JUDGMENT
B.P. Jeevan Reddy, J.
1. The following,, three questions are referred by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961 :
” (1) Whether, on the facts and in the circumstances of the case, amounts standing under ‘Capital Redemption Reserve’ are includible in computing the capital base ?
(2) Whether, on the facts and in the circumstances of the case, no deduction could be made from the capital base of proportionate capital ascertainable with reference to the exempted portion of dividends ?
(3) Whether, on the facts and in the circumstances of the case, while computing the chargeable profits, 50% of actual donations should be deducted without invoking the ceilings laid down under section 80G of the Income-tax Act, as restricted by the Income-tax Officer (it relates to the assessment year 1976-77 only) ?”
2. So far as question No. 2 is concerned, it is concluded by the decision of this court in CIT v. Indian Detonators Ltd. , in favour of the assessee. Accordingly, the said question has to be answered saying that no deduction could be made from the capital base of proportionate capital ascertainable with reference to the exempted portion of dividends.
3. The first question is whether the amounts standing under “capital redemption reserve” are includible in computing the capital base. According to the assessee, capital redemption reserve falls under “other reserves” mentioned in clause (iii) of rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The said reserve was created with a view to enable the assessee to redeem the redeemable cumulative preference shares which were issued in 1956 and which were to be redeemed on or after April 1, 1968. The company had passed a resolution on November 30, 1972, resolving to redeem them at the close of business on March 31, 1973. The Income-tax Officer refused to treat this as one of the reserves to be taken into account for the purpose of computing the capital base. The Tribunal, however, agreed with the assessee, following its earlier decision in the case of this very assessee. On a consideration of the relevant facts, we are inclined to agree with the Tribunal. Schedule VI to the Companies Act prescribes the form in which the balance-sheet shall be prepared by a company. The pro forma contains separate Columns for liabilities and assets. Under the heading “Reserves and surplus” in the column “Liabilities”, seven types of reserves/funds are mentioned. Among them “capital redemption reserve” is No. 2. This clearly shows that capital redemption reserve is a “reserve”. Now, the Explanation to rule 1 says that any amount standing to the credit of any account in the books of the company, which is in the nature of items Nos. 5, 6 or 7 under the heading “Reserves and surplus” in the column relating to “liabilities” in the aforesaid proforma, shall not be regarded as “reserve” for the purposes of computation of the capital base of the company. This would, by necessary implication, mean that “capital redemption reserve” is one of the reserves to be taken into account for computing the capital base.
4. In this connection, section 80 of the Companies Act may also be referred to. Section 80 deals with the power of the company to issue redeemable preference shares, but certain limitations are placed on such power. The limitations are that no such shares shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. It is further provided that where such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall, out of profits which would otherwise have been available for dividend, be transferred to a reserve fund, to be called the “capital redemption reserve account”, a sum equal to the nominal amount of the shares redeemed; and the provisions of the said Act relating to the reduction of share capital shall apply in that behalf. This provision also gives an indication that “capital redemption reserve” partakes of the nature of share capital. For the above reasons, we agree with the Tribunal that the capital redemption reserve should be taken into account while determining the capital base of the company.
5. The first question is, accordingly, answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
6. Now, we come to the third question upon which there was a good amount of debate at the Bar. The question is : what is the amount to be excluded under clause (vii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act ? We shall first state the relevant facts.
7. During the previous year relating to the assessment year 1976-77, the assessee made donations in a sum of Rs. 5,38,675 for purposes mentioned in sub-section (2) of section 80G. Of course, those were not the purposes falling under sub-clauses (i) to (iii-a) of clause (a) in sub-section (2) of section 80G. In the income-tax assessment proceedings, the authorities allowed a deduction of only Rs. 1,00,000. They appear to have proceeded in the following manner : They took the maximum permissible deduction at Rs. 2,00,000 only, having regard to sub-section (4) of section 80G. (10 per cent. of the total gross income of the assessee, it is not disputed, far exceeds Rs. 2 lakhs). Then, they granted deduction only of 50 per cent. of the said sum, purporting to act under sub-section (1). Be that as it may, a question now arises under the Companies (Profits) Surtax Act, 1964, and the question is : what amount shall have to be excluded from the total income while determining the chargeable profits in accordance with the First Schedule to the Act ? Rule I of the First Schedule, in so far as it is relevant, reads thus :
“1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely : –
(i) any income chargeable under the Income-tax Act under the head ‘Capital gains’;
(ii) any compensation or other payment as is referred to in clause (ii) of section 28 of the Income-tax Act;
(iii) profits and gains of any business of life insurance;
(iv) any income referred to in sub-section (2) of section 41 of the Income-tax Act;……
(vi) income chargeable under the Income-tax Act under the head ‘Interest on securities’ derived from any security of the Central Government issued or declared to be income-tax free or from any security of a State Government issued income-tax free, the income-tax whereon is payable by the State Government;
(vii) an amount equal to fifty per cent. of the sum with reference to which a deduction is allowable to the company under the provisions of section 80G of the Income-tax Act.”
8. A reading of rule I would show that the chargeable profits for the previous year, for the purpose of this Act, are not the same as the total income computed for that year under the Income-tax Act. The total income computed under the Income-tax Act for the said year has to be adjusted in accordance with the Rules in the said Schedule. Rule I provides for exclusion of several items which, no doubt, were included while computing the total income under the Income-tax Act. For example, the income chargeable under the head “Capital gains”, which would be included in the total income for purposes of the Income-tax Act, is directed to be excluded under this Act.
9. Now, we come to clause (vii). The language in which this clause is couched, deserves notice. It says, an amount equal to 50% of the sum with reference to which a deduction is allowable to the company under the provisions of section 80G of the Income-tax Act, shall be excluded from the total income. Now, there are two view points – one urged by the Revenue and the other by the assessee. The contention urged by Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, is to the following effect : The words “the sum with reference to which a deduction is allowable….. under the provisions of section 80G….” mean the amount which is deductible under section 80G and under this clause half of such amount should be excluded from the total income while determining the chargeable profits. Applying the said theory to the facts of this case, learned counsel says, only a sum of Rs. 50,000 should be deducted under this clause, which is 50% of Rs. 1,00,000, which was held deductible under section 80G in the proceedings under the Income-tax Act. on the other hand, Sri Y. Ratnakar, learned counsel for the assessee, says that the amount to be excluded under rule 1(vii) is 50% of the sum with reference to which a deduction is allowable under section 80G. According to him, the sum with reference to which deduction is allowable is the total amount donated for the purposes recognised by section 80G(2) and half of that amount should be allowed. According o this contention, a sum of Rs. 2,69,338 has to be excluded from the total income for arriving at the chargeable profits. For properly appreciating and answering the question, it is necessary to examine section 80G of the Income-tax Act in the first instance.
10. Sub-sections (1), (2), (3) and (4) of section 80G, which alone are relevant for our purposes, read as follows :
“80G. Deduction in respect of donations to certain funds, charitable institutions, etc. – (1) In computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of this section, –
(i) in a case where the aggregate of the sums specified in sub-section (2) includes any sum specified in sub-clause (vii) of clause (a) the reof, an amount equal to the whole of such sum plus fifty per cent. of the balance of such aggregate; and
(ii) in any other case, an amount equal to fifty per cent. of the aggregate of the sums specified in sub-section (2).
(2) The sums referred to in sub-section (1) shall be the following, namely : –
(a) any sums paid by the assessee in the previous year as donations to –
(i) the National Defence Fund set up by the Central Government; or
(ii) the Jawaharlal Nehru Memorial Fund referred to in the deed of declaration of trust adopted by the National Committee at its meeting held on the 17th day of August, 1964; or
(iii) the Prime Minister’s Drought Relief Fund; or
(iii-a) the Prime Minister’s National Relief Fund; or
(iv) any other fund or any institution to which this section applies; or
(v) the Government or any local authority, to be utilised for any charitable purpose other than the purpose of promoting family planning; or
(vi) any authority referred to in clause (20A) of section 10; or
(vii) the Government or to any such local authority, institution or association as may be approved in this behalf by the Central Government, to be utilised for the purpose of promoting family planning;
(b) any sums paid by the assessee in the previous year as donations for the renovation or repair of any such temple, mosque, gurdwara, church or other place as is notified by the Central Government in the Official Gazette to be of historic, archaeological or artistic importance or to be a place of public worship of renown throughout any State or States.
(3) No deduction shall be allowed under sub-section (I) if the aggregate of the sums referred to in sub-section (2) is less than two hundred and fifty rupees.
(4) The deduction under sub-section (I) shall not be allowed in respect of such part of the aggregate of the sums referred to in sub-clauses (iv), (v) and (vii) of clause (a) and in clause (b) of sub-section (2) as exceeds ten per cent. of the gross total income (as reduced by any portion thereof on which income-tax is not payable under any provision of this Act and by any amount in respect of which the assessee is entitled to a deduction under any other provision of this Chapter), or two hundred thousand rupees, whichever is less :
Provided that where such aggregate includes any donations referred to in clause (b) of sub-section (2) and such aggregate exceeds the limit of two hundred thousand rupees specified in this sub-section, then such limit shall be raised to cover that portion of the donations aforesaid which is equal to the difference between such aggregate and the said limit, so, however, that the limit so raised shall not exceed ten per cent. of the assessee’s gross total income as reduced as aforesaid, or five hundred thousand rupees, whichever is less.”
11. The proper method to be followed in applying this section is this : The Income-tax Officer must first ascertain the aggregate amount donated for the purposes mentioned in sub-section (2). He must then grant deduction for an amount equal to 50% of the said aggregate sum. This is what is required by sub-section (1). The next stage is to see whether the ceiling prescribed in sub-section (4) is attracted. Sub-section (4) prescribes a ceiling upon the amount to be granted as deduction under the said section. It says that the deduction under sub-section (I) shall not be allowed in respect of such part of the aggregate of the sums referred to in sub-clauses (iv), (v), (vi) and (vii) of clause (a) and in clause (b) of sub-section (2) as exceeds 10% of the gross total income, or two hundred thousand rupees, whichever is less. In other words, if the Income-tax Officer finds that the amount to be allowed as deduction under sub-section (1) exceeds 10% of the gross total income, or Rs. 2 lakhs, and if the donations are for purposes mentioned in the clauses aforesaid, the deduction shall be cut down and limited to either 10% of the gross total income, or Rs. 2 lakhs, whichever is less. This is also the interpretation placed by this court upon the said provision in Hyderabad Race Club v. Addl. CIT . Mr. Y. Ratnakar says that the provision was not understood by the assessing authorities in the manner set out by us hereinabove, but that they applied sub-section (4) first treating the ceiling as Rs. 2 lakhs and allowing 50% thereof, i.e., Rs. 1,00,000, as deduction. If that is what has actually been done, it is certainly wrong. But, that is not the question with which we are concerned herein.
12. Applying the principle indicated by us above, the following will be the position in this case : The aggregate of the amounts donated for the purposes mentioned in sub-section (2) of section 80G during the relevant previous year is Rs. 5,38,675. Fifty per cent. of that has to be allowed as deduction under sub-section (1) which comes to Rs. 2,69,338. But, since this amount is higher than the ceiling prescribed in sub-section (4), it has to be cut down and limited to Rs. 2 lakhs only. As stated above, 10% of the gross total income of the assessee is far above Rs. 2 lakhs, which means that the lower ceiling of Rs. 2,00,000 applies in this case. Learned standing counsel for the Revenue says that treating the said calculation as the correct one, the amount that can be excluded under rule 1(vii) in the First Schedule to the Companies (Profits) Surtax Act is Rs. 1,00,000 only, while according to Mr. Ratnakar, it is Rs. 2,69,338. We are unable to agree with Mr. M. Suryanarayana Murthy, learned standing counsel, that rule 1(vii) provides for exclusion of 50% of the amount actually allowed as deduction. If that were the intention of the rule, it would have run in this fashion : “an amount equal to 50% of the sum allowed as deduction to the company under the provisions of section 80G of the Income-tax Act”. But that is not the language actually used. The words to be borne in mind are “fifty per cent. of the sum with reference to which a deduction is allowable”. Now, the question is, what is the sum with reference to which deduction is allowable under section 80G? We are of the opinion that it is not possible to say that the sum of Rs. 2,00,000 is the amount with reference to which deduction is allowable, that is, the amount actually granted as deduction under section 80G. (As we have already mentioned hereinabove, though, as a matter of fact, only a sum of Rs. 1,00,000 was allowed as deduction under section 80G in the income-tax assessment proceedings, the correct amount to be deducted thereunder is Rs. 2,00,000 and, for the present purpose, we shall proceed on the assumption that that is the amount which has actually been granted thereunder). Once we hold that Rs. 2 lakhs is not the amount with reference to which deduction is allowable for the reason that that is the amount which is actually granted by way of deduction, the only other answer is to treat the entire amount of Rs. 5,38,675 as “the sum with reference to which a deduction is allowable to the company under the provisions of section 80G of the Income-tax Act”.
13. There is yet another reason in support of this view. Under sub-section (1), deduction is granted with reference to the total amount (on the aggregate sum) donated for the recognised purposes. Sub-section (4) merely imposes a ceiling upon the amount of deduction. Therefore, the amount prescribed in sub-section (4) cannot be treated or understood as the sum with reference to which deduction is allowable. Those words refer to the amount which is relevant for the purpose of sub-section (1) of section 80G and the said amount in this case is, to repeat, Rs. 5,38,675.
14. We are also of the opinion that adopting the interpretation placed by us would be consistent with the overall object and purpose underlying the Surtax Act. The Surtax Act levies a tax upon excess profits. Indeed, as it is well known, it was first enacted as “Excess Profits Tax Act” during the IInd World War and has been on the statute book under one or the other name over the years, though repealed very recently. The Act contemplates levying a tax, called “surtax”. in respect of so much of the chargeable profits of a company of the previous year as exceed the statutory deduction. For this purpose, the Act provides for computing the capital base of the company and 10% thereof is treated as the normal profit. The profits, i.e., chargeable profits, over and above the said figure are taxed. It is in this process that chargeable profits are determined. The First Schedule to the Act makes it clear that “chargeable profits” is not the same as the total income computed for the purpose of the income-tax. Several items, which are included while determining the total income for the purpose of the Income-tax Act, are excluded by virtue of rule 1 in the First Schedule. Probably, the idea is to tax the true or real profits as exceed the prescribed limit. It is but appropriate in this context that 50% of the amount actually donated for the purposes mentioned in sub-section (2) of section 80G – all of which are undoubtedly of a charitable, religious or public nature – should be allowed.
15. For all the above reasons, we are of the opinion that the amount to be excluded under clause (vii) of rule 1 in the First Schedule is 50% of the amount actually donated for the purposes mentioned in sub-section (2) of section 80G, that is, 50% of the aggregate amount referred to in sub-section (1) of section 80G.
16. Accordingly, we answer the third question saying that, while computing the chargeable profits, 50% of the actual donations (50% of Rs. 5,38,675) should be excluded under clause (vii) of rule 1 in the First Schedule to the Companies (Profits) Surtax Act, 1964. Answered accordingly. No costs.