Judgment:
ORDER
Per Shri B. S. Ahuja, Judicial Member - The first point at issue in whether the dividend income and royalty income to be excluded from the chargeable profits as the clauses (viii) and (ix) of rule 1 of the First Schedule to companies (Profits) surtax Act, 1964 (the Surtax Act) are the gross amounts and not the net amounts. The Commissioner (Appeals) has followed the order of the Tribunal in another case for the proposition that it is the gross amount of dividend and royalty. When his attention was drawn to section 80AA of the Income-tax Act, 1961 (the 1961 Act ) he observed that while section 80AA has been made retrospective with effect from 1-4-1968, a similar amendment of the Surtax Act was made effective from 1-4-1981 only.
2. The learned departmental representative relied on the decision of the Supreme Court in Distributors (Baroda) (P.) Ltd. v. Union of India : [1985]155ITR120(SC) for the proposition that section 80AA was only clarificatory, that the decision of the petitioner in Cloth Traders (P.) Ltd., v. Addl CIT : [1979]118ITR243(SC) was erroneous. Therefore, the law always was that the deduction under section 80M of the 1961 Act would have to be et amount of dividend less interest, etc., paid on moneys borrowed for earning such income. Their Lordships interpreted the words such income by way of dividends in section 80M to mean not only the category of income included in the gross total income but also to the quantum of the income so included.
3. The learned counsel for the assessee contended that though the Supreme Court considered the Bombay High Courts rulings in CIT v. Industrial Investment Trust Co. Ltd. : [1968]67ITR436(Bom) and CIT v. New Great Insurance Co. Ltd. : [1973]90ITR348(Bom) , they were not overruled. He also relied on rulings in CIT v. Jupiter General Insurance Co. : [1975]101ITR370(Bom) , CIT v. Mohan Meakin Breweries Ltd. v. CIT and CIT v. Patiala Flour Mills Co. (P.) Ltd. .
4. We have considered the rival contentions. The opening words of rule 1 of the First Schedule are :
'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...
(ix) income by way of royalties...'
The word excluded obviously refers to something which has been included in the total income.
5. The Supreme Court has in Distributors (Baroda) (P.) Ltd.s case (supra) discussed the Bombay High Courts rulings in New Great Insurance Co. Ltd.s case (supra) and observed as follows :
'But here again we are not concerned in inquiring whether the view taken by the Bombay High Court in New Great Insurance Co.s case : [1973]90ITR348(Bom) is correct, though it must be concerned that it has been held to be correct in the decision in Cloth Traders case : [1979]118ITR243(SC) . We do feel, however, that another view in regard to the interpretation of section 85A is possible. It is not at all unreasonable to construe the words income so included as meaning the quantum of income by way of dividends included in the total income of the assessee. These words in the context in which they occur have obviously reference to quantum of the income by way of dividends to which the average rate of income-tax is to be applied. The quantum is defined by these words and in order to determine it, we have to ask the question : what is the income by way of dividends included in the total income and the answer can only be that it is income computed in accordance with the provisions of the Act. But, as we have pointed out above, it is not necessary to consider whether the construction placed on section 85A by the Bombay High Court in New Great Insurance Co.s case : [1973]90ITR348(Bom) is correct of not, because we are not concerned here with the interpretation of section 85A...' (p. 131)
Thus, the correctness of that rulings has clearly be doubted by the Supreme Court itself.
6. Their Lordships considered the meaning of the words income by way of dividends in section 80M (1) and held as follows :
'... Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or, in other words forms part of the gross total income, the condition specified in the opening part of sub-section (1) of section 80M would be fulfilled and the provision enacted in that sub-section would be attracted.' (p. 135)
In the light of this ruling, we have to decide as to whether gross or net dividends/royalties have to be excluded from chargeable profits. In Patiala flour Mills Co. (P.) Ltd.s case (supra), the Punjab and Haryana High Court interpreted the words income by way of dividends in rule 1 (viii) as the gross income shown in the books of the assessee and not the net dividends which actually form part of the total income of the assessee. Reliance was placed on Supreme Court decision in Cloth Traders (P.) Ltd.s case (supra) and the Punjab and Haryana High Court decision in 118 ITR 400 , but the Supreme Court has already overrule the decision in Cloth Traders (P.) Ltd.s case (supra). Therefore, it is clear that if the High Court had before it the Supreme Court decision in Distributors (Baroda) (P.) Ltd.s case (supra), the reference would have been answered in favour of the revenue.
7. In Jupiter General Insurance Co.s case (supra) the Bombay High Court interpreted rule (viii) and the words income by way of dividends to mean gross dividends received by the assessee. The Tribunal had interpreted the words following the Bombay High Courts rulings in Industrial Investment Trust Co. Ltd.s case (supra) and New Great Insurance Co. Ltd.s case (supra). The High Court upheld the Tribunals interpretation.
8. It would be seen that the Supreme Court in its latest decision in distributors (Baroda) (P.) Ltd.s case (supra), has interpreted the words income by way of dividends to mean not only the category but also the quantum of income. Therefore, what has to be excluded under rule (viii) and (ix) is not the gross amount of dividend and royalty but the net amount after reducing the interest and proportionate management expenses. We have come to this conclusion after considering the entire case law and the changed interpretation of similar words used in section 80M as given by the Supreme Court.
9. We may also point out that the fact that the Explanation added at the end of rule 1 was effective from 1-4-1981 is not fatal to the case of the revenue. The Explanatory notes in Circular No. 308, dated 29-6-1981, [see Taxmanns Direct Taxes Circulars, Vol. 2, 1985 edn., p. 877] issued by the CBDT, show that the amendment became necessary on account of section 80AA having been introduced by the Finance (No. 2) Act, 1980, to overrule the effect of Supreme Court decision in Cloth Traders (P.) Ltd.s case (supra). It was stated therein that the legislative intention was only to exempt surtax on the amount of dividends actually included in the total income and the High Courts rulings had resulted in giving an unintended benefit to companies in respect of dividends received by them from domestic companies. It is thus clear that if the case of Cloth Traders (P.) Ltd. (supra) was wrongly decided, as now held by the Supreme Court, then the High Court decisions under the Surtax Act were also wrongly decided. Since Section 80AA has been held to be only clarificatory, the Explanation to rule 1 would also be held to be only clarificatory and not substantive.
10. We, therefore, allow the departmental appeal on ground No. 1 and accept the departmental contentions.
11. [This para is not reproduced here as it involves minor issue].
12. The appeal is partly allowed.