1985 PLP 630 (PTD)

"10 (4) Nothing in clause (xi) or clause (.Vv) of subsection (2) shall be deemed to authorise the allowance of any sum paid on account of any cess rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains I Income‑tax Act, 1961.

40. Amounts riot deductible‑‑ Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession." (a) in the case of any assessee‑ (ii) any stem 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 ; . . "2 (43) "tax" in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income, tax chargeable under the provisions of this Act, and in relation to any other assessment year income‑tax and super‑tax chargeable under the pro visions of this Act prior to the aforesaid date ;

33. It has been argued that under the Act of 1922 an assessees could not claim deduction on account of payment of any tax calculated on the basis of profits or gains of business and, therefore, an assessee could not have claimed any deduction on account of Excess Profits‑tax or Business Profits‑tax because these taxes were in the ultimate analysis levied on the profits of a company calculated in a certain manner. It has been argued that because of the changed phraseology and also the definition of 'tax' in the Act of 1961, the statutory disallowance is now limited only to income‑tax.

34. It has been argued that the legislature wanted to confine the disallowance only to income‑tax and super‑tax chargeable under the provisions of the Income‑tax Act and after 1st April 1965 only to income-tax. The phrase "chargeable under the provisions of this Act" clearly shows that the legislature intended the disallowance in section 40(a)(if) to be confined to a tax on income which was chargeable under the Income‑tax Act, 1961 and nothing else.

35. It has been argued that in any event the scope of section 40(a)(if) must be confined to a tax on the business income of the assessee which has been charged to' tax under section 28 under the head "profits and gains of business or profession". The chargeable profits under the Companies (Profits) Sur‑tax Act is computed on the basis of total income assessed under the Income‑tax Act and cannot be confined to profits or gains of business or profession only. Therefore, levy of sur‑tax does not come within the mischief of section 40(a)(ii).

36. We are unable to accept the contention that 'tax' in section 40(a)(ii) must be understood to mean only income‑tax. The definition given in section 2(43) will only apply "unless the context otherwise requires". The expression "any rate of tax" in section 40(a)(U) means any rate or any tax and not income‑tax only. That the section is not confined to income‑tax only is made clear by the words "levied on the profits or gains of any business or profession or assessed at a propor tion of or otherwise on the basis of any such profits or gains."

37. The legislature has refrained from using the expression "profits and gains of business or profession" to indicate that the exclusion from deduction in section 40(a)(if) was not to be confined to a tax imposed on income computed under section 28 of the Income‑tax Act. The expression "profits or gains" must be understood in ordinary sense. Profits" in common parlance mean excess of income over expenditure, "Gains" is also a word of very wide connotation, A man working for gain is not necessarily engaged in a trade or business. The word "Business" has been defined in section 2(13) of the Income‑tax Act :‑ " Business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture."

38. The profits made by a company including its income dividends, interest and rent will have to be shown in the Profits and loss Account. For the purpose of computation of total Income under the income‑tax Act the profits made by a company under different heads of income as laid down in section 14 of the Income tax Act. But the profit of a company does not change its character only because it is classified in a certain way under the Income‑tax Act for the purpose of assessment. The Supreme Court in the case of Commissioner of Income‑tax, Bombay City I v. Chugandas and Co. (1965) 55 I T R 17 : AIR 1965 S C 568) observed at p. 24 at p. 572) "Section 2(4) of the Indian Income‑tax Act, 1922, defines `business" as including any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture. Business is, therefore, an activity of a commercial nature. * * * * * * * The heads described in section 6 and further elaborated for the purpose of computation of income in sections 7 to 10 and 12, 12‑A, 12‑AA and 12‑B are intended merely to indicate the classes of income : the heads do not exhaustively delimit sources from which income arises. This is made clear in the judgment of this Court in the United Commercial Bank Ltd.'s case, that business income is broken up under different heads only for the purpose of computation of the total income ; by that break up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Indian Income tax Act for computation of income.".

39. In the case before us the question is whether sur‑tax payable by the assessee comes within the mischief of section 40(a)(ii). It is stated in the preamble of the Companies (Profits) Sur‑tax Act that "It is an Act to impose a special‑tax on the profits of certain companies". Although chargeable profits are computed on the basis of total income of a company assessed under the Income‑tax Act, but nonetheless it is the profit made by the company that is taxed under the Income‑tax Act. In this connection it is to be borne in mind that the assessee under the Sur‑tax Act is a company and not an individual. The importance of this d1stinc tion was pointed out by Jesse]. M. R. in the case of Smith v. Ander son (1880) 15 C D 247) at 258:‑ "There are many things which in common colloquial English would not be called a business, when carried on by a single person which would be so called when carried on by a number of persons. For instance, a man who is the owner of a house divided into several floors and used for commercial purposes, e.g. offices, would not be said to carry on a business because he let the offices as such. But suppose a company was formed for the purpose of buying a building, or leasing a house, to be divided into offices and to be let out should not, we say, if that was the object of the company, that the company was carrying on business for the purpose of letting offices? The same observations may be made as regards a single individual buying or selling land, with this addition, that he may make it a business, and then. it is a question of continuity. When you come to an association or company formed for a purpose, you would say at once that it is a business, because there you have from which you would infer continuity."

40. Although the judgment of Jessel M. R. in that case was ultimately overruled, the oft‑quoted passage extracted above ha, never been doubted.

41. In our opinion, it cannot be said that the tax sought to be imposed by the Companies (Profits) Sur‑tax Act will not come within the mischief of section. 40(a)(ii) of the Income‑tax Act.

42. Moreover. in the case before us the assessee filed a return dis closing an income of Rs 62,98,

220. The Income‑tax Officer computed the assessee's income at Rs. 66,91,550 out of which, business income came to Rs. 63,99,391 after making various disallowances. The sur‑tax imposable in this case has to be calculated on the basis of the total income of the assessee company after making statutory adjustments. If the tax that is sought to be imposed is not on the profits or gains of the business of the assessee, it is certainly levied on the basis of the profits or gains made by the assessee company in its business.

43. Even apart from section 40(a)(ii) a amount of Sur‑tax payable by the assessee cannot be allowed as deduction in computation of its total income. We are unable to accept the argument that on principle the tax payable under the Companies (Profits) Sur‑tax Act should be deducted as business expenditure under section 37 of the Income‑tax Act.

44. In this connection it will be useful to compare the provisions of the Companies (Profits) Sur‑tax Act with the provisions of the Excess Profits‑tax Act and the Business Profits Act. The Excess Profits‑tax Act imposed a tax "on the amount by which the profits during any chargeable accounting period exceeded standard profits". Profits had to be calculated in accordance with the provisions of the First Schedule wherein it was provided that the profits of a business were to be computed "on the principle on which the profits of a business are computed for the purpose of income‑tax under section 10 of the Indian Income‑tax Act, 1922". It was specifically provided under section 12 that the amount of excess profit tax payable in respect of a business shall be allowed to be deducted as an expense for the purpose of income‑tax or' Super Profit‑tax. It was provided in that Act that any repayment of excess profit‑tax would be chargeable to tax in computing the profits and gains of the business for the purpose of income‑tax as if the amount were a profit of the business accruing in the near in which the amount was repaid.

45. Under the provisions of the Business Profit‑tax Act, a tax was imposed on the amount of the "taxable profits" of the business. Deductible profit was defined to mean the amount by which the profits during a chargeable accounting period exceeded the abatement in respect of that period. It was provided in the First Schedule that the profits of a business should be computed in accordance with the provisions of section 10 of the Indian Income‑tax Act, 1922. Under section 10 it was provided that the amount of business profits‑tax payable by any person for any chargeable accounting period shall to computing total income for the purpose of income‑tax or super‑tax be allowed as deduction. It was also provided that if any amount of excess profit‑tax was refunded it would be taken into account in computing the profits and gains of a business for the purpose of income‑tax as if the amounts were profits accruing in the relevant previous year.

46. The provisions of the Companies (Profits) Sur‑tax Pare signi ficantly different. Section 2(5) defines chargeable profits. It means total income of an assessee computed under Income‑tax Act, 1961 and adjusted in accordance with provisions of the First Schedule. Section 4 imposes a charge of tax in respect of so much of chargeable profits as exceed the statutory deduction at the rate specified in the Third Schedule. Statutory deduction has been defined in section 2(8) to mean an amount equal to 10% of the capital of the company computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees whichever is greater.

47. The First Schedule which contains Rules for computing the charge able profits has provided under rule 2 as under :‑ "(1972) 82 I T R 166: 1972 Tax L R 10) The balance of the total income arrived at after making the exclusions mentioned in‑rule 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 Income‑tax Act after making allowance for any relief, rebate or deduction in respect of income‑tax to w rich the company may be entitled under the provisions of the said Act or the annual Finance Act."

48. Section 14 of the Companies (Profits) Sur‑tax Act empowers the Income‑tax Officer to recompute and determine the sue‑tax payable or refundable when an order has been passed under section 154, 155, 250, 254, 260, 262, 263 or 264 of the Income‑tax Act and the period of limitation for such recomputation shall be four years from the date of the relevant order passed under the Income‑tax Act. This goes to show that the total income must be computed first under Income‑tax Act and the Sur‑tax assessment will follow the income‑tax assessment. If there is any reduction or enhancement of the amount of income‑tax payable by an assessee as the result of any proceeding by way of rectification or revision or appeal or reference, then the sue‑tax assessment will have to be modified accordingly. The Income‑tax Act, however, does not contain any similar provision for rectification of the assessed income pursuant to any modifica tion in the amount of Sur‑tax payable as the result of any appeal, revision, rectification or reference.

49. The computation of income for the purpose of Income‑tax Act must precede an assessment under Companies (Profits) Sur‑tax Act. The total income under the Income‑tax Act must be calculated ; the tax payable under the Income‑tax Act has to be determined and then only the question of computation of chargeable profits of the company will arise. In computing the chargeable profits the amount of income‑tax has to be deducted. There is no provision similar to section 12 of the Excess Profits‑tax Act or section 10 of the Business Profits‑tax Act wherein it was specifically provided that‑these two taxes will be deductible from the total income for the purpose of computation of income‑tax.

50. The amount of sue‑tax paid by a company has been specifically made deductible from the total income under section 15 of the Sur tax Act. "

15. Sur‑tax deductible in computing d1stributable income under Income‑tax Act.‑Notwithstanding anything contained in clause (1) of section 109 of the Income tax ,Act, in computing the d1stributable income of a company for the purposes of Chapter XI‑D of that Act, 6the sur‑tax payable by the company for any assessment year shall be deductible from the total income of the company assessable for that assessment year." 51. 'Distributable income' has been defined in section 109 of the Income‑tax Act ; the material part of that section is as under "

109. For the purpose of sections 104, 105 and 107‑A and this section‑ (i) "distributable income'." means the gross total income of a com pany as reduced by‑ (a) the amount of income‑tax payable by the company in respect of its total income, but excluding the amount of any income‑tax pay able under section 104."

52. If we accept the contention made on behalf of the assessee and hold that the sue‑tax payable by the assessee is eligible for deduction under section 37 of the Income‑tax Act, for the purpose of computation of the total income of the assessee, then section I S of the Sur‑tax Act becomes mean ingless and otiose. Section 15 makes it clear that the liability for payment of sue‑tax is not a deductible expenditure for the purpose of computation of total income of the company, but the d1stributable income of a company must be computed after deducting the sue‑tax payable by the company from its total income.

53. The English Courts have cons1stently held that but for the specific provision contained in the statute, excess profits tax would not have been deductible for the purpose of computation of profits under the Income‑tax Act. It has been held that there is no d1stinction in principle between pay ment of excess profits tax under the laws of England and under the laws of a foreign country in this respect. The amount of excess profits tax paid under a foreign statute is not allowable as deduction because there is no specific provision of law to that effect. Therefore on general principle an amount paid by way of excess profits tax under foreign law cannot be allowed as deduction in England.

54. It has been argued that in order to decide the question that has arisen before us, reliance should not be placed on the English cases because the phrase "wholly and exclusively for the purpose of business" has been construed by the Supreme Court in a very wide sense. The English Courts have construed that expression in the context of the English Statute in a much narrower sense. It has been argued that the Supreme Court in the case of Indian Aluminium Company Limited v. Commissioner of Income- tax (1972) 84 I T R 735: 1972 Tax L R 873 (SC) has not accepted the test of capacity in this connection. It has further been argued that in the case of Commissioner of Income‑tax, West Bengal v. Birla Cotton, Spinning and Weaving Mills Ltd. (1972) 82 I T R 166: 1972 Tax L R 10) the Supreme Court has differed from the majority judgment of the House of Lords in the case of Smith Potato Estates Ltd. v. Bolland (1948) 30 Tax Cas. 267) and has allowed deduction of law charges incurred for conducting proceedings before the Investigation Commission for the assessment years. 1941‑42 to 1947‑48.

55. In the case of Indian Aluminium Company Limited v. Com missioner of Income‑tax (4) the Supreme Court held that the wealth‑tax paid by the assessee, a trading company on assets held by it for the purpose of its business, was deductible as business, expenditure in computing the assessee's income from business. The Supreme Court in that case re versed its earlier decision in the case of Travancore Titanium Products Ltd. v. Commissioner of Income‑tax Kerala (1966) 60 I T R 277: A I R 1966 S C 1250) in which it had held that the amount of wealth tax paid by the assessee was not a permissible deduction as business expenditure because wealth‑tax was imposed on the ownership of assets and not on any commercial activity. In the case of Rushden Heel Co. Ltd. v. Keene (1948) 30 Tax Cas 298) Lord Greene MAR. held that an expense was not deductible if it fell on a trader in some character other than a trader. This test, however, was not applied by the other Judges of the House of Lords who agreed with Lord Greene M.R. in that case. The unsoundness of the, test of capacity or character in which the tax was paid was pointed out in the case of Harrods (Buenos Aires) Ltd. v. Taylor Gooby (1964) 41 Tax Cas 450). .

56. In the case of Indian Aluminium Company the Supreme Court has relied on the ratio of the decision in the case of Harrods (Buenos Aires) Ltd. v. Taylor Gooby in holding that Wealth‑tax was an allowable de duction as business expenditure. The Supreme Court has not differed from that judgment in any way.

57. In the case of Harrods (Buenos Aires) v. Taylor‑Gooby it was held that a tax known as the substitute tax payable by the Company in Argentine which was charged annually at the rate of one per cent of the Company's capital and was payable whether or not there was profit liable to Argentine income-tax, was deductible as a business expenditure. It was held by Buckley, J. at p. 461 "The tax is not, in my judgment, a tax which is of the same character as Income‑tax or Excess Profits Tax ; it is not a tax which can only be measured and the liability to which can only be ascertained after the profits position of the Company has been finally de termined in any year. Payment of that tax is not, as it seems to me, an application of the Company's profits, nor is it a payment which in its nature could be said to fall to be made out of the earned profits of the Company, for it is not a tax the liability to which depends upon the Com pany having earned any profits. It is a liability which the Company has exposed itself to, or undertaken, in order that it may be able to carry on its business in the Argentine. And so it is, in my judgment, a liability which the Company .has undertaken for the purposes of its trade, and the payment of the tax is, in my judgment, a payment wholly and exclusively made for the purposes of the Company's trade, just as in the Lion Brewery case the liability of the landlord to make compensation fund contributions was a liability which it subjected itself to by assuming the character of land lord for the purposes of its trade, as brewer.

58. The judgment of Buckley, J. was affirmed on appeal. Willmer, L. J. rejected the proposition that the answer to the question depended on the capacity in which the tax‑payer paid the tax. Willmer, L. J. however d1stinguished the substitute tax payable in Argentine with the case of an English Company which pays Income‑tax Corporation profits tax and Excess Tax in Ireland. It was held by Willmer L. J. that the Substitute Tax was a disbursement wholly and erclusively laid out or expended for the purposes of the trade of the Company. Diplock L. J. who agreed with Willmer L.J. also rejected the d1stinction between, expenditure in the capacity of a trader and expenditure in some other capacity. Diplock L.J. observed "Liability to the tax does not depend upon whether profits are made or not. It is a payment, which the company is compelled to make if it has a business establishment in the Argentine at all, and it must have a business establishment if it is to carry on its trade. I can see no relevant difference between this tax and rates upon its business premises."

59. In the case before us the question of capacity or the character of the tax‑payer really does not arise. The real question is whether, a tax which has been imposed on the total income of a company after some adjustment can be allowed as a deduction in computing total income of that company under the Indian Tax Act. Is it a business expenditure of the Company ? In his concurring judgment in the case of Indian Aluminium Co. Ltd. v. Commissioner of Income‑tax the d1stinction between the two types of taxes was brought out by Beg, J. in the following words: "In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disburse ments to meet such taxes cannot be deducted. But, where the tax was levied, as it was in Harrod's case (1964) 41 Tax Cas 450), on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits." (Page 749).

60. The question of deductibility of excess profits tax paid by a com pany as business expenditure came up for consideration before House of Lords in the case of Commissioner of Inland Revenue v. Dowdell O'Mahoncy and Company Ltd. (1952) 33 Tax Cas.259. In that case the House of Lords held unanimously that such payments were not deductible. It was held that it could not be allowed as a deduction on the ground that excess profits tax was tax on profits and it could not be allowed on the same principle that income‑tax was not allowed as a deduction in making assessment of income. This case is important for our judgment and the principle laid down in this case is equally applicable to sur‑tax which is a tax of the same character as income‑tax or excess profits tax. Lord Oaksey observed at p. 274 of the report as follows :‑ On the first question I am of opinion that taxes such as those now in question, namely, income‑tax, corporation profits tax and excess profits tax, are not according to the authorities, wholly and exclu sively laid out for the purposes of the Company's trade in the United Kingdom. Taxes such as these are not paid for the purpose of earning the profits of the trade, they are the applica tion of those profits when made and not the less so that they are not exacted by a dominion or foreign Government. No clear d1stinc tion in point of principle was suggested to your Lordships between such taxes imposed by the United Kingdom Government and those imposed by domination or foreign governments." Lord Reid observed at pages 282-283:‑ "It is true that the payments which the respondents seek to have allowed as deductions were payments of hire taxes and not of United Kingdom taxes, but the parties have admitted that the relevant legislation in Eire corresponds to that in the United Kingdom, and I cannot see that there is any d1stinction in principle between them for present purposes. Certainly no authority for any such d1stinction was cited. It therefore appears to me to be established that there is not and never was any right under the principles applicable to case I to deduct income‑tax or Excess Profits tax, British or foreign, in computing trading profits."

61. Lord Reid mentioned another practical difficulty' for allowing this claim at page 284 as follows :‑‑ "Moreover the present case is an example of puzzling situation which would arise if the respondents were right. It is admitted that tax in Eire is assessable on the same principles, as in the United Kingdom So, if the respondents are right here, they would have been entitled in Eire to a deduction of United Kingdom Excess Profits Tax payable by them. The amount of tax payable in the one country could not be determined the amount of the deductions allowable there had been determined ; but one deduction would be the amount of tax payable in the other country. The amount of tax payable in the other country could not be determined until the deductions allowable there had been determined : but one of those deductions would be the amount of tax payable in the first country. I see no way in which the circle could be broken." Lord Radcliffe observed at page 285 as follows :‑ "It is true that both these decisions bore upon the question of deducting Excess Profits Tax paid in this country in a computation of profits and the question before us relates to a deduction of income and profit taxes paid in another country. But once it is accepted that the criterion is the purpose for which the expen diture is made in relation to the trade of which the profits are being computed, I have been unable to find any material d1stinction between a payment made to meet such taxes abroad and a payment made to meet a similar tax at home."

62. On behalf of the assessee reliance was placed on the judgment of the Supreme Court in the case of Vazir Sultan Tobacco Company Ltd. v. G. I. T. (1981) 132 1 T R 559 ; 1981 T L R 1780). But that case, in our opinion, does not support the contention of the assessee in any way. In that case the Supreme Court explained the meaning of `provision' and `reserve' under the Super Profits Tax Act and the Companies (Profits) Sur‑tax Act. In that case the question was whether the provisions for taxation, for retirement gratuity and for dividends could be treated as reserves for computing the capital for the, purpose of Super Profits Tax Act, 1963 for the assessment year 1963‑64.

63. In the case of t. C. Ltd: v. G. S. Ollivant, ,(Ltd. (1945) 13 1 T R 13 (Supple) the dispute was about construction of an agreement and the question that arose in the House of Lords was whether the expression `profits' in that agreement meant divisible profits. There are illuminating passages in the judgments of Viscount Simon L. C. and Lord Macmillan about the true nature of excess profits tax which have already been set out.

64. Lord Wright was also of the view that the amount paid by way of excess profits tax was not actually an expenditure but vas to be deducted as an expenditure from the profits of the company because of the specific provision made in the Finance Act, 1939. Lord Wright observed at pages 37‑38 of the report as follows :‑ "Finance Act, 1939 expressly provides that in computing profits for the purpose of income‑tax, excess profits tax, shall be allowed to be deducted as an expense incurred. I do not take that as mean ing that is actually an expense, because it is clearly not so. What is meant is that it is as much to be deducted from the earnings as if it were an expense in the strict sense.'

65. It has also been argued on behalf of the earning of profit and payment of taxes are not isolated and independent activities. These activities are continuous and take place from year to year. The liability to pay income‑tax and sur‑tax arises because a person is carrying on the business by which he earns profits. Therefore, the liability to pay the tax is an incidence of carrying on of the business through which he earns profits. Strong reliance has been placed on the decisions in Dehra Dun Tea Company v. Commissioner of Income -tax U. P. (1975) 99 I T R 7 ; 1975 Tax L R 286) and Indian Aluminium Company Limited v. Com missioner of Income‑tax (1972) 14 I T R 735 ; 1972 Tax L R 873 (SC?) which we have noted earlier. In the first of these two cases the Supreme Court allowed the tax levied by the U. P. Large Land Holdings Tax Act, 1957 on the ground that the tax was levied on the' business assets by applying the in the case of Indian Aluminium Company Limited. This was done the basis of the finding that the tax was levied on lands owned by the assessee company as its business assets. In the case of Mitsui Steamship Company Limited v. Commissioner of Income‑tax West Bengal 11 (1975) 99 1 T R 7 ; 1975 Tax L R 286), the question was whether the property tax paid by the assessee in Japan on its vessels was allowable and the Supreme Court held that the expen diture was as owner‑cum‑trader. and incidental to the carrying on of its business.

66. The question in this case is whether a tax imposed on the profits of a Company is allowable as deduction in computing the total income of the company. The subject‑matter of the tax is profits. Whatever profits of the company has made are being brought to the charge of Sur‑tax. The tax will be calculated according to the amount of profits that the assessee has earned. It is very difficult to see how the tax proposed to be levied on the profits can be deducted from the profits as expenditure wholly and exclusively laid out for business. Without an express provision to that effect there is no scope for deducting the estimated amount of sur‑tax from the profits for the purpose of arriving at the taxable income.

67. In the case of Commissioner of Income‑tax, West Bengal I v. Birla Cotton Shipping and Weaving Mills Ltd. the question before the Supreme Court was whether law charges incurred in connection with the proceedings before Income‑tax Investigation Commission were allowable deductions in the computation of the profits of business under section 10 (1) and under section 10 (2) (xv) of the Income‑tax Act, 1922. The Supreme Court pointed out that the ultimate object of the investigation that was being conducted was collec tion of material showing evasion of tax so that the avoided income could be subjected to taxation and penalties imposed for evasion. The assessee had engaged lawyers and had incurred expenses in conducting proceedings before the Commissioner and also in Courts where the vires or tile Investigation Commission Act was challenged. The Supreme Court in that case relied on the views of Viscount Simon and Lord Oaksey in the case of Smith's Potato Estates Ltd. v. Bolland in preference to the majority decision. The majority view in that case was that expenses incurred in filing an appeal against the decision of the Commissioner of Inland Revenue was not an allowable deduction for income‑tax and excess profits tax purposes. The Supreme Court pointed out at page 171 of (1972) 82 I T R : at p. 13 of 1972 Tax L R as follows: "The, essential test which has to be applied is whether the expenses wee incurred for the preservation and protection of the assessee's business from any such process or proceedings which might have resulted in the reduction of its income and profits and whether the same were actually and honestly incurred. It is not possible to understand how the expenditure on the proceedings in respect of the Investigation Commission by the assessee will not fall within the above rule. Even otherwise, the expenditure was incidental to the business and was necessitated or justified by commercial expediency. It must be remembered that the earning of profits and the payment of taxes are not. isolated and independent activities of a business. These activities are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes any steps for reducing its liability to tax which result in more funds being left for the purpose of carrying on the business there is always a possibility of higher profits...As was observed by Viscount Simon in Smith's Potato Estates case if the trader considers that the revenue seek to take too large a share and to leave him with too little the expenditure which the trade incurred in endeavouring to‑ correct this m1stake is a disbursement laid out for the purposes of his trade. If he succeeds he will have more money with which to earn profits next year."

68. But the problem in this case is quite different. Law charges. incurred has been justified as business expenditure on the ground of protection and preservation of assets and also on the ground that a busi nessman will legitimately try to get a larger share of the profit by reducing his tax liability. The assessee stands to gain by redaction of the burden of tax. Costs, charges and expenses for the purpose of reducing or avoiding liability for payment of income‑tax or sur‑tax may well be expenditure wholly and exclusively incurred for the purpose of business. But the tax imposed on the total income of an assessee cannot be allowed on that ground as a business expenditure in computation of total incomeo. How ‑can the fax that is sought to be imposed on income be a deduction from the very income which is being subjected to tax ? The tax imposed by the Companies (Profits) Sur‑tax Act is essentially of the same character as Income‑tax or Excess Profits‑tax. Liability to pay this tax depends upon whether profits are made or not. It is a tax which can only be measured and the liability to which can only be ascertained after the total income of the company has been finally determined and the income- tax payable thereon has been computed and deducted. To use the language of Lord Macmillan it is a super income‑tax. In our opinion having regard to the nature of the tax and the scheme of the sur‑tax. Act, the liability to pay sur‑tax cannot be allowed as a deduction from the total income of ‑the assessee as expenditure wholly and exclusively laid out for the purpose of its business.

69. We, therefore, answer the question that has been referred in the affirmative and against the assessee.

70. The parties will pay and bear their own costs. M. B. A. Answered in affirmative.