COMMISSIONER OF INCOME TAX Vs. CHELPARK COMPANY LIMITED

JUDGEMENT

(1.) THE following question has been referred to this court for its opinion by the Income-tax Appellate Tribunal at the instance of the Revenue :

(2.) THE assessee is a limited company manufacturing ink. For the assessment year 1974-75, while computing the chargeable profits for the purpose of surtax, the ITO arrived at the total income, after excluding short-term capital loss of Rs. 18,923 and rejecting the assessee's claim that the loss should not be so excluded. On appeal, the AAC confirmed the ITO's order. On further appeal before the Income-tax Appellate Tribunal, the assessee contended that the capital gains for the purpose of s. 45 could only mean a positive figure of income obtained on the transfer of a capital asset as defined in the I.T. Act and that as such the figure of loss cannot be added for arriving at the chargeable profits. THE Revenue, on the other hand, contended that capital gains included capital loss also. THE Tribunal, after considering the rival contentions, held that for the purpose of computation of chargeable profits for purpose of surtax, the ITO was not justified in adding back to the income the capital loss suffered. THE correctness of the said view of the Tribunal has been challenged in this reference.

(3.) THEREFORE, chargeable profits for the purpose of the Surtax Act should be taken as the total income of the assessee computed under the I.T. Act for any previous year and adjusted in accordance with the provisions of the First Schedule. Section 2(8) defines "statutory deduction" as meaning an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees, whichever is greater. Section 4 imposes the charge of surtax. It says that a tax called "surtax" shall be charged on every company for every assessment year commencing from the first day of April, 1964, in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. Schedule I sets out the rules for computing chargeable profits. Schedule II sets out the rules for computing the capital of the company for the purpose of surtax. Rule 1 of the First Schedule excludes certain items of income from the total income computed under I.T. Act for purposes of computation of chargeable profits. This is obviously for the reason that the Surtax Act levies a tax only on the business profits earned by the company and not in respect of its other heads of income. Rule 1(i) excludes from the total income any income chargeable under the I.T. Act under the head "Capital gains". Having regard to the object of rule 1 and also the language used therein, the expression "any income chargeable under the head 'Capital gains'" should be taken to refer to the source of income under the head "Capital gains" and that has to be excluded from the total income. Rule 2 states that the balance of the total income arrived at after making the exclusions mentioned in rule 1 should be reduced by the amount of income-tax, if any, payable by the company in respect of any income referred to in clauses (i) to (iii) or clause (viii) of rule 1 included in the total income. Thus, the First Schedule excludes income from some sources from the total income and thereafter a reduction is made towards the income-tax payable in respect of income from some of the sources excluded in clause (i). Thus having regard to the method of computation of chargeable profits contemplated by the First Schedule, the income from the head "Capital gains" has to be excluded. According to the Revenue, income from capital gains has been shown as one of the heads of income under s. 14E of the I.T. Act, and, since, in the computation of total income, the income from capital gains forms part, rule 1(i) of the First Schedule to the Surtax Act excludes that head of income from the total income for purpose of computing the chargeable profits as defined in s. 2(5) of that Act. Having regard to the classification of the heads of income in s. 14, the expression "income from capital gains" will have to take in capital loss as well. The learned counsel for the Revenue refers to ss. 70 to 78 of the I.T. Act to substantiate his contention that the losses arising under each head of income could be adjusted against income from another under the same head of income or against income from another head. Particular reference is made to s. 74(a)(ii) which contemplates loss arising under the head "Capital gains" and also sub-s. (3) of s. 71 which contemplates the net result of the computation of capital gains under ss. 48 to 55 being a loss and the same being allowed as set off against income under any other head. According to the learned counsel, the Tribunal is, therefore, not right in holding that rule 1(i) of Schedule I will take in only when the capital gain is a positive figure and not when it is a loss. Reference also is made to s. 115 which relates to taxation on capital gains in the case of companies, as throwing light on the question as to whether the income from capital gain should always be a positive figure as has been found by the Tribunal.