Capital gains exclusion under surtax law also covers short-term capital loss in computing chargeable profits.

For computing chargeable profits under rule 1(i) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion of income under the head "Capital gains" extends to the whole head and not only to positive capital gains. The court treated short-term capital loss as part of the same capital gains head under the Income-tax Act's computation provisions, including set-off and carry-forward rules, and applied the principle that statutory "income" may include losses where context so requires. Short-term capital loss was therefore held to fall within the exclusion and was rightly left out of chargeable profits.

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Issues: Whether, for computing chargeable profits under rule 1(i) of the First Schedule to the Companies (Profits) Surtax Act, 1964, short-term capital loss falling under the head "Capital gains" is to be excluded along with capital gains.

Analysis: The expression "any income chargeable under the head 'Capital gains'" in rule 1(i) was construed in the setting of the surtax scheme as excluding the entire head of income and not merely a positive figure. The computation provisions of the Income-tax Act, 1961, especially the provisions dealing with set-off and carry forward of capital loss, showed that capital gains and capital loss are both part of the same head of income. The Court also relied on the settled principle that, for income-tax computation, "income" and "profits and gains" may include losses where the statutory context so indicates. The exclusion in the First Schedule was therefore held to cover short-term capital loss as well.

Conclusion: Short-term capital loss is covered by rule 1(i) and was rightly excluded while computing chargeable profits. The question was answered in the affirmative, against the assessee and in favour of the Revenue.

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