Deductions claimed and allowed under Section 80j of the Income-tax Act cannot be treated as income 'not includible' in the total income of the assessee as contemplated by Rule 4 of Schedule II to the Companies (Profits) Surtax Act, 1964.

( 1 ) 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 Section 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 Section 80j of the I. T. Act, 1961. While computing its capital for the purposes of surtax under the Act, the ITO held that the assessees capital was liable to be reduced proportionately as per Rule 4 of Schedule II to the Act in view of the relief allowed to the assessee under Section 80j of the I. T. Act. Aggrieved, the assessee went up in appeal before the aac who accepted its contention that Rule 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 section 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.

( 3 ) THE Department then took up the matter before the Income-tax Appellate Tribunal. It claimed that the amount allowed as deduction under Section 80j of the I. T. Act, while computing the assessees total amount was income not includible in the assessees total income and Rule 4 of the rules (under Schedule II) for computing the capital for the purposes of surtax was clearly applicable and that the AAC had erred in interfer- ing 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 Rule 4 of Schedule II to the Act had, by reason of the fact that while assessing the assessees income it had been allowed deduction under Section 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.

( 4 ) RULE 4 of Schedule 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. "

( 5 ) 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.

( 6 ) ACCORDING to Sri Katju, learned counsel appearing for the Department, Section 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 assessees total income, the amount so deducted represents that part of the assessees income which is not includible in computing its total income, and as such the condition necessary for the applicability of Rule 4 of Schedule II to the Act is fully satisfied and for the purposes of s