Rule 4 surtax capital reduction excludes Chapter VI-A deductions, preserving only income inherently outside total income.

Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 was held to apply only to income, profits and gains that are inherently not includible in total income, and not to amounts reduced by Chapter VI-A deductions under the Income-tax Act, 1961. The court reasoned that Chapter VI-A deductions operate after inclusion in gross total income, and treating them as a capital reduction under rule 4 would create anomalies and a risk of double reduction. On that construction, the Tribunal was justified in cancelling the Commissioner's revision orders under section 16(1), and the references were answered against the Revenue.

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Issues: (i) Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applies only to income, profits and gains wholly not includible in total income under the Income-tax Act or also to deductions allowed under Chapter VI-A of the Income-tax Act, 1961; (ii) Whether the Tribunal was right in cancelling the Commissioner's revision orders under section 16(1) of the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applies only to income, profits and gains wholly not includible in total income under the Income-tax Act or also to deductions allowed under Chapter VI-A of the Income-tax Act, 1961.

Analysis: Rule 4 was construed in the context of the scheme of the Income-tax Act, 1961 and the surtax computation mechanism. The Court noted that although the language of the rule could, on a literal reading, support the Revenue's view, the better construction was that the rule is directed to a class of income which, by its nature, does not form part of total income, rather than to portions of income left out after Chapter VI-A deductions. The Court accepted the reasoning that Chapter VI-A items are first included in gross total income and are then reduced by deductions, and that extending rule 4 to such deductions would create anomalies, practical difficulty, and possible double reduction of capital.

Conclusion: The rule does not apply to deductions allowed under Chapter VI-A of the Income-tax Act, 1961; it applies only to income not includible in total income in the relevant sense. This issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the Tribunal was right in cancelling the Commissioner's revision orders under section 16(1) of the Companies (Profits) Surtax Act, 1964.

Analysis: The Commissioner's revision proceeded on the premise that the surtax capital had to be reduced under rule 4 by reference to Chapter VI-A deductions. Once that premise was rejected, the foundation for the revisional orders disappeared. The Tribunal's cancellation of the Commissioner's orders followed the correct interpretation of the rule and required no interference.

Conclusion: The Tribunal was right in cancelling the Commissioner's orders. This issue was also decided in favour of the assessee and against the Revenue.

Final Conclusion: The references were answered against the Revenue, affirming that Chapter VI-A deductions do not trigger a reduction of capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Ratio Decidendi: Rule 4 of the Second Schedule is attracted only by income which is inherently outside total income, and not by income that is included in gross total income but subsequently reduced by deductions under Chapter VI-A of the Income-tax Act, 1961.

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