SETHURAMAN J.

This reference is made by the Appellate Tribunal under the provisions of the Companies (Profits) Surtax Act, 1964

"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." *

With reference to the assessment years 1966 67 and 1967-68, the assessee was eligible for deduction of 8% of its profits in accordance with the provisions of section 80E as then in force. For the assessment year 1967-68, the assessee was eligible for deduction of the relevant amount computed in accordance with the provisions of section 80-I and section 80J. Section 80-I refers to income from priority industries which is given relief under the provisions of the Income-tax Act. Section 80J gives deduction or relief in respect of profits and gains from newly established industrial undertakings and others. There is no dispute that the assessee was eligible for the deductions available under sections 80E, 80-I and 80J as in force in the relevant yearsTaking 1966-67 for instance the assessee was eligible for a deduction of Rs. 4, 41, 361 at the rate of 8% of the manufacturing profits under the provisions of section 80E. Similar deductions were available under sections 80E, 80-I and 80J, as the case may be, for the other two years. In making the assessment under the Act, the concerned Income-tax Officer computed the capital without making any adjustment in accordance with the provisions of rule 4 of the Second Schedule to the Act for the assessment years 1966-67 and 1967-68. For the assessment year 1968-69, the Income-tax Officer considered the application of rule 4 of the Second Schedule even in the course of the original assessment. In the assessment reopened for 1966-67, the Income-tax Officer recomputed the capital by deducting from the capital as originally computed a proportionate part of the capital referable to the profits deducted under section 80E. Similarly, for the assessment year 1967-68, from the original capital computed, the Income-tax Officer made a deduction for the proportionate part of the capital referable to the profits given as deduction under sections 80-I and 80J. For the assessment year 1968-69, the Income-tax Officer while making the computation in the original assessment made a deduction with reference to the capital attributable to the profits deducted under sections 80-I and 80J

The assessee disputed this adjustment made to capital in each year by applying rule 4 of the Second Schedule before the Appellate Assistant Commissioner who dismissed the appeals. The assessee appealed to the Appellate Tribunal for each of these years and the Tribunal held that the Income-tax Officer did not act properly in adjusting the capital proportionate to the profits deducted under the provisions of sections 80E, 80-I and 80J, as the case may be; and it is this order of the Tribunal that has given rise to the present reference and the question referred to us runs as follows

"Whether, on the facts and in the circumstances of the case, the amounts of deductions under section 80E for the assessment years 1966-67 and 1967-68 and under sections 80-I and 80J for the assessment year 1968-69 could not be considered as sums not includible in the total income for income-tax assessment and, therefore, would not fall for deduction under rule 4 for computing the capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?" *

The problem is one of finding out whether the provisions of rule 4 of the Act authorises the deduction in the computation of capital as made by the Income-tax Officer. The short point is whether the part of the income, profits and gains of the company which was the su