Section 80J deduction does not trigger capital diminution under surtax rule 4 for excluded income.

Relief under section 80J of the Income-tax Act is a deduction from income already includible in total income and is not equivalent to income excluded at the threshold under provisions such as section 10. Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act applies only where part of the company's income, profits and gains is not includible in total income. On that basis, section 80J relief does not require corresponding diminution of capital under rule 4, and the prior principle that Chapter VI-A deductions are not income not includible in total income remained undisturbed by the later Supreme Court decision relied on by the Revenue.

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Issues: Whether relief allowed under section 80J of the Income-tax Act, 1961, required a corresponding diminution of capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, on the footing that such relief represented income not includible in total income.

Analysis: Rule 4 of the Second Schedule applies only where a part of the company's income, profits and gains is not includible in its total income. Relief under section 80J operates as a deduction from income that is already includible in total income, and is not the same as income excluded at the threshold under provisions such as section 10 of the Income-tax Act, 1961. The earlier decision holding that Chapter VI-A deductions do not amount to income not includible in total income was held to remain unaffected by the later Supreme Court decision relied upon by the Revenue, because that decision dealt with the manner of computing deductible dividend income and did not alter the principle governing rule 4.

Conclusion: Relief under section 80J does not attract diminution of capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The question was answered in favour of the assessee.

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