WHAT IS SURCHARGE? WHETHER INCOME TAX INCLUDES SURCHARGE?

WHAT IS SURCHARGE? WHETHER INCOME TAX INCLUDES SURCHARGE? – A CASE STUDY

By K P C Rao.,

LLB., FCS., FCMA

kpcrao.india@gmail.com

What is surcharge?

Surcharge, in general parlance means a fee or other charge that is added to the cost of a good or service. A surcharge is typically added to an existing tax, and may not be included in the stated price of a good or service. It may be a temporary measure to defray the cost of increased commodity pricing, such as with a fuel surcharge, or it may be permanent. Businesses use surcharges to shift additional costs to consumers.

According to section 2(2) of the Finance Act, 1964, where the total income of an assessee includes, any income chargeable under the head 'salaries' income-tax and super-tax payable by the assessee on the salary portion shall be the proportionate amount payable according to the rates provided in the Finance Act, 1963. Under section 2 of the Finance Act, 1963, income-tax was to be charged at the rates specified in Part I of the First Schedule and super-tax at the rates specified in Part II of that Schedule. The income-tax was to be increased, in certain cases mentioned, by a surcharge and additional surcharge for the purpose of the Union and a special surcharge.

In the case of The Commissioner of Income Tax, Kerala, Ernakulam v. K. Srinivasan [AIR 1972 SC 491], a controversy as to “Whether the words, Income Tax in the Finance Act of 1964 in sub-sec. (2)(a) and sub-sec. (2)(b) of Sec. 2 include surcharge and additional surcharge”, has come up before the Supreme Court.

Facts of the Case

The assessee's main source of income was salary from a limited company, (A. V. Thomas & Co. Ltd). In the previous year ending on 30th March 1964 his total income from salary amounted to ` 42,900/. In making the assessment the Income tax Officer levied surcharge and additional surcharge in accordance with the rates prescribed by the Finance Act 1963. The assessee preferred an appeal to the Appellate Assistant Commissioner. It was contended before him on behalf of the assesses that, the provisions of the Finance Act 1964 did not permit the Income tax Officer to levy surcharge and additional surcharge in accordance with the provisions of Finance Act of 1963. In other words it was contended that under sub-sec (2) of Sec 2 of the Finance Act of 1964 only income tax was payable in the proportion in which the salary stood to the total income, the income tax being worked out at the rates applicable under the Finance Act 1963. There being no mention of any surcharge in the sub-section, income tax alone was leviable which did not include surcharge. The Appellate Assistant Commissioner did not accede to these contentions. He was of the view that surcharge was only another form of income tax. The matter was taken to the Appellate Tribunal which upheld the levy of the surcharge and the additional surcharge. On a reference being sought the ‘follow-in- question of law’ was referred to the High Court: "Whether the words "income tax" in the Finance Act of 1964 in sub-sec. (2) (a) and sub-sec. (2) (b) of Sec. 2 would include surcharge and additional surcharge".

Legal Issues Involved

In this case, the assessee's main source of income was salary. For the previous year 1963-64 the Income-tax Officer levied surcharge and additional surcharge in accordance with the rates prescribed by the Finance Act, 1963. The assessee contended that under Sec 2(2) of the Finance Act, 1964 there was no mention of surcharge and hence only income-tax, which was to, be worked out at the rates applicable under the Finance Act, 1963, was payable. The Department and the Tribunal held that 'income-tax' included, surcharge. The assessee contested that since surcharge is not the same as Income Tax, the authorities have no right to levy surcharge on Income Tax.  The assessee raised this question before the assessing officer and subsequently got it referred to the High Court.  On reference, the High Court held that the words 'income-tax' in Sec 2(2) of the Finance Act, 1964, would not include 'surcharge" and 'additional surcharge' and held in favour of the assessee. Thereafter, the matter then carried to the Supreme Court by the Income Tax Department of Kerala.

Apex Court Ruling

Allowing the appeal the Supreme Court held that:

(1) Surcharge was levied for the first time by the Indian Finance Act, 1940. It was omitted in some later Finance Acts but was reintroduced in the Finance Act of 1951 and continued thereafter. The phraseology employed in the various Finance Acts showed that the word, ‘surcharge’ has been used to either increase the rates of income-tax and super-tax or to increase those taxes. Under section 2 of the Finance Act, 1971, the provisions of section 2 and of the First Schedule to the Act, 1970, shall apply in relation to income-tax for the assessment year commencing on the first day of April 1971. Section 2 of the Finance, Act 1971, speaks only of income-tax and not of any surcharge and, it is only in the modifications made in the Schedule to the Finance Act, 1970, that there is provision for a surcharge. Thus, the legislative history of the Finance Acts, as also the practice, indicates that the term 'income-tax' as employed in section 2 of the Finance Act, 1964, includes 'surcharge' as also 'the special and the additional surcharge' whenever provided.

(2)  One of the meanings of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to Sec 2 of the Finance Act, 1963, it would lead to the result that income-tax and super-tax were to be charged in four different ways or at 4 different rates which may be described as:

(a)  the basic charge or rate,

(b)  surcharge,

(c)  special surcharge, and

(d)  additional surcharge calculated in the manner provided in the Schedule.

Rest in that way the additional charges formed a part of the income-tax and super-tax. According to Art. 271 of the Constitution of India, notwithstanding anything in Arts. 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those Articles by a surcharge for the purpose of the Union and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India. The word 'surcharge' has been used in this Article only for the purpose of separating it from the basic charge of tax or duty, for the purpose of distributing the proceeds of the same between the Union and the States.

(3)  The legislative power of Parliament to levy taxes and duties is contained in Arts. 245 and 246(1), read with the relevant Entries in List I of the Seventh Schedule. Entry 82 in List relates to taxes on income other than agricultural income. Income-tax, super-tax and surcharge would all fall under this entry. It is in exercise of this legislative power that Parliament enacts the provisions relating to them in the Finance Act of each year. Sections 4 and 95 of the Income-tax Act, 1961, only provide that where any Central Act enacts that income-tax and super -tax shall be charged for any assessment year at any rate or rates income-tax and super-tax at those rates shall be charged in accordance thereto and subject to the provisions of the Act. Therefore, the distinction made by the High Court that surcharges are levied only under the Finance Act and income-tax under the Income-tax Act may not hold good.

Conclusion

Thereafter, this question was agitated in a different form claiming that surcharge on Income Tax is divisible in the same manner as Income Tax between the State and Centre.  However, the question was negative by the Supreme Court on the ground that surcharge is levied for the purposes of Union only and not for general purposes of the Union and State.

In the case of CIT Vs. Raju Bhatra [(2009) 310 ITR 105 (SC)], the  Supreme Court has laid down the ratio that surcharge leviable under the Finance Act was a distinct charge not dependent for its leviability on the assessee’s liability to pay income tax but on assessed tax.