Chapter VI-A deductions do not count as income not includible in total income for surtax capital reduction.

Section 80J relief was treated as a Chapter VI-A deduction in computing total income, not as income, profits or gains excluded from inclusion at the threshold under the Income-tax Act. On that basis, rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applies only where part of the company's income is not includible in total income under the Act, and does not extend to deductions of the Chapter VI-A kind. The company's capital was therefore not liable to proportionate reduction for surtax purposes on account of section 80J relief, and the answer was in favour of the assessee.

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Issues: Whether relief allowed under section 80J of the Income-tax Act forms part of income, profits and gains not includible in total income so as to attract rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and require proportionate reduction of capital for surtax purposes.

Analysis: Rule 4 of the Second Schedule operates only where a part of the company's income, profits and gains is not includible in total income as computed under the Income-tax Act. The relief under section 80J is a deduction made in computing total income from income already included in gross total income; it is not an item of income excluded from inclusion at the threshold. The Court distinguished between income that is not includible under Chapter III and deductions allowed under Chapter VI-A, and held that deductions of the latter kind do not answer the description of income, profits and gains not includible in total income. The Court also noted consistent High Court authority taking the same view.

Conclusion: Section 80J relief does not constitute income not includible in total income for the purpose of rule 4 of the Second Schedule, and the capital of the assessee was not liable to be diminished on that account. The answer was therefore in favour of the assessee.

Ratio Decidendi: Deductions allowed under Chapter VI-A of the Income-tax Act are not income, profits or gains not includible in total income within the meaning of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964; only income excluded from inclusion under the Income-tax Act can attract proportionate reduction of capital.

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