Madurai District Central Co-operative Bank Ltd. vs Third Income Tax Officer

Veeraswami, J.—This is a petition to quash an order of the Third Income Tax Officer, Madurai-2. The order related to the assessment year

1963-64. The petitioner, The Madurai District Central Co-operative Bank Limited, was assessed to Income Tax and super-tax which amounted

to Rs. 23, 845.47. The tax was computed on a total taxable income of Rs. 51,763, while, actually, the income taken for purposes of rate

amounted to Rs. 9,48,335. Applying the Finance Act, 1963, the residual income Was determined at Rs. 5,39,386. There is no dispute that the

computation of the residual income was strictly in terms of Section 2(8) of the Act. The additional surcharge leviable on the residual income Was

fixed at Rs. 52,828''60, the total tax payable by the petitioner thus amounting to Rs. 76.674-07.

The contention for the petitioner is that the provision relating to the additional surcharge levied on the residual income is not valid, inasmuch as it

goes beyond the taxable income computed for purposes of Income Tax. The point is also put slightly in a different way, viz., the Finance Act

cannot validly subject to additional surcharge an income, which, under the provisions of the Income tax Act, was exempt and not liable to charge.

Section 4 of the Income Tax Act charges the total income of the previous year or previous years of every person at the rate or rates prescribed by

any Central Act enacted for the purpose. Section 81, which is found in Chapter VII relating to income forming part of total income on which no

Income Tax is payable, provides that Income Tax shall not be payable by a co-operative society in respect of profits and gains of business carried

on by it, this exemption being subject to certain conditions. Section 2(1)(a)(ii) of the Finance Act, 1963, states that, subject to the provisions of the

other sub-sections, for the assessment year commencing on the 1st day of April, 1963, Income Tax shall be charged at the rates specified in Part I

of the First Schedule and, in the cases to which Paragraphs A and C of that Part apply, Income Tax shall be further increased by an additional

surcharge for purposes of the Union calculated in the manner provided in the Schedule. With reference to these provisions, we are unable to find

any support for the objection raised by the petitioner.

From the fact that u/s 81 of the Income Tax Act, the business income of a co-operative society, like the assessee, is exempt from tax, it does

not follow that such income was never part of, or has ceased to be part of, the total income of the previous year. The exemption provided by

Section 81 is not in terms of a deduction of the business income from the total income. Chapter VII itself is captioned ""income forming part of total

income on which no Income Tax is payable "". Quite apart from this, it seems to us to be obvious that, before exemption of tax is claimed, the

income with reference to which the claim is made must necessarily be part of the total income of the previous year. It is only then that the question

of exemption from tax can arise. Unlike deduction of income, which by that process ceases to be part of the income, income that is exempt from

tax but has once been computed does not cease to be part of the total income of the previous year.

The petitioner relies on The Commissioner of Income Tax, Bombay City Vs. The Khatau Makanji Spinning and Weaving Co. Ltd., Bombay, . ,

but we fail to see what assistance it gives to him in the instant case. All that was decided in that case was that, in view of the terms of Section 3 of

the Income Tax Act, 1922, income tax was levied on the income of the previous year and not on something which was not the income of the

previous year, or made fictionally so. The excess dividend in that case, which was subjected to the additional tax, was not shown or not deemed

by the particular Finance Act to be part of the total income of the previous year. In such circumstances, the Supreme Court agreed with the High

Court of Bombay that the Finance Act had misfired, because it did not resort to legislation which would have conformed to the subject for which

the Finance Act was passed every year. Observed the Supreme Court:

This fiction, as we have already pointed out, provides only that the dividends shall be deemed to be out of the profits not of the previous year

under assessment but of some other years. What the Finance Act fails to do is to make them '' total income '', so as to take in the rate which is

prescribed for the total income in the proviso. Unless the Finance Act stated that after the working out of the fiction the profits of the back year or

years shall ,be deemed to be a part of the total income of the previous year under assessment, the purpose of the Act clearly fails.

That was the basis for the decision of the Supreme Court. The position is very different in the case before us, where--and this is not actually

disputed by counsel for the petitioner--the income which was exempt from tax u/s 81 had formed part of the total income of the previous year.

There was no need, therefore, for the Finance Act to make any deeming provision making what was not the income of the previous year as such

income by a fiction.

It is next contended that the language of Section 2(I)(a) (ii) of the Finance Act is not appropriate for levy of additional surcharge on income

exempted from tax under the Income Tax Act. It is said that it is only where a tax can be levied that any question of its further increase by an

additional surcharge for purposes of the Union can arise, and that, if there was no tax at all levied under the statutory exemption, there is no basis

for any increase. It seems to us that the language aforesaid is adopted to conform to the words used by Article 271 of the Constitution. The

increase in the tax is for purposes of the Union, and such increase being not part of the Income Tax, is not divisible as between the States on the

prescribed percentage basis. But the point remains whether the additional surcharge levied can be said to be an increase of the tax for Union

purposes. In our view, where a part of the income is not chargeable to tax at all, it may be inappropriate to increase the tax, which did not exist, by

the additional levy. But this is not such a case. The income of the assessee from its business carried on as a co-operative society was part of the

total income as we have already mentioned, and it was chargeable to tax u/s 4. The charge would have been laid but for the exemption provided

by Section 81. In such a context, we think that, though the tax, because of the exemption, is not actually levied and collected, it will not be

inappropriate to regard the additional surcharge levied as an increase to the tax, which, though chargeable, is not actually levied and collected

because of the exemption.

The petition is dismissed with costs. Counsel''s fee, Rs. 250.