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Issues: Interpretation of rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act regarding the deduction of gross dividends vs. net dividends for computing chargeable profits under the Act.
Analysis: The High Court of Karnataka addressed the issue of whether gross dividends or net dividends should be deducted for computing chargeable profits under the Companies (Profits) Surtax Act. The assessee argued for the deduction of total dividends received, while the Revenue contended that only net dividends after deductions under the Income-tax Act should be considered. The interpretation revolved around rule 1(viii) of the First Schedule to the Surtax Act, which excludes income by way of dividends from the total income of the company for computing chargeable profits. The court examined the definition of "chargeable profits" under the Surtax Act and the adjustment of total income as per the First Schedule to compute chargeable profits. The court highlighted the significance of section 80M of the Income-tax Act, which allows a deduction of 60% of dividend income. The distinction between "total income" and "gross total income" was crucial in understanding the computation of dividends for income-tax purposes. Referring to the Supreme Court's decision in Distributors (Baroda) P. Ltd. v. Union of India, the court emphasized that the insertion of section 80AA in the Income-tax Act was a clarificatory amendment to ensure proper calculation of deductions related to dividend income. The court also cited the decision in CIT v. Hindustan Gum and Chemicals Ltd., where the Calcutta High Court supported the exclusion of dividend income while computing chargeable profits under the Surtax Act. Additionally, the court mentioned the judgment in CIT v. Andhra Bank Ltd., where the Andhra Pradesh High Court upheld a similar interpretation of the relevant rule. The court acknowledged conflicting views in other decisions, such as CIT v. Sundaram Industries (P) Ltd., CIT v. Jiyajeerao Cotton Mills Ltd., and CIT v. United India Fire and General Insurance Co., which relied on the outdated decision in Cloth Traders' case. However, the court concluded that the ruling in Distributors (Baroda) P. Ltd.'s case superseded the earlier decisions, leading to a negative answer to the question posed, favoring the Revenue's position.
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