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TMI Blog1980 (3) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act for the assessment years 1968-69, 1969-70 and 1970-71 ? " The surtax assessments of the above company for the assessment years 1968-69, 1969-70 and 1970-71 were completed on August 29, 1972, March 31, 1973, and March 31, 1973, respectively. In each of these years, while computing the chargeable profits for assessment under the Act, the ITO had to start by making adjustments to the total income of the company (as determined for purposes of income-tax), in accordance with the provisions contained in the First Schedule to the Act. In computing the figures of total income assessed under the I.T. Act, the assessee had been given the deductions contemplated under ss. 80G, 80-1, 80K, 80L, 80M and 80Q (occurring in Chap. VI-A) of the I.T. Act. It is not necessary to give the break up of the relief given under each of these sections; it is sufficient to mention that the deductions thus made amounted to Rs. 14,05,875 for the assessment year 1968-69, Rs. 11,74,122 for the assessment year 1969-70, and Rs. 15,48,113 for the assessment year 1970-71. Of the six deductions referred to above, the most substantial deduction was the one under s. 80-I in all the three years. The ITO also com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the proper interpretation of r. 4 of the Second Schedule to the Act. The question is whether, where an assessee gets a relief under ss. 80G, etc. (which may be generally described as deductions under Chap. VI-A of the I.T. Act) it could be said that a part of the company's income, profits and gains are not includible in its total income under the I.T. Act. Apart from the decision of the Karnataka High Court above referred to, there have been decisions by the Madras and Bombay High Courts on this question. We shall first refer to these decisions which are directly on the point at issue. Before turning to these decisions, a brief reference may be made to the scheme of the I.T. Act which is relevant in this context. The Surtax Act was introduced in 1964. Looking at the I.T. Act as it then stood, it envisages the charging of income-tax on the total income of every assessee (which also includes the income of certain other persons as set out in Chap. V). The figure of total income was arrived at, broadly speaking, in four stages : (a) The total income of a resident assessee " includes " all income profits and gains arising in India or outside. However, if the assessee is resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VIII in certain cases in respect of certain kinds of expenditure, incurred by him out of income forming part of his total income (e.g., " donations to charitable institutions "). The items described in this sub-para, it is clear, do not affect the computation of the total income in any way. They clearly form part of the total income, though not liable to tax. The last item in the above scheme was found to create many practical difficulties. The formulae for giving rebates and reliefs were very complicated and it was felt that the exemption process should be simplified. It was considered that, even in respect of these items, it will be much easier to grant relief by way of straight deduction in the computation of the total income, the amounts of deduction being so adjusted as to result in more or less the same extent of relief but obtainable in a much simpler manner. When this scheme was introduced by the insertion of Chap. VI-A headed " Deductions to be made in the computation of total income " it introduced a concept of " gross total income " (arrived at without reference to these deductions) which were then directed to be made from the " gross total income " in order to arrive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arnataka High Court (see Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1977] 106 ITR 399). The Division Bench practically covered the same ground as the learned single judge. It pointed out that the rule was based on the principle that where the capital employed by the company included capital investment in activities which are exempt from tax (e. g., agricultural activities) it was only natural and proper that the capital employed on the agricultural activities should be excluded in arriving at the capital of the company employed for earning the income which was chargeable to income-tax and hence also to surtax. It further pointed out that deductions under Chap. VI-A did not partake of this character. For example to take s. 80J, the profits of an industrial undertaking were part of the total income and chargeable profits. The court also referred to the provisions of r. 2 of the Second Schedule which also provides for a reduction of capital to the extent of assets owned by the company, the income from which is excluded from the chargeable profits under cl. (iii), (iv) or (viii) of r. 1 of the First Schedule and observed that r. 4 should be treated as complementary to the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Before the Bombay High Court in CIT v. Century Spg. and Mfg. Co. Ltd. [1978] 111 ITR 6, the question came up for consideration in regard to an item exempt under s. 84 of the I.T. Act, 1961. Though the question referred also to the provisions of s. 80J, this was not called for, and the question was modified by deleting the reference to s. 80J. Having regard to the heading of Chap. VII in which s. 84 fell and having regard to the fact that this category of income was included in the total income though no tax was payable on a part thereof, the court held that the provisions of r. 4 could not be applied. The court observed in this context, after referring to the scheme of the I.T. Act (p. 18). "Rule 4 will only apply in respect of items of income which are referred to in Chapter III, but rule 4 will not include any item of income which is included in Chapter VII which deals with incomes forming part of total income on which no income-tax is payable. At the relevant time as section 84 was in operation, the relief as provided by that section was granted to the assessee-company but merely by reason of such relief being granted it is not possible to take the view that the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of it is includible and a part not includible in the total income. Again, as Shri Verma rightly says, the part which is not taxable is includible in the computation of the " gross total income " (which is a different concept but not includible in the total income as computed for income-tax purposes. In this context, it may be pointed out, it is possible to take the view that the income envisaged under this rule need not be the entirety of a class of income derived from identifiable assets employed by the company (like, for e.g., agricultural income) as suggested by the Karnataka High Court. This will be clear from two factors. The first is the mode of computation provided by the rule for effecting necessary reduction of capital on this account. Unlike r. 2, which provides for the elimination from the capital computation of the value of assets which yield profits which are not chargeable under the Act and thus postulates the entirety of a class of income derived from specific assets, r. 4 provides for an arithmetical computation of excludible capital notionally conceived of as attributable to the income referred to therein by applying to the capital otherwise arrived at the same pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to be unreasonable or farfetched. But on a more careful consideration it seems that there are good reasons for not accepting the above construction. Many of the difficulties in accepting the department's interpretation have been discussed in the decisions already referred to and, without going once again over these grounds, we may just touch upon a few aspects which we think are relevant in attempting an interpretation of the rule : (a) The word " part " is used in the rule to describe income fulfilling a given description. In this context, the word can be said more appropriately to indicate an identifiable section, category or class of income rather than merely a portion of the amount of such income. As pointed out by the Karnataka High Court, it is difficult, in the case of these deductions, to answer the question: " What is that part of the income that is not included in the total income ? " The answer cannot be : " It is that part of the income that is derived say, from an industrial undertaking or a priority industry." The answer can only be: " A portion of that part of its income is not included in the total income". While, therefore, it may not be correct to suggest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross total income " which is arrived at as the first step in the above process of arriving at or computing the total income and hence do not attract r. 4. (c) It is important to bear in mind that the language of r. 4 was brought over from a similar rule framed under the Super Profits Tax Act, 1963, and it was not at the time the Legislature's scheme to exclude the items referred to in Chaps. VII and VIII from the total income. They were part of the total income but, having regard to their nature, a certain measure of relief from tax liability in relation thereto was provided for. We have already referred to the fact that though the Finance Acts of 1965 and 1968 changed the scheme, this was not due to any change of the policy in relation to these items but only to achieve simplicity in granting the intended relief. As counsel for the assessee pointed out, the deductions in respect of these items were so designed as to provide the assessee, as far as possible, with the same quantum of relief as they enjoyed earlier but in a simpler manner. Logically, therefore, the change in the scheme would not warrant a differential treatment for purposes of r. 4 after the change. That apart even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plications of reference to borrowed moneys, etc.) that the capital of the company should be diminished by the value of the shares yielding the said dividend. Now, if the department's interpretation is correct that r. 4 will apply in respect of such income, the capital arrived at after the application of r. 2 will again need to be diminished in the proportion referred to in r. 4. Such a double reduction of capital by reference to the same income could hardly have been intended. In the process of judicial assessment of such conflicting interpretations, there is no sensitive balance with which to weigh the pros and cons and determine with scientific accuracy which side is the weightier and, perhaps, in the drawing of the ultimate inference one way or the other, the subjective element is not altogether excluded. However, to us, it appears that the above discussion tends to support the conclusion that the view taken by the Karnataka, Madras and Bombay High Courts is preferable to the interpretation sought for by the department. We hold accordingly. We would like to add, without detracting from the firmness of our above conclusion, that even if one does not agree with it, one can hardl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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