Statutory deduction under surtax law cannot be reduced for assets that did not actually yield excluded income.

Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applies only when the relevant exclusion under rule 1 of the First Schedule actually operates in the assessment year. The Madras High Court held that the cost of assets cannot be reduced from statutory deduction merely because those assets were capable of yielding exempt income; the assessee must in fact have derived income of the kind covered by clauses (iii), (vi) or (viii) of rule 1. A contrary reading would produce an anomalous result inconsistent with the statutory scheme and the legislative object, and the court also relied on Form No. 1 in the Surtax Rules. The reference was answered in favour of the assessee.

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Issues: Whether, for computing statutory deduction under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the cost of assets is to be reduced only where those assets actually produced income of the kinds excluded under rule 1 of the First Schedule, or even where such assets did not produce any such income.

Analysis: The statutory scheme confines chargeable profits to income computed under the Income-tax Act and adjusted only under rule 1 of the First Schedule. The capital for statutory deduction is then computed under the Second Schedule, and rule 2 operates to diminish that capital by the cost of assets whose income is excluded under clauses (iii), (vi) and (viii) of rule 1. Reading the Schedules as a whole, and harmonising them with the object of the Act, the Court held that rule 2 is attracted only when rule 1 actually operates in the relevant assessment year. A literal reading that reduced statutory deduction even where no such income arose would create an unjust and anomalous result inconsistent with the legislative scheme. The Court also found support in Form No. 1 in the Surtax Rules.

Conclusion: Rule 2 of the Second Schedule does not apply where the assessee had no income of the relevant kind under clause (viii) of rule 1 of the First Schedule, and the cost of the assets could not be deducted from statutory deduction. The answer was in favour of the assessee and against the revenue.

Final Conclusion: The reference was answered by holding that the surtax computation does not require exclusion of the cost of assets capable of yielding exempt dividend income when no such income was earned in the relevant year.

Ratio Decidendi: A provision in a tax statute must be read harmoniously with the statutory scheme and applied only in the circumstances it is intended to cover, so as to avoid an anomalous result contrary to the legislative object.

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