1982 (11) TMI 32 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Rule 4 of Schedule II to the Companies (Profits) Surtax Act, 1964.
2. Interpretation of the term "income not includible" in the context of Section 80J of the Income-tax Act, 1961.
3. Whether deductions under Section 80J are considered income not includible in total income.

Detailed Analysis:

1. Applicability of Rule 4 of Schedule II to the Companies (Profits) Surtax Act, 1964:

The core issue revolves around whether the capital of the assessee should be proportionately reduced under Rule 4 of Schedule II to the Companies (Profits) Surtax Act, 1964, due to the relief allowed under Section 80J of the Income-tax Act, 1961. Rule 4 states: "Where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains."

2. Interpretation of the term "income not includible" in the context of Section 80J of the Income-tax Act, 1961:

The Department's argument was that the deduction under Section 80J should be considered as "income not includible" in the total income of the assessee, thereby necessitating a reduction in the capital for surtax purposes. However, the court clarified that the term "income not includible" refers to income that is not capable of being included in the total income as per the Income-tax Act, not to deductions made for relief purposes.

3. Whether deductions under Section 80J are considered income not includible in total income:

The court emphasized that deductions under Chapter VI-A, including Section 80J, are made from the total income to provide relief and are not considered income that is not includible in the total income. The court stated, "An amount which stands included in the total income of an assessee but is deducted in computing the total income of the assessee with a view to grant him some relief cannot be said to represent any income or part thereof which is not includible in the total income of the assessee."

Supporting Judgments:

- Karnataka High Court in Second ITO v. Stumpp, Schuele and Somappa Ltd. [1977] 106 ITR 399: Relief under Sections 80-I and 80J cannot be considered as income not includible in total income.
- Madras High Court in Addl. CIT v. Bimetal Bearings Ltd. [1977] 110 ITR 131: Deductions under Chapter VI-A are not income not includible in total income.
- Bombay High Court in Commissioner of Surtax v. Ballarpur Industries Ltd. [1979] 116 ITR 528: The term "not includible" refers to sums not capable of being included in total income, not to deductions under Chapter VI-A.
- Kerala High Court in CIT v. Premier Cotton Spinning Mills Ltd. [1981] 128 ITR 694: Only categories of income specified in Chapter III of the Income-tax Act are considered not includible in total income.
- Gujarat High Court in CIT v. Alembic Chemical Works Co. Ltd. [1982] 133 ITR 578: Deductions under Chapter VI-A are not income not includible in total income.

Conclusion:

The court concluded that the deductions under Section 80J are not to be considered as income not includible in total income for the purposes of Rule 4 of Schedule II to the Companies (Profits) Surtax Act, 1964. This interpretation aligns with the decisions of various High Courts. The question referred was answered in the affirmative and in favor of the assessee, with costs assessed at Rs. 250.