R.K. Abichandani, J.
1. The Tribunal, Ahmedabad Bench 'B' has referred for the opinion of the High Court under s. 18 of the Companies (Profits) Surtax Act, 1964 r/w s. 256(1) of the IT Act, 1961, the following questions : '1. Whether, the Tribunal has not erred in law and on facts of the case in holding that capital employed could not be diminished proportionately with reference to the income exempted under ss. 80M and 80J of the IT Act, 1961
2. Whether, the Tribunal has not erred in law and on facts of the case in holding that gross dividends income is deductible in computing the chargeable profits
3. Whether, the entire amount of debentures issued to the public is required to be treated as capital under Second Schedule to the Surtax, 1964 ?'
2. The relevant assessment year is 1976-77. As regards question No. 1, the controversy therein is covered by the decision of the Supreme Court in the case of Second ITO vs . Stump Schuele & Somappa Pvt. Ltd. : [1991]187ITR108(SC) . In the said judgment, the Supreme Court has observed that there is preponderance of judicial opinion in favour of the assessee and has approved the interpretation given by the various High Courts including Karnataka and the Gujarat High Court in the case of CIT vs . Alembic Chemical Works Co. Ltd. : [1982]133ITR578(Guj) . After discussing in detail the contentions raised by the parties, this Court in the case of Alembic Chemical Works (supra) had observed that any income falling under Chapter VI-A of the IT Act, since that chapter deals with deductions, is includible, that is, is capable of being included in the total income but by virtue of the special provisions relating to deductions in Chapter VI-A, is taken out and excluded from the total income computed in accordance with the provisions of the IT Act. This Court further observed that deductions allowed to the assessee under Chapter VI-A of the IT Act are not income, profits and gains not includible in the total income as contemplated by r. 4 of Schedule II of the Surtax Act. Such deductions are not to be taken for the proportionate deduction of the capital of the company computed under rr. 1 to 3 of the Rules. Hence, question No. 1 is answered in the affirmative, in favour of the assessee and against the Revenue.
3. Regarding question No. 2, the same question stands concluded by our decision in Commr. of Surtax vs. Atul Products Ltd., Surtax Ref. No. 15/80 decided on 17th Jan., 1994 wherein we have arrived at the conclusion that, in computing the chargeable profits, the net income by way of dividend which is a component of the total income computed under the IT Act, is required to be excluded and not the gross income by way of dividend. We therefore, hold that the Tribunal has erred in holding that the gross dividend income is deductible in computing the chargeable profit and hence, question No. 2 is answered in the negative, in favour of the Revenue and against the assessee.
4. Regarding question No. 3, for appreciating the controversy involved the provisions of r. 1(iv) and 3 of the Second Schedule of the Rules for computing capital of a company for the purposes of surtax contained in the Second Schedule are reproduced below :
'1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of.........
(iv) the debentures, if any, issued by it to the public : Provided that according to the terms and conditions of issue of such debentures, they are not redeemable before the expiry of a period of seven years from the date of issue thereof; and'
'3. Where after the first day of the previous year relevant to the assessment year the capital of a company as computed in accordance with the foregoing rules of this Schedule is increased by any amount during that previous year on account of increase of paid up share capital or issue of the debentures referred to in clause (iv), or borrowing of any moneys referred to in clause (v), of r. 1 or is reduced by any amount on account of reduction of paid up share capital or redemption of such debentures or repayment of any such moneys, such capital shall be increased or reduced, as the case may be, by a sum which bears to that amount the same proportion as the number of days of the previous year during which the increase or the reduction remained effective bears to the total number of days in that previous year.'
5. It will be clear from the above provisions that what is relevant is to find out whether debentures have been issued to the public by the company. Rule 3 speaks of reduction in capital in this context only when the debentures are redeemed. There is no provision for reducing the capital in cases of purchase by the company of its own debentures which is not barred under the provisions of the Companies Act, 1956. The debentures were not redeemable within a period of seven years. They were purchased and later sold at profit to the Unit Trust of India which indicates that they were transferable. This is not a case of redemption of the debentures. The fact that the company had bought the debentures would not mean that the debentures were not issued to the public. The debentures bore the stamp and character of having been at one time issued to the public. In this view of the matter, we are of the opinion that the Tribunal has not committed any error in confirming the order of the CIT(A) holding that the assessee's claim that the entire amount of the debentures issued to the public should be considered for the purpose of computation of the capital under the Second Schedule to the Surtax Act. Question No. 3 referred to us is, therefore, answered in the affirmative in favour of the assessee and against the Revenue. The Reference stands disposed of accordingly with no order as to costs.