H.N Seth, J.:— Income-tax Appellate Tribunal, Allahabad, has, at the instance of the Commissioner of Income-tax, in respect of the assessment of the assessee, M/s. J.K Synthetics Ltd., Kanpur, under s. 62 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as “the Act”), for the assessment years 1967-68 and 1968-69, referred the following question of law for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of relief allowed to the assessee under section 80J of the Income-tax Act was not income not includible in the total income of the assessee within the meaning of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964?”

2. The assessee is a company. For the assessment years 1967-68 and 1968-69, it was allowed deduction under s. 80J of the I.T Act, 1961. While computing its capital for the purposes of surtax under the Act, the ITO held that the assessee's capital was liable to be reduced proportionately as per r. 4 of Sch. II to the Act in view of the relief allowed to the assessee under s. 80J of the I.T Act. Aggrieved, the assessee went up in appeal before the AAC who accepted its contention that r. 4 could be applied only if the company had income which was not includible in its total income and that the deduction allowed to the assessee under s. 80J of the I.T Act while computing its total income did not fall in the category of income not includible in the total income. He accordingly allowed the appeal filed by the assessee. The Department then took up the matter before the Income-tax Appellate Tribunal. It claimed that the amount allowed as deduction under s. 80J of the I.T Act, while computing the assessee's total amount was income not includible in the assessee's total income and r. 4 of the Rules (under Sch. II) for computing the capital for the purposes of surtax was clearly applicable and that the AAC had erred in interfering with the order of the ITO. The Income-tax Appellate Tribunal repelled the aforementioned plea of the Department and held that no case for diminishing the capital contemplated by r. 4 of Sch. II to the Act had, by reason of the fact that while assessing the assessee's income it had been allowed deduction under s. 80J of the I.T Act, been made out. However, at the instance of the Commissioner, it stated the case and referred the aforesaid question of law for the opinion of this court.

3. Rule 4 of Sch. II to the Act runs thus:

“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 proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains.”

4. According to this rule the capital of a company is liable to be proportionately reduced only in cases where the company had some income, profits or gains, any part whereof was not includible in its total income.

5. According to Sri Katju, learned counsel appearing for the Department, s. 80J of the I.T Act provides that where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking a deduction in respect of the capital employed in the industrial undertaking has to be made while computing its total income. He contends that inasmuch as the section specifically provides for deduction of the amount stipulated therein, while computing assessee's total income, the amount so deducted represents that part of the assessee's income which is not includible in computing its total income, and as such the condition necessary for the applicability of r. 4 of Sch. II to the Act is fully satisfied and for the purposes of surtax the capital of the company was liable to be diminished accordingly.

6. Having given our careful consideration to the submission made by Sri Katju, we are unable to accept the same. A plain reading of r. 4 shows ‘that before the Department can, for purposes of surtax, claim to diminish the capital of the company it has to find that the assessee’ had some income or profits and gains which were not includible in its total income as computed under the I.T Act (not while computing the income under the I.T Act). In the instant case, the claim of the Department can be sustained only if it shows that the amount for which deduction under s. 80J is allowable is in fact either the assessee's income or any part thereof which had not been included in its total income. The expression “income” has been defined in s. 2(24) of the I.T Act as including various items mentioned therein. An amount representing certain percentage of the capital employed in an industrial undertaking as contemplated by s. 80J neither falls in any of the (sic) I.T Act nor can it be considered to be the income of the assessee in any sense of the word. The expression total income has been defined in s. 2(45) of the I.T Act as meaning the total amount of income referred to in s. 5 computed in the manner laid down in the Act. According to s. 5 of the I.T Act, the total income of a person who is a resident includes all income from whatever source derived which is received or deemed to have been received by him or on his behalf in India or which accrues or arises or is deemed to have accrued or arisen to him in India as also the income which accrues or arises to him outside India. Likewise in the case of a non-resident it will mean all income from whatever source which the non-resident receives or is deemed to have received in India or accrues or arises or is deemed to have accrued or arisen to him in India. Chapter III of the I.T Act specifies the categories of income which are not includible in the total income of an assessee. Chapter IV of the I.T Act then provides for computation of total income and Chap. VI-A which contains provisions from ss. 80A to 80VV lays down the deductions which are to be made in computing the total income. It will thus be seen that whereas on the one hand the I.T Act contemplates that the total income of an assessee would embrace all income derived by him in India from whatever source, it, on the other hand, specifically provides in Chap. III certain classes of income which are not includible in it. The I.T Act then provides that, after excluding certain categories of income, the total income of the assessee has to be for purposes of the I.T Act, computed in the manner laid down in Chap. IV thereof. With a view to grant relief to assessees the Legislature introduced Chap. VI-A containing ss. 80A to 80VV in the I.T Act. Section 80A lays down that in computing the total income of an assessee there shall be allowed from his gross total income, in accordance with and subject to the provisions of the chapter, the deductions specified in ss. 80C to 80VV. This section clearly envisages that for the purposes of the I.T Act the total income of an assessee is to be reduced to the extent specified in ss. 80C to 80VV. The reduction in the total income of the assessee contemplated by the various provisions contained in Chap. VI-A can be made only in respect of the amounts that are in fact included in the total income of the assessee. The deductions contemplated in Chap. VI-A are, for the purposes of taxation, made from out of the amount, which stands included in the total income of the assessee, for granting relief in (tax) and not with a view to exclude any income or part thereof which already stands included in the total income of the assessee. An amount which stands included in the total income of an assessee but is deducted in computing the total income of the assessee with a view to grant him some relief cannot be said to represent any income or part thereof which is not includible in the total income of the assessee. In our opinion, the I.T Act makes a clear distinction between an income which is not includible in determining total income of an assessee and deduction of certain specified amount from the total income of an assessee for purposes of computing total income which may be subjected to tax. In the latter case, the deduction is made from out of the amount which is actually includible and which forms part of or stands included in the assessee's total income. Viewed in this light, it will not be possible to say that the deductions provided for in Chap. VI-A of the I.T Act can be described as income, profits and gains which is not includible in the total income computed under the I.T Act.

7. There is yet another way in which the matter can be looked into. The provisions contained in r. 4 of Sch. II to the Act, for diminishing the amount of capital of an assessee can, in relation to the deductions made under ss. 80C to 80VV of the I.T Act, become applicable only if it can be said that the deductions contemplated by those provisions are in the nature of income, profits and gains of the company and that they are as such income, profits and gains being excluded from the total income of the assessee. In case the deductions contemplated by ss. 80C to 80VV of the I.T Act cannot be treated as or considered to be income of the assessee, no question of applicability of r. 4, for the reason that they had been excluded in computing assessee's income, would arise. Sections 80C to 80GG of the I.T Act provide for certain deductions, of expenditure incurred by the assessee, being made in computing his total income. The amounts contemplated by ss. 80C to 80GG are deducted in computing the assessee's total income not because they form part of any such income of the assessee which is not includible in its total income, but they are deducted as expenditure which had been incurred by the assessee with a view to grant it relief in the matter of taxation. Likewise, the amounts mentioned in s. 80J of the I.T Act can hardly be described as income of the assessee much less income of an assessee which is not includible in its total income.

8. In the case of Second ITO v. Stumpp, Schuele and Somappa Private Ltd., [1977] 106 ITR 399, a Division Bench of the Karnataka High Court held that relief granted under ss. 80-I and 80J of the I.T Act cannot be said to be income, profits or gains not includible in the total income. The expression “part of income, profits and gains not includible in the total income” in r. 4 of Sch. II cannot be construed or understood as referring to deductions, allowances, etc., made in the I.T Act for purposes of computation of total income.

9. In the case of Addl. CIT v. Bimetal Bearings Ltd., [1977] 110 ITR 131, a Division Bench of the Madras High Court ruled that the part of the profits of a company not includible in its total income contemplated by r. 4 of Sch. II to the Act is what is not includible under the provision of s. 10 of the I.T Act, 1961. As far as deductions made under the provisions of Chap. VI-A of the I.T Act are concerned, the position is that up to the stage when we reach the computation for purposes of Chap. VI-A the amount which is eligible to be considered under the Chapter forms part of or is included in the total income and the deduction is given only because of the exclusion. In such a case the provisions of r. 4 do not have any scope for operation because it may not be stated that the said profits were not at all includible in the total income of the company computed under the I.T Act. In other words, in making the computation for purposes of applying Chap. 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 being includible in the total income.

10. When a similar question came up for consideration before the Bombay High Court in the case of Commissioner of Surtax v. Ballarpur Industries Ltd., [1979] 116 ITR 528, it observed that the expression “not includible” in r. 4 of Sch. II to the Act means “not capable of being included”. It cannot refer to an amount which already forms part of the gross total income and which would be later on deducted for purposes of determining the tax liability under Chap. VI-A. It pointed out that the expression “shall not be included” which is found in ss. 10 and 11 and which are found in Chap. III is not used in any provision contained in Chap. VI-A. Similarly, the said expression is not used in Chapter IV of the I.T Act, which provides for the method of computing income under which the assessee is allowed deduction by way of expenses, rebates, allowances, etc. Both in Chap. IV and Chap. VI-A, Parliament has consistently used the words “deduction shall be allowed” and not the expression “shall not be included”. It was, therefore, clear that the expression, “income, profits and gains of a company not includible in its total income as computed under the I.T Act in r. 4” refers to those sums which are not includible in the total income under the provisions of Chap. III of the I.T Act and does not refer to any of the deductions claimable under Chap. VI-A of the I.T Act.

11. In the case of CIT v. Premier Cotton Spinning Mills Ltd., [1981] 128 ITR 694, the Kerala High Court observed that where an assessee has been granted relief under s. 80G in respect of an amount paid by way of donations, such amount was not constituted, for purposes of r. 4 of Sch. II to the Act, a part of the income, profits and gains of the company “not includible in its total income as computed under the I.T Act”. There are certain categories of income which, by reason of their special nature, are treated by the I.T Act as not liable to be included in the assessee's total income and those categories are enumerated in Chap. III of the I.T Act and it is only those categories that are to be regarded as income. “not includible” in the total income of a company for purposes of rule 4 of Sch. II to the Act.

12. Similarly, in the case of CIT v. Alembic Chemical Works Co. Ltd., [1982] 133 ITR 578, Gujarat High Court held that the words “not includible in the total income as computed under the I.T Act” are the governing words of r. 4 of Sch. II to the Act. The Legislature when it enacted r. 4 used the words “not includible” and not the words “not included”. There is a difference between “not includible” and “not included”. “Not includible” means not capable of being included and this is altogether different from income, profits and gains “not included” in the total income. The provisions of the 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 concept of not includible according, to the I.T Act refers to income, profits and gains which may not be included or is not capable of being included in the total income of the assessee concerned. Under the I.T Act, s. 4 is the charging section. It is in the light of s. 5 of the I.T Act that one has to judge the sweep of the charging section because the definition of total income in s. 2(45) indicates that the total amount of income is that which is referred to in s. 5 and if by the provisions of s. 5 certain categories of income cannot be brought to tax under the I.T Act, then those categories of income are not capable of being included in the total income of the assessee concerned. Chapter III of the I.T Act deals with the income which do not form part of the total income. Apart from the provisions of Chap. III, the phrase “income not includible in r. 4 of Sch. II of the Act” would also cover income which is beyond the sweep of the provisions of ss. 4 and 5 of the I.T Act. So far as r. 4 is concerned, it is only the income of the assessee falling within s. 10 of the I.T Act and that part of the income which is outside the sweep of ss. 4 and 5 of that Act, that can be said to be income not includible in the total income as computed under the provisions of the I.T Act. Deductions allowed to the assessee under Chap. VI-A of the I.T Act are not income, profits and gains not includible in the total income as contemplated by r. 4 of Sch. II to the Act. Such deductions are not to be taken for the proportionate diminution of the capital of a company computed under rules 1 to 3. The view taken by us that the deductions claimed and allowed under s. 80J of the I.T Act cannot be treated as income “not includible” in the total income of the assessee as contemplated by r. 4 of Sch. II to the Act is fully in consonance with the various decisions of the Karnataka, Madras, Bombay, Kerala and Gujarat High Courts cited above. No decision of any other High Court to the contrary has been brought to our notice.

13. In the result, we answer the question referred to us in the affirmative and in favour of the assessee. The assessee shall be entitled to costs of this reference which are assessed at Rs. 250.