1. The following question has been, at the instance of the assessee, referred to us by the Income-tax Appellate Tribunal, Cochin Bench:

"Whether Rs. 76,777/-being the surtax liability is to be allowed as a deduction in computing the total income of the assessee for the assessment year 1976-77."

The assessee's claim for deduction under S.37 of the Income-tax Act, 1961 of the amount paid as surtax under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the "Surtax Act") was disallowed by the Incometax Officer, but on appeal it was allowed by the Appellate Assistant Commissioner. On further appeal by the Revenue, the Tribunal, following its earlier decision, held that such amount could not be deducted in the computation of profits and gains. According to the Revenue, the amount paid on account of surtax fell within the mischief of S.40 (a) (ii) of the Income-tax Act, for such sum was paid on account of tax levied on the profits or gains of the assessee's business or assessed at a proportion, or otherwise on the basis, of such profits or gains. According to the assessee, however, surtax is not a tax on profits or gains, but on the total income of the assessee which is a concept much wider than what is postulated under S.40 (a) (ii).

2. S.40 of the Income-tax Act, in so far as it is material, reads:

"40. Notwithstanding anything to the contrary in S.30 to 39, the following amounts shall cot be deducted in computing the income chargeable under the head 'profits and gains of business or professions',

(a) in the case of any assessee (i)

(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains;

This Section is non obstante the provisions of S.30 to 39 in so far as they provide to the contrary. This means that for the purpose of computing the profits and gains of business or profession under S.28 of the Income-tax Act, the deductions permissible under Ss, 30 to 39 do not include any sum expressly disallowed under S.40. Clause (ii) of sub-section (a) of S.40 is attracted where the amount sought to be deducted has been paid on account of (a) tax levied on the profits or gains, or, (b) an assessment at a proportion of the profits or gains, or, (c) an assessment which is otherwise on the basis of such profits or gains. In order to come within the prohibition of this clause, the sum paid must be relatable directly to a levy on, or at a proportion or on the basis of, profits or gains.

3. One question therefore is whether, as contended by the Revenue, surtax is a levy on the basis of profits or gains, or, as contended by the assessee, it is a levy not on profits or gains, but on a conceptually different amount, namely, total income. The further question is, if surtax is what it is contended for by the assessee, even then can it be said that it is deductible under S.37 any more than income-tax is deductible.

4. We shall now read the relevant provisions of the Surtax Act. S.4 reads:

"4. Charge of tax. Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the lst day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous I years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule," "Chargeable profits" are defined under S.2(5) as follows:

"'Chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (XLIII of 196t), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule."

"Statutory deduction" is defined under S.2(8) As it stood at the relevant time as follows:

"'Statutory deduction" means an amount equal to ten per cent, of the capital of the company as computed