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Issues Involved:
1. Interpretation of rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964. 2. Applicability of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Issue-Wise Detailed Analysis: 1. Interpretation of rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964: The primary issue is whether the gross dividend received by the assessee from another Indian company should be excluded in computing the chargeable profits under the Companies (Profits) Surtax Act, 1964, unaffected by the provisions of section 80M of the Income-tax Act, 1961. Facts and Arguments: - The assessee earned a dividend income of Rs. 27,500, out of which Rs. 16,500 was allowed as a deduction under section 80M of the Income-tax Act, resulting in a net dividend of Rs. 11,000. - The Income-tax Officer deducted only the net dividend of Rs. 11,000 from the chargeable profits, whereas the assessee contended that the gross dividend of Rs. 27,500 should be deducted. - The Commissioner of Income-tax (Appeals) directed the Income-tax Officer to allow the gross dividend as a deduction, which was upheld by the Tribunal. Legal Provisions and Judicial Precedents: - Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, provides that income by way of dividends from an Indian company shall be excluded from the income, profits, and gains. - The Explanation to rule 1(viii) introduced by the Finance Act of 1981 specifies that the amount to be excluded is the income computed in accordance with the Income-tax Act, excluding Chapter VI-A deductions. - The Supreme Court decision in Distributors (Baroda) P. Ltd. [1985] 155 ITR 120 clarified that the deduction under section 80M should be computed with reference to the net dividend after allowing for expenses incurred in earning such income. Court's Analysis and Conclusion: - The court noted that the decision in CIT v. Jiyajeerao Cotton Mills Ltd. [1985] 154 ITR 323, which allowed the exclusion of gross dividend, was based on the now-overturned decision in Cloth Traders (P.) Ltd. [1979] 118 ITR 243. - The court held that the net dividend, after allowing any expenditure for earning such dividend income, should be included in the gross total income, and the deduction under section 80M should be computed on this net amount. - The court concluded that the total income as computed under the Income-tax Act, including all deductions, should be considered for surtax purposes. Therefore, the net dividend after deduction under section 80M should be excluded, not the gross dividend. Judgment: The first question was answered in the negative and in favor of the Revenue, indicating that only the net dividend (after section 80M deduction) should be excluded from the chargeable profits. 2. Applicability of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964: The second issue pertains to whether rule 4 of the Second Schedule can be applied to proportionately reduce the capital apportionable to the dividend deduction under section 80M of the Income-tax Act, 1961. Facts and Arguments: - The applicability of rule 4 of the Second Schedule was previously addressed in CIT v. Britannia Industries Co. Ltd. [1990] 182 ITR 113, where it was held that rule 4 cannot be invoked for proportionately reducing the capital apportionable to deductions under Chapter VI-A of the Income-tax Act. Court's Analysis and Conclusion: - The court followed the precedent set in CIT v. Britannia Industries Co. Ltd., confirming that rule 4 of the Second Schedule is not applicable for proportionate reduction of capital in relation to section 80M deductions. Judgment: The second question was answered in the negative and in favor of the assessee, confirming that rule 4 of the Second Schedule does not apply to proportionately reduce the capital apportionable to the dividend deduction under section 80M. Conclusion: The court ruled in favor of the Revenue on the first issue, confirming that only the net dividend after section 80M deduction should be excluded from chargeable profits. On the second issue, the court ruled in favor of the assessee, confirming that rule 4 of the Second Schedule does not apply to proportionately reduce the capital apportionable to the dividend deduction under section 80M.
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