S.S Sodhi, J.:— The matter here concerns surtax for the assessment years 1973-74, 1974-75 and 1975-76.
2. The assessee-company, Oswal Woollen Mills Limited, was assessed to surtax for the three assessment years in question. In order to work out the profits chargeable to surtax, the capital of the assessee-company had to be computed as per the Second Schedule to the Companies (Profits) Surtax Act and the interpretation of rule 4 of that Schedule with reference to the relief allowed under section 80J of the Income-tax Act, 1961 (hereinafter referred as “the Act”). The Income-tax Officer came to the conclusion that proportionate deduction in the capital under rule 4 on account of the deductions allowed under sections 80J and 80G of the Act, was warranted and he accordingly reduced the capital computed for the three assessment years in question for the purpose of working out the standard deduction at the rate of 10 per cent, of the amount of capital computed.
3. The Income-tax Officer, however, negatived the assessee's contention on the point and held that when a sum was deducted from the total income, it did not find place in the total income when it was computed and in view thereof, such income would have to be held to be not includible therein and that while computing the capital, the proportionate amount would, therefore, be excluded on account of the deductions made under Chapter VIA of the Income-tax Act. He further held that deductions mentioned in that Chapter including the deductions allowed under sections 80J and 80G of the Act, represent a part of the income which is not included in the total income as computed under the Income-tax Act and these deductions were to be allowed from the gross total income to arrive at the total income and that since the deductions allowed under sections 80J and 80G of Chapter VI-A represent a part of the income which, though included in the gross total income, were not included in the total income, the capital for the purposes of rule 4 will have to be reduced proportionately.
4. When the matter went up in appeal before the Appellate Assistant Commissioner, a different view was taken following the judgment of the High Court of Karnataka in Second ITO v. Stumpp, Schuele and Somappa Pvt. Ltd., [1977] 106 ITR 399. The assessee's contention was accepted and the Income-tax Officer was directed to recompute the capital of the company and, consequently, the standard deduction, after excluding from computation, the proportionate deduction on account of relief under section 80J of the Act was computed by him. The appeal against this order was later dismissed by the Tribunal by its order of May 20, 1978.
5. This is what led to the following question being referred to this court for the opinion in respect of the three assessment years in question:
“Whether, on the facts and in the circumstances of the case and on a correct interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Appellate Tribunal was right in law in confirming the direction of the Appellate Assistant Commissioner to the Income-tax Officer to recompute the capital of the assessee-company by excluding from such computation the proportionate deduction on account of section 80J relief allowed to the assessee-company in the income-tax assessments for the years 1973-74 to 1975-76 and consequently to recompute the standard deduction for arriving at profits chargeable to surtax?”
6. The question posed has, indeed, to be answered in the affirmative, in favour of the assessee and against the Revenue, keeping in view the judgment of the High Court of Karnataka in Stumpp, Schuele's case, [1977] 106 ITR 399, the reasoning of which we respectfully agree with and accept and adopt. A similar view has also been taken in CIT v. Peico Electronics and Electricals, [1987] 166 ITR 299 (Cal); CIT v. Schrader Scovill Duncan Ltd., [1981] 132 ITR 822 (Cal) and CIT v. J.K Synthetics Ltd., [1983] 143 ITR 396 (All). There will be no order as to costs.