1977 (6) TMI 27 - HC - Income Tax

Summary

Issues involved: Interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 in relation to deductions under sections 80E, 80-I, and 80J of the Income-tax Act for the assessment years 1966-67, 1967-68, and 1968-69.

Assessment Year 1966-67 and 1967-68:
The assessee was eligible for deductions under section 80E at the rate of 8% of manufacturing profits. The Income-tax Officer initially computed the capital without adjusting for these deductions. Upon reassessment, adjustments were made to the capital for the proportionate part of profits deducted under section 80E. The Appellate Tribunal held that such adjustments were improper, leading to the reference question on whether these deductions should be considered in computing capital under rule 4 of the Second Schedule.

Assessment Year 1968-69:
Similar adjustments were made for deductions under sections 80-I and 80J. The Tribunal questioned the validity of these adjustments, prompting the reference on whether these deductions should impact the computation of capital under rule 4.

Interpretation of Rule 4:
The crux of the matter was whether the profits subject to deductions under sections 80E, 80-I, and 80J were not includible in the total income, justifying application of rule 4. The court analyzed the legislative history and changes in tax laws post-1965 amendments. It was debated whether the straight deductions provided post-amendment could fall within the scope of rule 4.

Court's Decision:
The court deliberated on whether profits eligible for deductions under Chapter VIA of the Income-tax Act were truly not includible in total income. It was argued that such profits, being part of the total income, did not warrant adjustment under rule 4. The court favored the assessee's stance, emphasizing that any ambiguity should benefit the taxpayer. The judgment aligned with a similar stance taken by the Karnataka High Court in a previous case. Consequently, the court ruled against the revenue, allowing the assessee's claim and awarding costs.