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TMI Blog1998 (1) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 8(b) of the Companies (Profits) Surtax Act, 1964 (Act No. VII of 1964)---for short (the "Surtax Act"), on the basis of the information received in the form of a report from the audit party, which felt that the tax credit certificates to the extent of Rs. 19,57,996 received by the company under section 280ZB of the Income-tax Act, 1961 (Act No. 43 of 1961 for short "the Income-tax Act"), should have been deleted from the capital base under rule 4 of the Second Schedule to the Surtax Act, which authorises exclusion of proportionate capital in respect of exempt income. On appeal, the Commissioner of Income-tax (Appeals-II), Madras 34, held that the tax credit certificate was not an income at all and hence there was no question of it being part of the total income so as to require the recomputation of the capital on the ground that it was exempt from income-tax. Thus, on the ground that there was no escapement, the Commissioner of Income-tax (Appeals-II) cancelled the assessment without entering into the question whether the reassessment was otherwise properly initiated. The Revenue appealed to the Tribunal. It was contended on behalf of the Revenue that the view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings, rule 4 of the Second Schedule to the Surtax Act was not at all taken into consideration, in the presence of computation of the capital of the assessee-company and this aspect of the matter had been pointed out by the audit party. It was on that basis the Assessing Officer reopened the assessment entertaining the reasonable belief that chargeable profits had been underassessed. Section 4 of Surtax Act is the charging provision. The said section read as under : "4. Charge of tax.---Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule." The section contained the methodology for computing surtax on every company. Such surtax shall be charged on every, company for every assessment year commencing on and from the 1st day of April, 1964. "Chargeable profits" of the previous year, and "statutory deduction" have to be worked out a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "10. Incomes not included in total income.---In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included---... (28) any amount adjusted or paid in respect of a tax credit certificate under the provisions of Chapter XXIIB and any scheme made thereunder." Chapter VIA of the Income-tax Act contains provisions pertaining to deductions to be made in computing total income. The question as to whether rule 4 of the Second Schedule to the Surtax Act takes in its fold, a part of the income, profits and gains of a company, not includible in its total income, as computed under section 10 alone and also the deductions to be made in computing total income under Chapter VI-A of the Income-tax Act had been the subject of a vexed question before the superior courts of jurisdictional High Courts and the apex court. We may now refer to some of the decisions of the superior courts of jurisdiction. In Stumpp, Schuele and Somappa P. Ltd. v. ITO (Second) [1976] 102 ITR 320 (Kar), E. S. Venkataramiah J. (as he then was) took the view that the expression in rule 4, "income, profits and gains of a company not includib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act are concerned, the position is that up to the stage when we reach the computation for purposes of Chapter VIA, the amount which is eligible to be considered under Chapter VIA forms part of or is included in the total income and the deduction is given only because of the inclusion. In such a case, the provisions of rule 4 do not have any scope for operation because it cannot be stated that the said profits were not at all includible in the total income of the company computed under the Income-tax Act. In other words, in making the computation for the purpose of applying Chapter VIA the amount which is the subject of relief is included in the total income and, therefore, it cannot be treated to be a case of profits and gains of a company not being includible in the total income. In International Instruments (P.) Ltd. v. CIT [1982] 133 ITR 283 (Kar), a Division Bench of the Karnataka High Court consisting of M. Rama Jois and G. N. Sabhahit JJ., expressed the view as below : "A receipt which is income does not cease to be income even if exempted from tax, and a receipt which is not income does not become income just because it is exempted from tax. The amount received by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view expressed by this court in the case of Bimetal Bearings Ltd. [1977] 110 ITR 131, had been affirmed by the apex court of this country in Second ITO v. Stumpp, Schuele and Somappa (P.) Ltd. [1991] 187 ITR 108, (on further appeal). Therefore, so much of a reliance, which had been placed by learned counsel appearing for the assessee on the case of International Instruments (P.) Ltd. [1982] 133 ITR 283 (Kar), has to be brushed aside, as not having any binding effect, in the face of the decision of the apex court in the case of Stumpp, Schuele and Somappa P. Ltd. [1991] 187 ITR 108. In view of the discussions as above, we can safely come to the conclusion that a part of the income, profits and gains of a company not includible in its total income, as computed under Chapter III of the Income-tax Act alone can be taken into account for the purpose of diminishing the capital base under rule 4 of the Second Schedule to the Surtax Act. From the scheme of the Surtax Act, as reflected by its various provisions, such as clauses (5) and (8) of section 2, section 4, and Schedules I to III, with particular reference to rule 4 of the Second Schedule. It is rather crystal clear that the in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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