which a
deduction of income-tax is admissible under any of the
aforesaid provisions, no account shall be taken of the
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additional surcharge."
The First Schedule of the Finance Act, 1963 consists of
three parts out of which we are only concerned with Part I.
Part I which is called "Income-tax and surcharges on income-
tax" consists of Paragraphs A, B, C, and out of which we are
concerned with Paragraph A only. Clause (ii) of Paragraph A
prescribes rate of income-tax for incomes accruing, inter
alia, to "association of persons". Since a co-operative
society is an association of persons, Paragraph A of Part I
would apply to the case of the appellant for‘the purposes of
section 2(1)(a)(ii) of the Finance Act oil 1963, though not
for the purpose of bringing its exempted business income to
income-tax.
That portion of Part I, Paragraph A, called "Surcharges
on Income Tax" provides: "The amount of income-tax computed
at the rates hereinbefore specified shall be increased by
the aggregate of the surcharges calculated as under". Clause
(a) provides for a surcharge for the purposes of the Union
at the rates mentioned in sub-clauses (i), (ii) and (iii).
Clause (b) provides for the levy of a special surcharge.
Clause (c) with which we are concerned provides for the levy
of "an additional surcharge for the purposes of the Union
calculated on the amount of the residual income" at the
rates mentioned therein.
The grievance of the appellant, which appears to have
been pressed before the High Court with some earnestness,
that the tax levied upon it exceeds its taxable income can
afford no true guide to the construction of the relevant
provisions of the Income tax Act or the Finance Act.
Harshness of a taxing statute, apart from a possible
challenge to it under Article 13 of the Constitution, cannot
be an invalidating circumstance. But the grievance on this
score is basically misconceived. It assumes, what has to be
examined, that no part of the income exempted from income-
tax and super-tax under the Income-tax Act can be brought to
tax by a Finance Act. The total income of the appellant was
computed
141
at Rs. 10,00,098. By reason of sections 81 (i) (a) and 99
(1) (v) of the Income-tax Act, 1961 the appellant enjoys an
exemption from income tax and super-tax in respect of its
business income which amounts to Rs. 9,48,335. The balance,
viz. Rs. 51,763 which was the appellant’s income from other
sources was alone taxable under the Act of 1961 and a tax of
Rs. 23,845.47 was imposed on that income; The Finance Act
of 1963 subjects ’residual income’ to certain charges and
such in come was computed, admittedly correctly, at Rs.
5,39,386. An additional surcharge of Rs. 52,828.60 was
levied on the residual income. Thus on the assumption that
the Finance Act, validly-and on a true interpretation,
imposes the additional surcharge on residual income, the tax
imposed on the appellant is Rs. 23,845.47 plus Rs.
52,828.60. The total tax of Rs. 76,674.07 thus imposed is
far less than the. appellant’s total taxable income arrived
at by the addition of its non-business income and the
residual income. That leads to the inquiry first as regards
the scope of a Finance Act and then as regards the
interpretation of the Finance Act of 1963.
Learned counsel for the appellant, during the course of
his arguments, gave up the challenge to the power of the
Parliament to impose a new charge by a Finance Act. This
concession was properly made. By Article 246(1) of the
Constitution, Parliament has the exclusive power to make
laws with respect to any of the matters in List I of the
Seventh Schedule. Entry 82 in List I relates to "taxes on
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income other than agricultural income". The Income-tax Act,
1961 and the annual Finance Acts are enacted by the
Parliament in exercise of the power conferred by Article
246(1) read with Entry 82 of List I. Once the Parliament has
the legislative competence to enact a law with respect to a
certain subject-matter, the limits of that competence cannot
be judged further by the form or manner in which that power
is exercised. Accordingly, though it would be unconventional
for the Parliament to amend a taxing statute by
incorporating the amending provision in an Act of a
different pith and substance, such a course would not be un-
constitutional.
Much more so can the Parliament introduce a charging
provision in a Finance Act. True, as said in Kesoram
Industries and Cotton Mills Ltd v. Commissioner of Wealth
Tax, (Central) Calcutta(1), that the Income-tax Act is a
permanent Act v. while the Finance Acts are passed every
year and their primary purpose is to prescribe the rates at
which the income-tax will be charged under the Income tax
act. But that does not mean that a new and distinct charge
cannot be introduced under the Finance Act. Exigencies of
the Financial year determine the scope and nature of its
provisions. If the Parliament has the legislative competence
to introduce a new charge of tax, it may exercise that power
either by incorporating that charge in the Income-tax Act or
by introducing it in the Finance Act or for the matter of
that in any other Statute. The alternative in this regard is
generally determined by the consideration whether the new
charge is intended to be more or less of a permanent nature
or whether its introduction is dictated by the financial
exigencies of the particular year. Therefore, what is not
’income’ under
142
the Income-tax Act can be made ’income’ by a Finance Act, an
exemption granted by the Income-tax Act can be withdrawn by
the Finance Act or the efficacy of that exemption may be
reduced by the imposition of a new charge. Subject to
constitutional limitations, additional tax revenue may be
collected either by enhance the rate or by the levy of a
fresh charge. The Parliament, through the medium of a
Finance Act, may as much do the one as the other. In
McGregor and Balfour Ltd., Calcutta v. C.I.T., West
Bengal(1), which was affirmed by this Court in 36 I.T.R. 65.
Chakravartti C.J. delivering the judgment of a Division
Bench observed that the Finance Acts though annual Acts are
not necessarily temporary Act for they may and often do
contain provisions of a general character which are of a
permanent operation.
In Hari Krishna Bhargav v. Union of India and Anr.(2)
an assessee challenged the scheme of Annuity Deposits of the
ground that the Parliament has no competence to incorporate
ill the Income tax Act a provision which was substantially
one relating to borrowings by the Central Government from a
class of tax-payers. That scheme was introduced by Finance
Act 5 of 1964 which incorporated Chapter XXII-A containing
section 28-A to section 28-X in the Income tax Act, 1961.
The challenge was repelled by this Court on the ground that
if the parliament had the legislative competence to pass an
Act for collecting Annuity Deposits from tax-payers, nothing
contained in the Constitution disentitled it "as a matter of
legislative arrangement to incorporate the provisions
relating to borrowing from tax-payers in the Income-tax Act
or any other statute".
This discussion became necessary in spite of the
appellant’s concession on the Parliament’s legislative
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competence because for a proper understanding of the
provisions of the Finance Act 1963, it is essential to
appreciate that a Finance Act may not only prescribe rates
but also introduce a new charge.
We will now proceed to consider the provisions of the
Finance Act, 1963 under which the respondent has levied
additional surcharge on the appellant’s residual income. The
question for consideration is whether clause (c) of the
portion "Surcharges on Income Tax" occurring in Paragraph A
of Part I introduces a new charge in the shape of additional
surcharge so that the said charge, can be levied even on a
part of the appellant’s income which is exempt from income-
tax and super-tax under sections 81(i)(a) and 99(1)(v) of
the Act of 1961.
The history of Indian income-tax, according to
appellant’s counsel, shows that surcharges by way of
increase in the amount of income-tax are nothing but income-
tax and therefore the expression "income-tax" occurring in
sections 4 and 81 of the Act of 1961 and in section 2 and
the First Schedule of the Finance Act, 1963 includes
surcharges. To put it differently, the argument is that the
exemption granted by section 81(i)(a) extends to surcharges
also as a result whereof a co-operative society engaged in
the business of banking is neither liable to pay income-tax
nor any of the surcharges on its business income.
143
In C.I.T., Kerala v. K. Srinivasan(1) on which the
appellant relies, this Court has traced the history of the
concept of ’surcharge’ in tax laws of our country. After
considering the report of the Committee on Indian
Constitutional Reforms, the provisions of the Government of
India Act, 1935, the provisions of Articles 269, 270 and 271
of the Constitution and the various Finance Acts, this Court
held, differing from the High Court, that the word "income-
tax" in section 2(2) of the Finance Act, 1964 includes
surcharges and the additional surcharge.
This case does not touch the point before us. In that
case, the assessee’s income for the accounting year ending
March 30, 1964 consisted mainly of his salary. Section
2(2)(a) of the Finance Act, 1964 did not by itself refer to
any surcharge but it provided that in making the assessment
for the assessment year commencing on April 1, 1964 the
"income-tax" payable by the assessee on his salary-income
shall be an amount bearing to the total amount of "income-
tax" payable according to the rates applicable under the
operation of the Finance Act, 1963 on his total income, the
same proportion as the salary income bears t the total
income. The question which arose for consideration was under
the total income. The question which arose for consideration
was whether the words "income-tax payable according to the
rates applicable under the operation of the Finance Act,
1963" included surcharges which were leviable under the Act
of 1963. The question was answered by this Court in the
affirmative. As the judgment shows, "the essential point for
determination" was whether surcharge is an additional mode
or rate for charging income tax" (p. 351). The Court held
that it was. The question before us is whether, even if the
surcharger is but an additional mode or rate for charging
income-tax, the Finance Act of 1963 authorises by its terms
the levy of additional surcharge on income which is exempt
from income-tax under the Income-tax Act, 1961 In K.
Srinivasans case the Court declined to express any opinion
on the distinction made by the High Court that surcharges
are levied under the Finance Act while income tax was levied
under the Income-tax Act (p. 351). In the instant case it is
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not disputed by the-revenue that a surcharge partakes of the
essential characteristics of income-tax and is an increase
in income-tax. What we have to determine is whether the Act
of 1963 provides for the levy of additional surcharge.
Granting that the word "income-tax" includes
surcharges, it may be arguable that the exemption from the
payment of income-tax under section 81 (i) (a) of the 1961
Act would extend to surcharges. But the matter does not rest
with what section 81 (i)(a) says. Even if that section were
to grant an express exemption from surcharges on business
income the Parliament could take away that exemption or
curtail the benefit available under it by making an
appropriate provision in the Finance Act. If while
legislating on a matter within its competence the Parliament
can grant an exemption, it is surely competent to it to
withdraw that exemption in exercise of the self-same power.
The Finance Act, 1963, like its annual counterparts,
contains provisions not only prescribing rates of taxation
but making extensive and important modifications in the
Income-tax Act itself. By sections 4 to
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20 of the Act of 1963, various provisions of the income-tax
Act have been amended. By these amendments, some of which
are given retrospective effect, old provisions are deleted,
new ones are added and indeed new concepts of taxation
altogether are introduced. Such innovations fall within the
legitimate scope of Finance Acts. Section 11 (14) of the
Indian Finance Act, 1946 made in the amount of excess
profits tax repaid under section 28 of the U.K. Finance Act,
1941, "income" for the purpose of the Indian Income tax Act
and further provided that "income shall be treated for
purposes of assessment to income tax and super-tax as the
income of the previous year. It was held by this Court in
McGregor and Balfour Ltd. v. C.I.T. West Bengal(1) that
section 11(14) charged the amount with a liability to tax by
its own force. It was further held that the particular
provision, framed as it was, applied to subsequent
assessment years just as it applied to the assessment year
1946-47.
Having seen the nature and scope of Finance Acts, the
specific question which we have to consider is whether, as
contended by the appellant, section 2 read with Paragraph A,
Part I of the First schedule of the Finance Act, 1963 merely
lays down a method of computation in cases where income-tax
is in fact payable or whether, as contended by the revenue,
the Finance Act provides for the levy of a new and
independent charge. According to the appellant, these
provisions of the Finance Act do not, directly or
indirectly, bring about any amendment to section 81(i)(a) of
the Income-tax Act but merely prescribe that in cases where
the income-tax is payable, "The amount of income tax....
shall be increased by the aggregate of the surcharges". The
heading "Surcharges on income tax" under which provision is
made in the Finance Act for the calculation of a surcharge,
a special surcharge and an additional surcharge is also said
to bear out the contention that the levy of additional
surcharge on the residual income cannot be disassociated
from the main charge of income-tax.
We are unable to accept this contention Article 269(1)
of the Constitution provides that the duties and taxes
mentioned therein shall be levied and collected by the
Government of India but shall be assigned to the States in
the manner provided in clause (2). Article 270(1) provides
that Taxes on income other than agricultural income shall be
levied and collected by the Government of India and
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distributed between the Union and the States in the manner
provided in clause (2). By Article 271, notwithstanding
anything in Articles 269 and 270, Parliament may increase
any of the duties or taxes referred to in those Articles by
a surcharge for purposes of the Union. Surcharges leviable
under section 2(1) of the Finance Act. 1963 are relatable to
Article 271 of the Constitution.
Section 2(1)(a)(ii) of that Act provides, in so far as
relevant, that for the assessment year commencing on April
1, 1963 income-tax shall be charged at the rates specified
in Part I of First Schedule and in cases to which Paragraph
A of Part I applies, the income-tax shall further
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be increased by an additional surcharge for purposes of the
Union calculated in the manner provided in the First
Schedule. ‘Clause (c) of Paragraph prescribes the manner in
which the additional surcharge is to be calculated. It
provides that additional surcharge for purposes of the Union
shall be calculated "on the amount of the residual income’.
at the rates mentioned in that clause. Thus both the purpose
and concept of the additional surcharge are different from
those of income-tax. The additional surcharge is leviable
exclusively for purposes of the Union so that the entire
proceeds of such surcharge may under Article 271 of the
Constitution, from part of the Consolidated Fund of India.
taxes and duties mentioned in Article 269(1), though levied
and collected by the Government, have to be assigned to the
States in the manner provided in clause (2) of that Article.
Then again, the additional surcharge levied for purposes of
the Union is to be calculated not on total income like the
income-tax but it is to be calculated on the residual
income. Section 2(8) of the Act of 1963 defines residual
income as total income reduced by (a) capital gains, if any,
included in that total income and (b) the amount of tax
(exclusive of additional surcharge) which would have been
chargeable on such reduced total income if it had been the
total income no part of which had been exempt from tax and
on no portion of which deduction of tax had been admissible.
In order that the exemption granted to co-operative banks by
section 81 (i) (a) may not lose its meaning and content,
section 2(8) of the Finance Act introduces the concept of
residual income on which alone the additional surcharge is
payable. The residual income is not the same as the business
income of a co-operative bank, which is exempt under section
81(i)(a) from income tax. For ascertaining the residual
income the total income is reduced by the amount of capital
gains and further by the amount of tax (other than
additional surcharge) which would have been charged on such
reduced total income on the assumption that the whole of it
was liable to be brought to tax.
Thus in the instant case the additional surcharge is
not levied on the appellant’s business income of Rs.
9,48,335 which is exempt from income-tax and super-tax. It
is levied on the residual] income of Rs. 5,39,386 which is
arrived at after deducting Gross taxes (exclusive of
additional surcharge) amounting to Rs. 4,60,712 from the
assessee’s gross income of Rs. 10,00,098. By section 3 of
the Finance Act of 1963 no account can be taken of the
additional surcharge in calculating any relief, rebate or
deduction in respect of income-tax payable on the total
income of an assessee which includes any income on which no
income-tax is payable or in respect of which a deduction of
income-tax is admissible. Section 3, by its terms, has
precedence over anything contained in Chapter VII or Chapter
VIII A or in section 110 of the Income-tax Act or section
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2(5) of the Finance Act itself. Additional surcharge is
treated in this way as falling in a separate category.
Thus, additional surcharge is a district charge. not
dependent for its leviability on the assessee’s liability to
pay income-tax or super-tax. Such a qualification cannot be
read into section 2(1)(a)(ii) of the Act of 1963 as argued
by the appellant. That section uses the language that
"income-tax....shall further be increased by an additional
sur-
146
charge", not for making the assessability to surcharge
dependent upon Assessability to income tax but for the
simple reason that if an assessee‘s total income includes
income on which no tax is payable, tax has all the same to
be computed for purposes of rate Section 110 of the Income-
tax Act, 1961 provides that where there is included in the
total income of an assessee any income on which no income-
tax is payable, the assessee shall be entitled to deduction,
from the amount of income tax with which he is chargeable on
his total income, of an amount equal to the income-tax
calculated at the average rate of income tax on the amount
on which no income-tax is payable. The income-tax computed
at a certain rate is by section 2(1)(a)(ii) to be further
increased by an additional surcharge for purposes of the
Union. This becomes clearer still from the language of
Paragraph A, under the heading ..Surcharges on Income Tax".
It says: "The amount of income-tax computed at the rate
hereinbefore specified shall be increased by the aggregate
of the surcharges,". If the intention was to limit the
liability to pay additional surcharge to income which can be
brought to income tax, appropriate language could have been
used to convey that simple sense.
The weakness of the appellant’s contention becomes
manifest when it is realised that were the contention right,
the appellant would not be liable to pay additional
surcharge even on that portion of its non-business income
which is contained in the residual income. By the definition
in section 2(8) of the Act of 1963, residual income means
the total income as reduced and therefore, the non business
income which is chargeable to income-tax must form a
component of the residual income. Concededly, the appellant
is liable to pay additional surcharge on its non-business
income. This is so not because additional surcharge is
payable by law on non-business income but because it is
payable on residual income and residual income, by
definition, includes non business income as reduced. In
fact, it consists of the amount of total income as reduced
by the amounts mentioned in clauses (a) and (b) of section
2(8).
Relying on United Commercial Bank Ltd. v. Commissioner
of Income-tax, West Bengal(1), East India Housing and Land
Development Trust Ltd. v. Commissioner of Income-tax West
Bengal(2), and K. V. Al. M. Ramanathan Chettiar v.
Commissioner of Income-tax, Madras(3), the appellant’s
counsel urged that income-tax is a single levy, that it is
one tax and not so many taxes separately levied on several
heads of income. This partly is the same argument in a
different disguise that an assessee who is not liable to pay
income-tax cannot be made liable to pay additional surcharge
under the Finance Act, 1963. We have rejected that
contention. Partly, the argument is designed to establish
correlation with section 146 of the income tax Act, 1961 by
which, when any tax, interest, penalty, fine or any other
sum is payable in consequence of any order passed under the
Act, the Income-tax office has to serve upon the assessee a
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notice of demand in the prescribed form specifying the sum
so payable. This provision presents no
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difficulty for, if an assessee is liable to pay additional
surcharge but no income-tax or super tax, the notice of
demand will mention the particular amount payable as tax
due. The appellant being liable to pay tax on its non-
business income and additional surcharge on its residual
income, the demand notice will call for payment of the total
amount due from the appellant by way of tax.
The interpretation put by us on the Finance Act, 1963
does no violence to section 4 of the Income-tax Act, 1961
under which income-tax at the rates prescribed by the
Finance Act is to be charged "in accordance with, and
subject to the provisions of." the Income-tax Act. The
Income-tax Act exempts the assessee’s business income from
income tax and super-tax. The Finance Act brings to tax its
residual income.
The decision of the Allahabad High Court in Allahabad
District Co-operative Bank Ltd. v. Union of India and
Ors.(1) is directly in favour of the appellant and
naturally, learned counsel for the appellant relies on it
very strongly. But that case, in our opinion, is incorrectly
decided. The learned Judges were in error in holding that
section 2 of the Finance Act, 1963 does not provide for
the levy of a tax other than income-tax" and that therefore
additional surcharge is not payable to the extent of the
income which is exempt under section 81 of the Income-tax
Act. One of the difficulties which the learned Judges felt
in accepting the revenue’s contention was that if "the
additional surcharge mentioned in the Finance Act of 1963
was not partake of the nature of income-tax it will not be
possible to demand and realise it under the provisions of
the income-tax Act, and the notice of demand and recovery
proceedings would be vitiated on that account". The very
assumption of this observation is falacious because
additional surcharge indubitably partakes of the nature and
essential characteristics of income-tax. It is a tax on
residual income and by reason of the definition contained in
section 2(8) of the Act of 1963, "residual income" would
include non-business income which under the Income-tax Act
is charge able to income-tax. Thus, the additional
surcharge, though levied by the Finance Act, 1963
independently of the Income-tax Act, is but a mode of
levying tax on a portion of the assessee’s income computed
in accordance with the definition in section 2(8) of the Act
of 1963. Therefore, the notice of demand under section 156
of the Income-tax Act can lawfully call for the payment of
amount due from an assessee by way of additional surcharge.
For these reasons, we confirm the judgment of the High
Court but in the circumstances there will be no order as to
costs.
P.H.P. Appeal dismissed.
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