SANKAR PRASAD MITRA, CJ.

( 1 ) THIS is a reference under Section 256 (1) of the I. T. Act, 1961. Before we go into the facts of the case it would be appropriate to set out a few provisions of the Super Profits Tax Act, 1963, and a few provisions of the First and Second Schedules to the Act. Section 2 (5) defines " chargeable profits ". It means the total income of an assessee computed under the I. T. Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule.

( 2 ) SECTION 2 (9) defines "standard deduction". It means, inter alia, an amount equal to 6% of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater.

( 3 ) SECTION 4 is the charging section. It says :"subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1963, a tax (in this Act referred to as the super profits tax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the standard deduction at the rate or rates specified in the Third Schedule,"

( 4 ) WE have seen that chargeable profits under Section 2 (5) have to be computed in accordance with the provisions of the First Schedule. The provisions of the First Schedule, relevant for our purposes, run thus :"in computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows: 1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely:- -. . . . . . (viii) Income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India,"

( 5 ) UNDER Section 2 (9) the capital of a company is to be computed in accordance with the rules in the Second Schedule. The provisions of the Second Schedule which require our attention are as follows:"1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid-up share capital and of its reserves, if any, created under. . . . . . . . . . . . . . . and of its other reserves. ;. . . . . . . . . . diminished by the amount by which the cost to it of the assets the income from which in accordance with. . . . . . Clause (viii) of Rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of. . . . . . "

( 6 ) IN the light of the above provisions we have to examine the facts of this case. For the assessment year 1963-64, the ITO proceeded to compute the capital of the assessee under the Super Profits Tax Act, by reducing from its capital an amount of Rs. 32,44,340 representing the investment in shares. The assessee was doing business at the material time and had also held certain shares by way of investment. It received dividends on shares of the value of about Rs. 18 lakhs. On the balance of the shares it did not receive any dividends during the year under consideration. After reducing the capital by Rs. 32,44,340, the ITO found that the result was a negative figure. He, therefore, gave a standard deduction of Rs. 50,000 to the assessee.

( 7 ) BEFORE the AAC, it was contended that the scheme of the Act was first to start with the total income computed under the I. T. Act and then proceed to make adjustments according to the First Schedule.

( 8 ) THE income by way of dividends has to be excluded from the total income under r. . l (viii) of the First Schedule. This would imply, according to the assessee, that only that dividend income which is actually included in the total income initially that had to be excluded for super profits tax p

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