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TMI Blog1980 (7) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961, and in that view cancelling the order of the Commissioner of Income-tax under section 18 of the Companies (Profits) Surtax Act? " This reference relates to the assessment years 1968-69, 1969-70 and 1970-71. For these assessment years, the surtax assessments made by the ITO were considered by the Commissioner of Income-tax to be erroneous and prejudicial to the interests of the revenue, since the capital computed was not proportionately reduced, having regard to the deductions allowed under s. 80-I and s. 80J of the I.T. Act, 1961, overlooking the provisions of r. 4 of the Second Schedule to the C. (P.) S.T. Act, 1964. The Commissioner, therefore, after giving to the assessee-company a show-cause notice and considering the submissions made on behalf of the assessee-company in response thereto, had held that the capital computed should have been proportionately reduced, having regard to the deductions allowed under ss. 80-I and 80J, in view of the provisions of r. 4 of the Second Schedule to the C.(P.) S.T. Act, 1964. The Commissioner, accordingly, set aside the assessments made by the ITO and directed the ITO to compute the capital and make fresh assessments in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the capital of a company for the purposes of surtax. Rule 4 stipulates that " 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 rr. 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 ". Therefore, in order to answer the questions posed before us, it is material to consider as to what is the meaning of the expression " total income of an assessee computed under the Income-tax Act ". The meaning of " total income not includible in rule 1 of the Second Schedule of the Super Profits Tax Act, 1963 " was construed by a decision of this court in the case of Nava Bharat Vanijya Ltd. v. CIT [1980] 123 ITR 865, where the Division Bench of this court held that the word " includible " in r. 1 of the Second Schedule to the S.P.T. Act, 1963, was indicative of the quality or description of the assets, the cost of which was to be excluded from the capital base. The word " includible ", the Division Bench was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the I.T. Act, 1961. Section 2(45) stipulates " total income ", which is referred to in s. 5 (as income) computed in the manner laid down in the Act. Section 5 of the Act defines the scope of the total income and stipulates that the total income of any previous year, which is received, includes " all income from whatever source derived " and it is not necessary to enumerate the different items. Therefore, it is apparent that it should be income which is includible in the total income of the assessee, on the basis of the actual receipt or accrual as contemplated under s. 5 of the I.T. Act. Learned advocate for the revenue, in this connection, drew our attention to s. 66 of the I.T. Act, which is in Chap. VI which stipulates that in computing the total income of an assessee, there shall be included all income given under Chap. VII. Chapter VII provides for certain income which forms part of the total income but on which no income-tax is payable. It contemplates the income, for example, of a partner of an unregistered firm in certain contingencies or a member of an association of persons or body of individuals and all deductions under certain Govt. securities. Other provisions, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain items of the income or payments contained in Chap. VII., Chap. VIII, and Chap. XII of the I.T. Act, by provisions for allowing a straight deduction of the whole or a specified percentage of the amount qualifying for the rebate or at a concessional rate of tax, in computing the total income. Learned advocate for the revenue also drew our attention to the Notes on Clauses on the introduction of the C. (P.) S. T. Act, 1964, which stated that the Second Schedule contained the rules for the computation of the capital of the company for the purpose of determining the amount of it statutory deduction " admissible to a company. Under those rules, the capital of the company consists of the amounts, as on the first day of the relevant previous year, of its paid up capital, reserves (including the reserves required to be created under the Indian I.T. Act, 1922, and the I.T. Act, 1961, for entitlement to development rebate) debentures and specified loans. If a company possessed assets, the income from which was not taken into account in computing the chargeable profits under certain provisions of the First Schedule such as investments in shares of companies, the cost thereof, (subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' cannot have reference to the quantum of the income included, but they must be held referable only to the category of the income included, that is, income by way of dividends from a domestic company. The words 'such income' as a matter of plain grammar must be substituted by the words 'income by way of dividends from a domestic company' in order to arrive at a proper construction of the section and if that is done, it would be obvious that the deduction is to be in respect of the whole or 60 per cent. of the 'income by way of dividends from a domestic company' which can only mean the full amount of dividends received from a domestic company. The deduction permissible under the section is, therefore, to be calculated with reference to the full amount of dividends received from a domestic company, and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act. The view that we are taking on the construction of the section is in consonance with the views of several other High Courts and it would be appropriate to refer to some of these views. In this connection, it would be proper fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income and which would be later on deducted for the purpose of determining the tax liability under Chap VI-A. The Division Bench observed, in this connection, that the expression " shall not be included " which is found in ss. 10 and 11 in Chap. III was not used in any of the provisions of Chap. VI.A. Similarly, the said expression was not used in Chap. IV of the I T. Act which provided for the method of computing the income under which the assessee was allowed deduction by way of expenses, rebates and allowances, etc. Both in Chap. IV and Chap. VI-A, Parliament had consistently used the words " deduction shall be allowed " and not the expression " shall not be included It was very clear, according to the Division Bench, that the expression income, profits and gains of company not includible in its total income as computed under the Income-tax Act in r. 4 referred to those sums which were not includible in the total income by the provisions of Chap. III of the I.T. Act and did not refer to any of the deductions claimable under Chap. VI-A of the Act. Hence, it was held that the amount of relief permissible by reason of the provisions contained in s. 80-I should not be deducted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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