Surtax computation and terminal allowance: Chapter VI-A deductions reduce capital, while terminal allowance remains includible in chargeable profits.

Chapter VI-A deductions were treated as requiring proportionate reduction of capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, following the binding Supreme Court position, so the point went against the Revenue. Terminal allowance under section 32(1)(iii) was treated as depreciation already reflected in income-tax assessment and was held includible in chargeable profits for surtax; it was not equated with the excluded profit under section 41(2), so the Revenue's exclusion argument also failed.

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Issues: (i) Whether capital was required to be reduced proportionately under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, because of deductions allowed under Chapter VI-A of the Income-tax Act, 1961, in the surtax assessment for assessment year 1976-77. (ii) Whether the loss allowed under section 32(1)(iii) of the Income-tax Act, 1961, was required to be added to the chargeable profits for levy of surtax.

Issue (i): Whether capital was required to be reduced proportionately under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, because of deductions allowed under Chapter VI-A of the Income-tax Act, 1961, in the surtax assessment for assessment year 1976-77.

Analysis: The issue was governed by the Supreme Court decision relied upon by the Court, which settled the position on the effect of Chapter VI-A deductions while computing capital for surtax purposes under rule 4. The Court followed that binding decision and treated the contention as no longer open.

Conclusion: The question was answered in the affirmative and against the Revenue.

Issue (ii): Whether the loss allowed under section 32(1)(iii) of the Income-tax Act, 1961, was required to be added to the chargeable profits for levy of surtax.

Analysis: The Court held that the terminal allowance under section 32(1)(iii) is in the nature of depreciation already allowed in the income-tax assessment while ascertaining business profits. It distinguished this allowance from the profit under section 41(2), which is specifically excluded under the surtax schedule, and held that the same reasoning did not justify excluding terminal allowance from the computation of business profits for surtax. The Court therefore rejected the Revenue's comparison between the two provisions.

Conclusion: The question was answered in the affirmative and against the Revenue.

Final Conclusion: Both referred questions were decided against the Revenue, and the surtax computation was held not to warrant the proposed reductions or exclusions.

Ratio Decidendi: A statutory allowance that retains the character of depreciation and is already reflected in income-tax assessment is not excluded from business profits for surtax computation unless the surtax scheme expressly so provides.

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