Surtax capital computation turns on Chapter VI-A deductions, net dividend income, and public debentures treated as capital until redemption.

Chapter VI-A deductions under the Income-tax Act are not amounts excluded from total income for rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, so they cannot proportionately reduce capital employed. For surtax computation, the dividend component relevant to chargeable profits is net dividend income, not the gross receipt, so gross dividend is not deductible as such. Debentures issued to the public remained includible as capital under the Second Schedule because reduction applies on redemption, not on a company's purchase of its own debentures. The reference was disposed of accordingly, with relief on capital-employment and debenture-capital issues and the Revenue succeeding on dividend income.

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Issues: (i) Whether capital employed could be diminished proportionately with reference to income exempted under sections 80M and 80J of the Income-tax Act, 1961; (ii) Whether gross dividend income is deductible in computing chargeable profits; (iii) Whether the entire amount of debentures issued to the public is required to be treated as capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether capital employed could be diminished proportionately with reference to income exempted under sections 80M and 80J of the Income-tax Act, 1961.

Analysis: Deductions under Chapter VI-A are amounts includible in total income but taken out by virtue of the special deduction provisions. Such deductions are not income, profits and gains not includible in total income for the purpose of rule 4 of the Second Schedule to the surtax provisions, and therefore cannot reduce the capital employed on a proportionate basis.

Conclusion: The question was answered in the affirmative, in favour of the assessee and against the Revenue.

Issue (ii): Whether gross dividend income is deductible in computing chargeable profits.

Analysis: In computing chargeable profits, the dividend component relevant for total income is the net income by way of dividend and not the gross receipt. The gross dividend income is therefore not the amount to be excluded for surtax computation.

Conclusion: The question was answered in the negative, in favour of the Revenue and against the assessee.

Issue (iii): Whether the entire amount of debentures issued to the public is required to be treated as capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: What matters is whether the debentures were issued to the public. Reduction of capital under rule 3 is attracted on redemption, not on purchase by the company of its own debentures. Since the debentures were issued to the public, were not redeemable within seven years, and the transaction was not one of redemption, the full amount remained includible as capital.

Conclusion: The question was answered in the affirmative, in favour of the assessee and against the Revenue.

Final Conclusion: The reference was disposed of with relief being granted to the assessee on issues relating to capital employed and debenture capital, while the Revenue succeeded on the dividend-income question.

Ratio Decidendi: Amounts deductible under Chapter VI-A are not to be treated as income excluded from total income for proportionate reduction of surtax capital, and debentures issued to the public remain part of capital until redemption, not mere purchase by the company.

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