1980 (10) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of Rule 4 of the Second Schedule of the Companies (Profits) Surtax Act, 1964.
2. Determination of whether deductions under Chapter VI-A of the Income-tax Act are considered "income, profits or gains not includible in the total income."

Issue-wise Detailed Analysis:

1. Interpretation of Rule 4 of the Second Schedule of the Companies (Profits) Surtax Act, 1964:

The core issue revolves around the interpretation of Rule 4 of the Second Schedule of the Companies (Profits) Surtax Act, 1964. 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." The crux of the matter is understanding the term "not includible in its total income" as per Rule 4.

The judgment emphasizes the distinction between "not includible" and "not included." "Not includible" means not capable of being included, whereas "not included" refers to income that is excluded due to specific provisions. The court clarifies that "not includible" pertains to income inherently incapable of being included in the total income due to the nature of the income or specific statutory provisions.

2. Determination of whether deductions under Chapter VI-A of the Income-tax Act are considered "income, profits or gains not includible in the total income":

The court examined whether deductions under Chapter VI-A of the Income-tax Act fall under the category of "income, profits or gains not includible in the total income" as per Rule 4. The Commissioner had directed the ITO to recompute the capital employed by the assessee after deducting a proportionate amount of the relief allowed under Chapter VI-A from the capital computed.

The Tribunal, however, differentiated between the headings of Chapters III and VI-A of the Income-tax Act. Chapter III deals with "Incomes not includible in total income," whereas Chapter VI-A pertains to deductions from total income. The Tribunal concluded that Chapter VI-A deductions do not amount to "income, profits and gains not includible in the total income."

The court upheld the Tribunal's view, emphasizing that Chapter VI-A deals with deductions from total income, meaning the income is capable of being included but is excluded due to specific provisions. The court stated, "We are of the opinion that any income falling under Chap. VI-A of the I.T. Act-since that Chapter deals with deductions is includible, that is, is capable of being included in the total income but by virtue of the special provisions relating to deductions in Chap. VI-A, is taken out and excluded from the total income computed in accordance with the provisions of the I.T. Act."

The court also referenced decisions from other High Courts, including Karnataka, Madras, and Bombay, which had arrived at similar conclusions. The court noted that while the reasoning might differ slightly, the ultimate conclusion was consistent across these judgments.

Conclusion:

The court answered the referred question in the negative, determining that deductions allowed to the assessee under Chapter VI-A of the Income-tax Act are deductions from the total income and not "income, profits or gains not includible in the total income" as contemplated in Rule 4 of the Second Schedule of the Companies (Profits) Surtax Act, 1964. The judgment was thus in favor of the assessee and against the revenue, with the Commissioner directed to pay the costs of the reference to the assessee.