Capital base under surtax law is not proportionately reduced by deductions under sections 32A, 35B and Chapter VI-A.

Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applies only where income is statutorily excluded from total income, such as income falling under section 10 of the Income-tax Act. Deductions allowed while computing taxable income, including relief under sections 32A, 35B and Chapter VI-A, do not make the underlying receipts "income not includible in total income" for rule 4 purposes. On that basis, the capital base is not reduced proportionately merely because such deductions were granted in the income-tax assessment.

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Issues: Whether, for computing capital base under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the relief allowed in the income-tax assessment under sections 32A, 35B and Chapter VI-A of the Income-tax Act, 1961 required a proportional reduction of capital base.

Analysis: Rule 4 applies only where a part of the company's income, profits and gains is not includible in total income. The expression refers to income excluded from total income under the Income-tax Act, such as income covered by section 10, and not to deductions granted in the course of computing taxable income. Deductions under sections 32A and 35B and under Chapter VI-A reduce taxable income, but they do not convert the relevant business receipts into income not includible in total income for rule 4 purposes. The fact that the rule was enacted before later amendments to the Income-tax Act did not justify reading it as extending to such deductions.

Conclusion: The capital base was not required to be reduced proportionately on account of reliefs allowed under sections 32A, 35B and Chapter VI-A of the Income-tax Act, 1961. The question was answered in the affirmative, in favour of the assessee and against the Revenue.

Ratio Decidendi: For rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, only income statutorily excluded from total income is to be treated as income not includible in total income; deduction-based reductions in taxable income do not attract proportional reduction of capital base.

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