Surtax payable under the Companies (Profits) Surtax Act, 1964, is not deductible as business expenditure under section 37 or as expenditure incidental to the carrying on of the business under section 28 of the Income-tax Act, 1961.

( 1 ) AT the instance of the assessee, M/s. Vazir Sultan Tobacco Co. Ltd. , Hyderabad, this reference was made by the Income-tax Appellate Tribunal, Hyderabad, under section 256 (1) of the Income-tax Act, 1961. The question referred was as follows :"whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of the surtax payable under the Companies (Profits) Surtax Act, 1964, as business expenditure under section 37 of the Income-tax Act, 1961, or alternatively as expenditure incidental to the carrying on of the business deductible under section 28 of the Income-tax Act while computing the income under the head Business ?"

( 2 ) THE contention raised by the assessee before the Tribunal was that the surtax payable by the company under the Companies (Profits) Surtax Act, 1964 (Act 7 of 1964) (for short "the C. P. S. T. Act"), should be allowed as deduction from the total income. Following the judgment of the Special Bench of the Tribunal in ITA No. 3643/bom/1974-75 dated 1/12/1977, in the case of M/s. Amar Dye-Chem Ltd. v. ITO, the Tribunal held that the surtax payable cannot be allowed as deduction from the total income.

( 3 ) THE relative assessment years are 1968-69 and 1969-70. Sri Y. Ratnakar, learned counsel for the assessee, has advanced two contentions which are as follows : (1) The profits received by the assessee during the relevant years could not be treated as income since they were attracted by the doctrine of overriding title. Even before the profits reached the hands of the assessee, its liability to tax under the Companies (Profits) Surtax Act, 1964, assumes primacy, with the result that such profits go to the State without the assessee getting a chance to treat the same as income. (2) In any event, the surtax paid by the assessee constitutes expenditure incidental to business and is, therefore, "wholly and exclusively" necessary for the purpose of business and so under section 37 (1) of the Income-tax Act, the same must be deducted from the tax net.

( 4 ) SRI M. Suryanarayana Murthy, learned counsel for the Revenue, contends that it was only after the profits had reached the assessee, that the same were brought to tax under the Companies (Profits) Surtax Act, 1964, and, therefore, the contention that the doctrine of overriding title in favour of the State was attracted, the counsel pleads, is untenable. So far as the second contention raised for the assessee, the plea taken by Sri Suryanarayana Murthy for the Revenue is that the surtax paid by the assessee cannot be deducted since the same falls within the ambit of section 40 (a) (ii) of the Income-tax Act.

( 5 ) THE Companies (Profits) Surtax Act, 1964, seeks to impose a special tax on the profits of certain companies. Section 4 of the Companies (Profits) Surtax Act, 1964, which is the charging section says that subject to the provisions of the Act, tax shall be levied on every company in respect of so much of its chargeable profits of the previous year or years which exceed the statutory deduction at the rate or rates specified in the Third Schedule. The expression "chargeable profits" is defined by section 2 (5) of the Companies (Profits) Surtax Act, 1964, as meaning the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. It is, therefore, clear that unless the chargeable profits are determined, the question of invoking the provisions of the Companies (Profits) Surtax Act, 1964, in respect of any company does not arise. When profits are received which fall within the ambit of "tax net" as contemplated by the Companies (Profits) Surtax Act, 1964, then alone the tax, as worked out under the Companies (Profits) Surtax Act, 1964, would be levied but not otherwise. The chargeable profits have to be computed with reference to the total income of the assessee under the Income-ta