1980 (9) TMI 78 - HC - Income Tax

High Court Rules Deductions under Section 80G Not Part of Total Income for Capital Computation

Commissioner Of Income-Tax, Kerala II Versus Premier Cotton Spinning Mills Limited

The High Court ruled in favor of the assessee, holding that deductions under Section 80G of the Income-tax Act are not to be considered as part of the ... Surtax Issues Involved:1. Computation of chargeable profits under the Companies (Profits) Surtax Act, 1964.2. Interpretation of Rule 4 of the Second Schedule to the Surtax Act.3. Treatment of donations eligible for deduction under Section 80G of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Computation of Chargeable Profits under the Companies (Profits) Surtax Act, 1964:For the assessment years 1971-72 and 1973-74, the assessee, a limited company, made donations eligible for deduction under Section 80G of the Income-tax Act, 1961. The Income-tax Officer (ITO) computed the chargeable profits by deducting 50% of the donations from the total income. The Commissioner of Income-tax revised this assessment, directing the ITO to adjust the capital computation by considering the donations. The Tribunal, however, ruled in favor of the assessee, stating that such donations do not fall within the scope of Rule 4 of the Second Schedule to the Surtax Act.2. Interpretation of Rule 4 of the Second Schedule to the Surtax Act:Rule 4 states: '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, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains.' The Tribunal interpreted this rule to apply only to incomes not includible under Chapter III of the Income-tax Act, which deals with 'incomes which do not form part of total income,' and not to deductions under Chapter VI-A, including Section 80G.3. Treatment of Donations Eligible for Deduction under Section 80G of the Income-tax Act, 1961:Section 80G allows for a deduction of 50% of donations made to specified charitable institutions. The Tribunal held that such deductions do not qualify as 'income not includible in total income' under Rule 4 of the Second Schedule to the Surtax Act. The High Court supported this view, stating that deductions under Section 80G are part of the total income and are only excluded for the purpose of tax relief, not for capital computation under the Surtax Act.Conclusion:The High Court affirmed the Tribunal's decision, holding that the amount of deduction allowed under Section 80G is not to be treated as part of the income 'not includible in its total income as computed under the Income-tax Act' for the purposes of Rule 4 of the Second Schedule to the Surtax Act. Consequently, the capital of the company should not be decreased correspondingly. The questions referred were answered in the affirmative, favoring the assessee and against the department. Each party will bear its respective costs.Final Order:A copy of this judgment will be forwarded to the Tribunal as required by law.