Chapter VIA deductions are not income excluded from total income, so rule 4 capital reduction under surtax law does not apply.

Chapter VIA deductions under sections 80E, 80I and 80J are allowed after inclusion in gross total income and are not amounts excluded from total income at the computation stage. For that reason, such deductions do not constitute income "not includible in the total income" for rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Capital reduction under rule 4 is therefore not available by reference to those deductions, and the position is stated in favour of the assessee.

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Issues: Whether deductions allowed under section 80E and under sections 80I and 80J of the Income-tax Act, 1961, were amounts not includible in the total income so as to require a reduction in capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: Rule 4 applies only where a part of the company's income, profits and gains is not includible in its total income as computed under the Income-tax Act. The relief under Chapter VIA is obtained by way of deduction from the gross total income, which necessarily proceeds on the footing that the relevant amount is first included in the total income and then deducted. Such deductions are therefore different from items excluded at the stage of computation under section 10 of the Income-tax Act, 1961. On that basis, the profits qualifying for deduction under sections 80E, 80I and 80J do not answer the description of income not includible in total income for the purpose of rule 4.

Conclusion: Rule 4 of the Second Schedule does not authorise reduction of capital by reference to deductions under sections 80E, 80I and 80J, and the question is answered in favour of the assessee.

Ratio Decidendi: A deduction under Chapter VIA of the Income-tax Act, 1961 is made after inclusion in gross total income and is not equivalent to income excluded from total income; therefore, such amounts do not attract rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

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