1978 (6) TMI 38 - HC - Income Tax

Capital Of Company Companies Profits Surtax Computation Of Capital Income Tax Act Total Income

Summary

Issues:
Interpretation of the provision under the Companies (Profits) Surtax Act, 1964 regarding the deduction allowable under section 80-I of the Income-tax Act in determining the capital of the assessee-company for surtax assessment.

Detailed Analysis:

The judgment delivered by the High Court of BOMBAY pertains to a reference made by the Commissioner of Surtax, Vidarbha, and Marathwada, Nagpur, regarding the treatment of the deduction allowable under section 80-I of the Income-tax Act in determining the capital of the assessee-company for surtax assessment for the year 1971-72. The primary question was whether the amount in proportion to the relief allowed under section 80-I had to be deducted from the capital of the company as of July 1, 1969, for surtax assessment purposes. The assessee, Ballarpur Industries Ltd., had not initially adjusted the relief under section 80-I while calculating the capital base. However, the Income Tax Officer (ITO) reduced the capital by the amount proportionate to the deduction under section 80-I, a decision upheld by the Appellate Authority and later appealed by the assessee to the Tribunal. The Tribunal, relying on a judgment of the Karnataka High Court, ruled in favor of the assessee, leading to the Commissioner challenging this decision.

The crux of the issue revolved around the interpretation of rule 4 of the Second Schedule of the Companies (Profits) Surtax Act, 1964, which determines the capital of a company for surtax purposes. Rule 4 specifies that where a part of the income of a company is not includible in its total income under the Income-tax Act, the capital shall be adjusted accordingly. The contention raised was whether deductions allowed under Chapter VI-A of the Income-tax Act, including section 80-I, fell under the ambit of income not includible in total income. The assessee argued that only incomes specified in Chapter III of the Income-tax Act, which do not form part of total income, should be considered under rule 4.

The court delved into the legislative history of the Surtax Act and the Income-tax Act, highlighting the evolution of provisions related to deductions for priority industries and new industrial undertakings. The court referred to a previous judgment concerning the treatment of deductions under section 84 (now replaced by section 80J) under Chapter VII, which indicated that such deductions did not attract rule 4 of the Second Schedule. The court then analyzed a judgment of the Karnataka High Court, which emphasized that deductions claimable under Chapter VI-A should not be considered as income not includible in total income under Chapter III.

The court ultimately concurred with the Tribunal's decision, aligning with the interpretations provided by the Karnataka High Court. It concluded that adjustments under rule 4 should pertain only to incomes excluded from total income under Chapter III of the Income-tax Act, not deductions or reliefs under Chapter VI-A. Therefore, the court answered the reference question in the negative, in favor of the assessee, and directed the Commissioner to bear the costs of the reference.

This detailed analysis of the judgment showcases the intricate legal interpretation surrounding the treatment of deductions under different chapters of the Income-tax Act in determining the capital base for surtax assessment, emphasizing the significance of legislative history and precedent judgments in guiding the court's decision-making process.