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Issues: Whether, for the purpose of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, deductions allowable under sections 80-I and 80J of the Income-tax Act, 1961, reduce the capital of a company on the footing that the corresponding income is not includible in its total income.
Analysis: Rule 4 applies only where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act. The expression denotes income that is incapable of being included in total income, such as income excluded under Chapter III of the Income-tax Act, 1961. Deductions under Chapter VI-A, including sections 80-I and 80J, operate only after income has entered the computation of total income and therefore do not answer the description of income not includible in total income. The scheme of the Act, the distinction between exclusions under Chapter III and deductions under Chapter VI-A, and the authorities relied upon all support this construction.
Conclusion: The deductions under sections 80-I and 80J do not require a proportional reduction of capital under rule 4, and the question was answered in favour of the assessee.
Ratio Decidendi: For the purpose of surtax capital computation, only income excluded from total income altogether falls within the expression "not includible in total income"; Chapter VI-A deductions do not.
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