1992 (2) TMI 6 - HC - Income Tax

Capital Redemption Reserve Chargeable Profits Companies Profits Surtax Company Surtax Computation Of Capital

Summary

Issues:
1. Inclusion of amounts under 'capital redemption reserve' in computing the capital base.
2. Deductibility of gross dividends in arriving at chargeable profits under the Companies (Profits) Surtax Act, 1964.

Analysis:
1. The first issue pertains to the inclusion of amounts under 'capital redemption reserve' in computing the capital base. The court referred to a previous judgment in CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 173 ITR 567, where a similar question was addressed, and ruled in favor of the assessee against the Revenue based on the precedent.

2. Regarding the second issue, the court analyzed the deduction of gross dividends in arriving at chargeable profits under the Companies (Profits) Surtax Act, 1964. The assessee sought deduction of the gross amount of dividends received from other companies, while the Revenue contended for deduction of only net dividends. The court referred to relevant provisions of the Surtax Act and the Income-tax Act to interpret the rule in question. The court emphasized the need to exclude dividends that have already suffered tax to avoid double taxation.

3. The court discussed the interpretation of rule 1(viii) of the Surtax Rules and referred to the principles laid down by the Supreme Court in Distributors (Baroda) Pvt. Ltd. v. Union of India [1985] 155 ITR 120. It highlighted that the intention behind the rule is to prevent double taxation and ensure that only the net amount of dividends, after deductions permissible under the Income-tax Act, is excluded from the total income for tax computation purposes.

4. The court examined various judgments, including Mohan Meakin Breweries Ltd. v. CIT (No. 2) [1979] 118 ITR 300, CIT v. Hindustan Gum and Chemicals Ltd. [1990] 182 ITR 396, and CIT v. Kil Kotagiri Tea and Coffee Estates Ltd. [1991] 191 ITR 283, to establish that the net dividends, not gross dividends, are deductible in computing chargeable profits under the Surtax Act.

5. Additionally, the court addressed the contention regarding the Explanation to rule 1(viii) of the Surtax Act, inserted in 1981, clarifying that only the net income should be excluded for tax computation. The court emphasized that the Explanation does not alter the existing criteria but merely provides a declaratory interpretation of the rule.

6. Ultimately, the court ruled in favor of the Revenue, stating that the Tribunal was incorrect in allowing the deduction of gross dividends from the total income for computing chargeable profits under the Surtax Act. The judgment emphasized the importance of excluding only the net amount of dividends that have not already suffered tax to avoid double taxation.

7. The judgment concluded by answering the second question in the negative, in favor of the Revenue and against the assessee, without awarding any costs.