1989 (4) TMI 21 - HC - Income Tax

Court rules on application of Rule 4 of Companies Surtax Act regarding income inclusion and deductions

The court ruled in favor of the assessee, affirming that rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 should only be applied ... Company, Surtax Issues:Interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 regarding diminution of capital in proportion to the deduction allowed under section 80J of the Income-tax Act, 1961.Analysis:The primary issue in this case revolves around the interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, specifically concerning the diminution of capital in proportion to the deduction allowed under section 80J of the Income-tax Act, 1961. The question raised was whether the Tribunal was correct in holding that such diminution of capital was not permissible. The Second Schedule provides guidelines for computing a company's capital for surtax purposes, with rule 4 stating that if a part of the company's income is not included in its total income under the Income-tax Act, the capital should be diminished accordingly.The dispute arose from the assessee obtaining relief under section 80J of the Income-tax Act, 1961, leading the Income-tax Officer to reduce the capital for surtax purposes in line with rule 4. The Appellate Assistant Commissioner supported this reduction, but the Tribunal disagreed, citing a judgment from the Karnataka High Court. The High Court, in a previous case, had ruled that deductions allowable under certain sections of the Income-tax Act are not incomes incapable of being included in the total income, thus impacting the application of rule 4.The crux of the matter lies in whether deductions allowed under the Income-tax Act should trigger diminution of capital under rule 4. The court emphasized that deductions are relevant only when income is includible in the total income; if the income is not meant to form part of the total income, deductions do not apply. The court referred to previous judgments to support its stance that rule 4 is applicable only when a portion of income is not includible in the total income. The court differentiated between the computation of income for income tax assessment and the application of rule 4 for surtax purposes.Regarding the impact of a Supreme Court decision on the interpretation of rule 4, the court clarified that the Supreme Court's ruling did not alter the application of rule 4 as established in previous judgments. The court highlighted that deductions imply a part being taken away from income already included, emphasizing the necessity of inclusion before deduction. Ultimately, the court answered the question in favor of the assessee, affirming that rule 4 should only be applied when a portion of income is not includible in the total income.In conclusion, the court's decision provides clarity on the interpretation of rule 4 in the context of deductions allowed under the Income-tax Act, emphasizing that the rule applies when income is not meant to be included in the total income. The judgment reaffirms the principle that deductions are applicable only to income included in the total income, maintaining consistency with previous legal interpretations.