TMI Blog1980 (10) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... deductions under Chap. VI-A, came to Rs.93,11,291. Under the provisions of the Act, the assessee is entitled to standard deduction from the total income and this standard deduction is ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or rupees two lakhs, whichever is greater. Under r. 4 of the Second Schedule it is provided that where part of the income, profits and gains of a company is not includible in its total income as computed under the I.T. Act, its capital ascertained otherwise would be diminished by a proportionate amount. The ITO determined the capital of the company for the purpose of standard deduction according to the Second Schedule. The Commissioner took up the matter in suo motu revision under s. 16 of the Act. The provisions of s. 16 are similar to the provisions of s. 263(1) of the I.T. Act, 1961. In the view of the Commissioner, deductions made under the various sections of Chap. VI-A of the I.T. Act were made in arriving at the total income and since the amounts had been actually deducted from the total income, it could not be said that the said deductions were included in the total income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... almost all the items in dispute fell in group (c), that is, deductions in respect of certain income, and only one item fell under group (b) of Chap. VI-A. It was, therefore, urged on behalf of the revenue that the items falling under group (c) of Chap. VI-A were covered by r. 4 of the Second Schedule. It was also urged that all income would be included in the total income but for the special provisions; in these circumstances, it could be said that such incomes included under the special provisions were a part of income, profits and gains which were not includible in the total income. The Tribunal held that there was a difference in the headings of Chaps. III and VI-A of the I.T. Act and they made a distinction between certain types of income brought altogether out of the scope of taxable income and which were not includible at all in the total income as computed under the I.T. Act and deductions provided for under Chap. VI-A. The Tribunal held that there was no reason why they should differ from the decision of the Bombay Tribunal and following the decision of the Bombay Bench of the Tribunal, the Tribunal set aside the decisions of the Commissioner for the two years under refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing at the figure of chargeable profits, the amount of statutory deduction has to be ascertained. Statutory deduction means an amount of Rs. 2,00,000 or, if the capital of the company computed in accordance with the provisions of the Second Schedule exceeds rupees twenty lakhs, on the basis of that ten per cent. mentioned in s. 2(8), ten per cent. of the capital employed by the assessee-company concerned. Hence, the greater the amount of capital computed in the light of the provisions of the Second Schedule, the higher is the amount of statutory deduction and hence the lesser is the burden of surtax on the assessee-company concerned because from the amount of chargeable profits, the amount of statutory deduction has to be taken out and only the excess above the statutory deduction bears the burden of surtax at the rate or rates specified in the Third Schedule. Under r. 4 of the Second Schedule it is provided : " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is the total income computed in accordance with the provisions of the I.T. Act which is the basis for proceeding so far as companies are concerned, under the provisions of the Surtax Act. There are certain types of income which, by the very sweep of the provisions of s. 4 of the I.T. Act, are outside the applicability of the I.T. Act altogether. For example, income of a non-resident cannot, by any stretch of imagination be brought to tax under the provisions of the I.T. Act. non-resident earns income abroad. He is not amenable to the jurisdiction of the Indian Legislature and, therefore, by the scope of the I.T. Act, because under s. 5 of the I.T. Act, the total income of any previous year of a person who is resident in India includes all income, etc., and in regard to non-resident, it includes all income from whatever source derived which is received or deemed to be received or accrues or is deemed to accrue to non-resident in India. Therefore, the scheme of ss. 4 and 5 of the I.T. Act indicates what is the area that is covered by the charging s. 4 of the I.T. Act and what income is not capable of being included in the total income of an assessee. So far as non-residents are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emphasized in the earlier part of this judgment, r. 4 of the Surtax Rules refers to income which is not includible as distinguished from income which is not included in the total income in accordance with the provisions of the I.T. Act. The provisions of the Surtax Act are in pari materia with the provisions of the I.T. Act, and, therefore, when r. 4 speaks of income which is not includible, the words "not includible" must be read in the light of the provisions of the I.T. Act. The dictionary meaning indicates that " not includible " means not capable of being included. It is true that in computing total income for the purposes of the I.T. Act, certain items are specifically taken out and are excluded but it is because of the special provisions relating to such deductions, rebates, reliefs, etc., that they are taken out, not because of the inherent nature of the income. If by the very nature of the income read in the light of the provisions of the I.T. Act, a part of the income, profits or gains is not capable of being included in the total income of the assessee, it is only the portion of the income which can be processed under r. 4 for determining the proportionate capital att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether a particular part of the income is includible or not in the total income of the assessee. Therefore, ultimately, so far as r. 4 is concerned, it is only the income of the assessee falling within s. 10 and that part of income which is outside the sweep of ss. 4 and 5 of the I.T. Act, that can be said to be income not includible in the total income as computed under the provisions of the I.T. Act. Barring these two categories, one dealing with the sweep of ss. 4 and 5 of the I.T. Act, and the other covered by the different clauses of s. 10, all other income is capable of being included in the total income as computed under the provisions of the I.T. Act, but by reason of one or the other section of the I.T. Act, though capable of being included, in fact it is excluded, that is, not included, in the total income as computed under the provisions of the I.T. Act We are, therefore, of the opinion that any income falling under Chap. VI-A of the I.T. Act-since that Chapter deals with deductions is includible, that is, is capable of being included in the total income but by virtue of the special provisions relating to deductions in Chap. VI-A, is taken out and excluded from the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hap. VI-A the amount which is the subject of relief is included in the total income and, therefore, it cannot be treated to be a case of profits and gains of a company not being includible in the total income. At p. 135 of the report, Sethuraman J., speaking for the Division Bench, observed : " We may point out that the position is not free from doubt as the heading of Chapter VI-A states that it is a 'deduction from total income'. However, any ambiguity has to be resolved in favour of the subject." With great respect to the learned judges of the Madras High Court, once the problem is approached from the angle from which we have looked at this problem, there is no scope for doubt while interpreting the provisions of r. 4 of the Surtax Rules. Otherwise, as we have seen, the ultimate conclusion of the Division Bench of the Madras High Court is the same at which we have arrived at for the reasons which have appealed to us. In CIT v. Century Spg. and Mfg. Co. Ltd. [1978] 111 ITR 6, a Division Bench of the Bombay High Court has also come to the same conclusion as we have arrived at. At p. 17 of the report it has been pointed out that question No. 5 which was the relevant question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 ITR 901, the case dealt with the provisions of r. 2 of Sch. II and is not helpful to us for the purposes of this judgment. Similarly, in the decision of the Madras High Court in Addl. CIT v. Madras Motor and General Insurance Co. Ltd. [1979] 117 ITR 354, the scheme of the C. (P.) S.T. Act, 1964, and the rules thereunder have been referred to but the provisions of r. 4 which are material for the purposes of our judgment have not been interpreted and, as we have indicated, there is no occasion to go to the scheme of the Act for the purpose of interpreting the provisions of r. 4 of the Second Schedule to the Surtax Act. In Nav Bharat Vanijya Ltd. v. CIT [1980] 123 ITR 865, a Division Bench of the Calcutta High Court consisting of Sankar Prasad Mitra C.J., and S.C. Deb J., has held that the word "includible" in r. 1 of Sch. II to the Super Profits Tax Act, 1963, is indicative of the quality or description of the assets, the cost of which is to be excluded from the capital base. The word " includible " means capable of being included. The words " is not includible ", therefore, mean " is not capable of being included ". They cannot mean " has not been included ". The words " in acc ..... 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