Ajit K. Sengupta, JJ.
1. At the instance of the Commissioner of Income-tax, Central-I, Calcutta, the following question of law has been referred to this court under Section 256(1) of the I.T. Act, 1961, read with Section 18 of the Companies (Profits) Surtax Act, 1964 :
' Whether, on the facts and in the circumstances of the case, and on a correct interpretation of Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, in computing the chargeable profits under the said Act and the Rules made thereunder, the assessee-company deriving income by way of dividends from another Indian company is entitled to the exclusion of the gross dividend amount received, unaffected by the provisions of Sections 57, 80K, 80L and 80M of the Income-tax Act, 1961?'
2. The assessee is a public limited company. For the assessment years 1971-72 and 1972-73, the total gross dividend income of the assessee came to Rs. 27,01,558 and Rs. 32,93,399, respectively. In respect of the said income, the assessee was entitled to deductions under Sections 80K and 80M of the 1961 Act totalling to Rs. 19,08,433 for the assessment year 1971-72, and Rs. 19,76,039 for the assessment year 1972-73. The assessee in its surtax assessments for the years under consideration urged before the ITO that in computing the chargeable profits, the deduction under Rule 1(viii) of the First Schedule to the Act should be of the aforesaid gross amounts of dividend before deductions under Section 80K, 80L and 80M of the Act of 1961. This claim of the assessee has been negatived by the ITO by observing that ' what is includible in total income is the net dividend and not the gross dividend.'
3. On appeal, the AAC upheld the orders of the ITO. The AAC observed as follows:
' The total income as computed for the purpose of income-tax assessment has been taken by the Income-tax Officer in computing the chargeable profits and in seeking adjustments as per rule 1, certain items of income, profits and gains and other sums ' shall be excluded from such total income'. Now, only that item of income, profits and gains can beexcluded from such total income (taken to be the base by the Income-tax Officer) which was included in it What was included in the total income computed by the Income-tax Officer as per the Income-tax Act was Rs. 7,59,686 and Rs. 13,17,360 (dividends from an Indian company) in the assessment years 1971-72 and 1972-73, respectively. I do not think that rule 1 of the First Schedule to the Surtax Act provides any scope for excluding from the total income computed by the Income-tax Officer any amount in excess of what was included in it. In this view of the matter, the Income-tax Officer's computation of chargeable profits for both the years seems correct. If the total income computed under the Income-tax Act is taken to be the total of incomes referred to in Section 5 (i.e., without the consideration of deductions in Chapter VIA), then the gross dividend, as claimed by the appellant, will necessarily have to be excluded from the total of such incomes. The result, however, will be the same as has been reached by the Income-tax Officer in computing the chargeable profits. As stated earlier, I am inclined to confirm the method of computation of chargeable profits adopted by the Income-tax Officer. '
4. The assessee went on appeal before the Tribunal. The Tribunal was of the view that the matter was concluded by the decision of the Kerala High Court in the case of Thomas & Co. v. CIT, [1971] 110 ITR 515. Accordingly, the Tribunal held that while computing the chargeable, profits under the Act, the company, like the assessee, deriving income by way of dividends from another Indian company, is entitled to the exclusion of the gross dividend received unaffected by the provisions of Sections 80K, 80L and 80M of the 1961 Act.
5. To appreciate the controversy raised in this reference, it is necessary to set out the relevant provisions of the Act. The First Schedule to the Act contains the rules for computing the chargeable profits. 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...... '
6. The other clauses of rule I are not material and are, therefore, left out.
7. The main contention of the Revenue is that the total income as computed for the purpose of income-tax assessment has to be taken by the ITOin computing the chargeable profits and in making adjustments in terms of Rule 1, certain items of income, profits and gains and other sums shall be excluded from such total income. Therefore, if in the assessment, the net dividend has been included, such net dividend should only be excluded from the total income in terms of Rule 1. It is contended that Rule 1 of the First Schedule does not provide for exclusion from the total income computed by the ITO under the I.T. Act any amount in excess of what was included in it. If in the total income, only the net dividend is included, then such dividend income can only be excluded from the total income. It is urged that the expression 'such total income' in Rule l(viii) of the First Schedule means total income as computed for the purpose of income-tax assessment. That item of income, profits or gains can be excluded from the total income which was included in it.
8. On the other hand, the contention of the assessee is that a company deriving income by way of dividends from another Indian company is entitled to the exclusion of the gross dividend received unaffected by the provisions of Sections 57, 80K, 80L and 80M of the I.T. Act, 1961. The learned counsel for the assessee has relied on several decisions in support of his contention.
9. The first decision cited is in the case of Thomas & Co. v. CIT, : [1977]110ITR515(Ker) . There, the Kerala High Court held that the total income computed for the purpose of the I.T. Act, 1961, has to be adjusted to arrive at the chargeable profits for the purpose of the Companies (Profits) Surtax Act, 1964, in the mode and manner indicated by the First Schedule of the latter Act. Turning to Rule 1(viii) thereof, there is no warrant to detract from the generality of the words ' income by way of dividends ' and to confine these words only to such income as has been reduced by applying the provisions of Section 57 or Section 80M or any other provisions of the I.T. Act, 1961. Therefore, while computing the chargeable profits under the Companies (Profits) Surtax Act, 1964, a company deriving income by way of dividends from another Indian company is entitled to the exclusion of the gross dividend received, unaffected by the provisions of Sections 57 and 80M of the I.T. Act, 1961.
10. The second decision cited by the learned counsel for the assessee is in the case of Mohan Meakin Breweries Ltd. v. CIT, (No. 2), [1977] 118 ITR 300. There, the Himachal Pradesh High Court held that the definition of 'chargeable profits' provided in Section 2(5) of the Companies (Profits) Surtax Act, 1964, deals with the total income of an assessee computed under the I.T. Act and the total income is further required to be adjusted in accordance with the provisions of the First Schedule by excluding 'income by way of dividends '. When the legislature speaks of ' income by way ofdividends ', it refers to the gross income shown in the books of the assessee and not the actual net income computed by the assessee. If the legislature intended that only net dividend is to be excluded, they would have used some other language than the expression ' income by way of dividends '. The company which declared the dividend has paid the tax on the gross dividend. If for computation of surtax, net dividend is only reduced from the total income, the remaining part of the dividend would again be subjected to surtax and that would result in a case of double taxation which has to be avoided. Therefore, the gross dividend is to be excluded under Rule 1(viii) of the First Schedule from the total income computed for that year under the I.T. Act in order to arrive at the chargeable profits for the payment of surtax.
11. The next decision cited by the learned counsel for the assessee is in the case of CIT v. Patiala Flour Mills Co. P. Ltd. . In that case, the Punjab and Haryana High Court followed the decision in the case of Mohan Meakin Breweries Ltd. v. CIT, (No. 2), and applied the principles laid down by the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT, : [1979]118ITR243(SC) . There, the court held that the provisions of Rule 1(viii) of the First Schedule have to be interpreted so as not to include the quantum of dividend only but the category of the dividend.
12. The last decision cited is in the case of CIT v. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd., : [1984]146ITR178(MP) . There, the Madhya Pradesh High Court has observed that there was no reason to limit the expression ' income by way of dividends ' to the ' net income by way of dividends '. The income by way of dividends refers to gross income.
13. It appears to us that the real controversy centres round the word 'such income by way of dividends '. If the words 'such income by way of dividends ' are referable to the quantum of income included in the total income, then the contention of the Revenue has to be accepted inasmuch as what is included in the total income should be excluded in view of Rule 1(viii) of the 1964 Act. However, the interpretation as contended by the Revenue cannot be accepted in view of the judgment of the Supreme Court in the case of Cloth Traders (P.) Ltd., : [1979]118ITR243(SC) . The Supreme Court held that the words ' income by way of dividends ' refer only to the category of the income included in the total income, and not to the quantum of the income so included. It, therefore, follows that if the total income includes a particular category of income, e.g., income by way of dividends from an Indian company, whatever might be the quantum pf such income included in the income-tax assessment, the company would be entitled to exclusion of the entire dividend income, that isto say, the gross dividend from received from an Indian company. It is true that the Supreme Court in Cloth Traders (P.) Ltd.'s case, : [1979]118ITR243(SC) , was considering the case of deduction under Section 80M of the I.T. Act, 1961, but the principles laid down in that case will apply in construing the provisions of Rule 1(viii) of the First Schedule.
14. We may add that in Cloth Traders (P.) Ltd.'s case, : [1979]118ITR243(SC) , the Supreme Court held that, in computing the taxable income for the purposes of the I.T, Act, the deduction in respect of intercorporate dividends should be allowed on the gross amount of such dividends received by the company and not with reference to the net amount. With a view to grant such deduction with reference to the net income by way of dividends only, the Finance (No. 2) Act, 1980, inserted a new Section 80AA to the I.T. Act, 1961, with retrospective effect from 1st April, 1968. Since the several cases, the High Courts, following the said decision of the Supreme Court, held that even for the purposes of determining the chargeable profits under the Companies (Profits) Surtax Act, the gross amount of dividend should be excluded from the total income, Rule 1 has since been amended by the Finance Act, 1981, adding an Explanation at the end of Rule 1. This Explanation provides that in computing the chargeable profits, the amount of income or profits and gains referred to in Rule 1, which stands included in the total income, will alone be deducted from the chargeable profits. The amendment takes effect from April 1, 1981, and will apply in relation to the assessment year 1981-82 and the subsequent years. The Explanation added by the Finance Act, 1981, cannot be construed as clarifying the legislative intent. It declares the legislative intent to exempt from surtax the amount of dividends which has actually been included in the total income from the assessment year 1981-82.
15. In the premises, we answer the question in the affirmative and in favour of the assessee.
16. Each party will pay and bear its own costs.
Dipak Kumar Sen, J.
17. I agree.