Commissioner Of Surtax vs Modi Industries Ltd.
1992 Latest Caselaw 207 Del

JUDGMENT

B.N. Kirpal, J.

1. Under Section 256(1) of the Income-tax Act, 1961, the Income-tax Tribunal has referred the following question of law to this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire gross dividend of Rs. 2,51,350 and not net dividend after giving deductions under sections 80L and 80 of the Income-tax Act, 1961, was deductible from the total income of the assessed in computing the chargeable profits in accordance with clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964 ?"

2. The facts, as stated in the statement of the case, are that in respect of the assessment year 1971-72, the relevant previous year having ended on October 31, 1970, the assessed was liable to assessment under the Companies (Profits) Surtax Act, 1964. In respect of this year, the net chargeable profits were computed at Rs. 60,34,958. The assessed had claimed before the Surtax Officer that in computing the chargeable profits, dividend income of Rs. 2,51,350 was deductible. The Surtax Officer, however, allowed the deduction of Rs. 99,340 on the ground that the balance amount of Rs. 1,52,010 had earlier been allowed under sections 80 and 80M of the Income-tax Act, 1961, while computing the total income.

3. The assessed filed an appeal to the Appellate Assistant Commissioner, who came to the conclusion that in computing the chargeable profits the gross dividend of Rs. 2,51,350 had to be excluded. Thereupon the Revenue filed an appeal before the Appellate Tribunal. The contention of the Revenue was that since gross dividend was not included in the gross total income or total income as computed under the Income-tax Act, and only the net dividend was included, therefore, it is only the net dividend which should be excluded and not the gross income. This contention was not accepted and the Tribunal decided the question in favor of the assessed. Thereupon, the aforesaid reference was made to this court.

4. In order to appreciate the controversy in issue, it is necessary to refer to rule 1(viii) of the First Schedule to the Surtax Act. The said First Schedule contains the rule for computing the chargeable profits of a previous year and it, inter alia, provides as follows :

"In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows :

(1) Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely :....

(viii) income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India..."

5. It may here be noticed that by the Finance Act, 1981, an Explanation to this rule 1(viii) was added with effect from April 1, 1981, which was in the following terms :

"Explanation. - Notwithstanding anything contained in any clause of this rule, the amount of any income or profits and gains which is required to be excluded from the total income under that clause shall be only the amount of such income or profits and gains as computed in accordance with the provisions of the Income-tax Act (except Chapter VIA thereof), and in a case where any deduction is required to be allowed in respect of any such income or profits and gains under the said Chapter VIA, the amount of such income or profits and gains computed as aforesaid as reduced by the amount of such deduction."

6. The short question which, therefore, arises for our consideration is as to what is the meaning of the expression "income by way of dividend". The Supreme Court had occasion to deal with the question as to the amount of deduction which is allowed under section 80 of the Income-tax Act. The first case was that of Cloth Traders (P) Ltd. v. Addl. CIT , while interpreting the expression "income by way of dividend" occurring in section 80. The Supreme Court in Cloth Traders' case [1979] 118 ITR 243 came to the conclusion that an assessed would be entitled to exclusion of the gross dividend which is received from an Indian company. The contention of the Revenue in that case, that it is only the net dividend which is taxable and which is to be excluded was not accepted. This decision in Cloth Trades (P) Ltd. [1979] 118 ITR 243 was overruled by the Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India . In the latter case, it was held by the Supreme Court that it is only the net dividend, which was included in the total income and on which tax was paid, which has to be allowed as a deduction.

7. Following the decision of the Supreme Court in Distributors (Baroda) P. Ltd.'s case [1985] 155 ITR 120, a number of High Courts have come to the conclusion that, on a correct interpretation of the said rule 1(viii) of the First Schedule to the Surtax Act, it is only the net dividend which is included in the total income and, therefore, it is this amount which would be deductible while arriving at the figure of the chargeable profits. This conclusion has been arrived at by the Calcutta High Court in the case of CIT v. Hindustan Gum and Chemicals Ltd. [1990] 182 ITR 396; CIT v. Andhra Bank Ltd. ; CIT v. R. B. Multanimal Modi and sons [1991] 189 ITR 730 (All) and CIT v. Kil Kotagiri Tea and Coffee Estates Ltd. [1991] 191 ITR 283 (Ker).

8. On a plain reading of the aforesaid rule it appears to us that the contention of the Revenue before the Tribunal was correct, namely, what is intended, and provided, by the said rule is that the amount which is included in computing the total income for the purpose of the Income-tax Act is the amount which has to be excluded while determining the chargeable profits. In other words, if for example, the gross dividend receivable is Rs. 1,000, but after allowing the deductions permissible under the Income-tax Act what is included in the total income is only Rs. 400, then for the purpose of the Surtax Act it is only Rs. 400 which is to be excluded while determining the figure of chargeable profits. If the contention of the assessed was to be accepted, the result would be that it would give double benefit which was never intended. It cannot be that what is included in the total income, which is the basis for computing chargeable profits is Rs. 400, but what is to be excluded by virtue of rule 1 (viii) is Rs. 1,000. The amount which is excluded from the chargeable profits can only be the amount which was initially included in determining the total income. The total income referred to in rule 1 (viii) would necessarily mean income on which income-tax is to be paid under the Income-tax Act.

9. We are in respectful agreement with the decision of the High Courts referred to hereinabove where this very view has been expressed.

10. It was contended by Mr. Aggarwal that the aforesaid Explanation came into force with effect from April 1, 1981, and it is only thereafter that the net dividend has to be excluded. We cannot agree with this submission. In our view, the said Explanation is explanatory. Even without recourse to the provisions of the Explanation, the substantive rule 1(viii) is clear and unambiguous and this is what has been also held by the Calcutta High court in the case of Hindustan gum and Chemicals Ltd. [1990] 182 ITR 396. There can be no manner of doubt that the Legislature provided only that amount to be excluded while determining the quantum of chargeable profits which amount has been included in the total income of the assessed. In other words, it is the net dividend and not the gross dividend which has to be excluded.

11. For the foregoing reasons, the aforesaid question of law is answered in the negative and in favor of the Revenue.

12. There will be no order as to costs.