G.P. Singh, C.J.
1. This is a reference made by the Income-tax Appellate Tribunal referring for our answer the following question of law ;
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire amount of dividend of Rs. 59,944 instead of Rs. 23,976 is deductible from the total income in computing the chargeable profits as provided under Clause (viii) of Rule 1 of the First Schedule to Section 2(5) of the Companies (Profits) Surtax Act, 1964?'
The relevant assessment year is 1968-69. The assessee is a company and the reference relates to assessment of surtax. The assessee had received gross dividend income of Rs. 59,944 from Indian companies in the relevant previous year. In computing the chargeable profits for purposes ofsurtax, the ITO allowed a deduction of Rs. 23,976 as income by way of dividend received from Indian companies on the ground that 60% of the gross dividend income had already been deducted while computing total income under Section 80M of the I.T. Act. The Tribunal took a different view and following its earlier decisions it allowed the deduction of the entire amount of Rs. 59,944.
2. Section 2(5) of the Companies (Profits) Surtax Act, 1964, defines the expression 'chargeable profits' to mean the total income of the assessee computed under the I.T. Act, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. Rule 1 of the First Schedule provides for adjustments. Clause (viii) of this rule makes provision for the exclusion of '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'. According to the learned Standing Counsel appearing for the Department, the expression 'income by way of dividends' in Clause (viii) refers to net income by way of dividends and not the gross income. His argument is that the amount of dividend received which had already been deducted under Section 80M cannot again be deducted, here, under Clause (viii) for the computation of chargeable profits. We are unable to agree with this contention. We do not find any reason for limiting the expression 'income by way of dividends' to the net income by way of dividends. If the Legislature had intended that only the net income should be deducted under Clause (viii) it would have said so clearly. The view that 'income by way of dividends 'in Clause (viii) refers to the gross income has been taken by the Punjab & Haryana and the Himachal Pradesh High Courts [CIT v. Patiala Flour Mills Co. P. Ltd. (No. 2) and Mohan Meakin Breweries Ltd. v. CIT (No. 2) ]. The view taken in these rulings is suported by the Supreme Court decision in Cloth Traders (P.) Ltd. v. Addl. CIT : [1979]118ITR243(SC) , which construed the words 'income by way of dividends' as they occur in Section 80M. It may be here mentioned that by the Finance Act, 1980, Parliament has introduced Section 80AA with retrospective effect from 1st April, 1968, to get over the ruling of the Supreme Court. By Section 43 of the Finance Act, 1981, the following Explanation has been added in Rule 1 :
'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 VI-A 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 VI-A, the amount ofsuch income or profits and gains computed as aforesaid as reduced by the amount of such deduction.'
The Explanation, however, has not been given any retrospective effect and so it will have application only for the assessment year 1981-82, and subsequent years. After coming into force of the Explanation, the deduction under Clause (viii) of Rule 1 for computing chargeable profits would be of the net income received from dividends but as the Explanation has no application to the assessment year 1968-69, with which we are concerned in this reference, the Tribunal, in our opinion, was right in deducting the gross income from dividends. The learned counsel for the assessee has pointed out to us a circular of the CBDT which is reproduced in [1981] 131 ITR 156, that the newly added Explanation has come into force from 1st April, 1981, and will accordingly apply in relation to the assessment year 1981-82 and subsequent years. The circular supports the view that the Explanation is not retrospective.
3. For the reasons given above, our answer to the question referred is in the affirmative, in favour of the assessee and against the Department. The assessee will get costs of this reference. Counsel's fee Rs. 250.