Tax credit certificates were not income for surtax capital reduction because an exempt receipt is not income in substance.

Tax credit certificates issued under section 280ZB were held not to be income for the purposes of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Applying the ordinary and commercial meaning of income, the receipt was treated as a refund-like incentive subject to statutory conditions, not as a trading or earning return freely disposable as income ordinarily is. Its inclusion among exempt items under section 10(28) did not change its character. Because the receipt was not income in substance, it could not be taken into account to reduce capital for surtax purposes, and the assessee succeeded on reference.

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Issues: Whether tax credit certificates issued under section 280ZB of the Income-tax Act, 1961, and received by the assessee in the relevant accounting year constituted income so as to be taken into account for reduction of capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The receipt under section 280ZB represented a refund-like incentive linked to the tax already payable on assessed profits and was subject to statutory conditions on its adjustment or use. Applying the ordinary and commercial meaning of income, the receipt lacked the character of income because it was not a return from trading or earning activity in the usual sense and was not freely disposable like income ordinarily is. The fact that the amount was also placed within the exempted items under section 10(28) of the Income-tax Act, 1961 did not by itself make it income; an exempt receipt remains income only if it is income in substance. Since the tax credit amount was not income in the first place, it could not be brought within rule 4 of the Second Schedule to diminish the capital base for surtax purposes.

Conclusion: The tax credit certificates did not constitute income for purposes of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and the assessee succeeded on the reference.

Ratio Decidendi: A receipt is not income merely because it is exempted from tax; only receipts that answer the ordinary commercial meaning of income can be brought within rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

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