1985 (1) TMI 40 - HC - Income Tax

Summary

Issues:
Interpretation of rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964 in computing chargeable profits for an assessee deriving income from dividends from another Indian company.

Detailed Analysis:
The case involved a question of law referred to the High Court regarding the entitlement of an assessee-company to exclude the gross dividend amount received from another Indian company while computing chargeable profits under the Companies (Profits) Surtax Act, 1964. The assessee argued for the exclusion of gross dividend amounts before deductions under specific sections of the Income-tax Act, 1961. The Income Tax Officer (ITO) and the Appellate Authority Commissioner (AAC) had negated the claim, stating that only net dividends should be excluded from the total income. The Tribunal, however, relied on a decision by the Kerala High Court and held that gross dividends should be excluded from the chargeable profits.

The main contention revolved around the interpretation of rule 1(viii) of the First Schedule to the Surtax Act. The Revenue argued that only the net dividend included in the total income should be excluded, while the assessee contended that gross dividends should be excluded unaffected by certain provisions of the Income-tax Act, 1961. The assessee relied on various court decisions to support their argument, including cases from the Kerala High Court, Himachal Pradesh High Court, Punjab and Haryana High Court, and Madhya Pradesh High Court.

The High Court analyzed the interpretation of "such income by way of dividends" and referred to a Supreme Court judgment in Cloth Traders (P.) Ltd.'s case, which clarified that the term refers to the category of income included in total income, not the quantum of income. The Court emphasized that even if the total income includes a specific category of income, the company is entitled to exclude the entire dividend income, i.e., the gross dividend received. The Court also highlighted that subsequent amendments to the rule reinforced the exclusion of gross dividends for determining chargeable profits under the Surtax Act.

Ultimately, the High Court answered the question in favor of the assessee, affirming that the company deriving income from dividends from another Indian company is entitled to exclude the gross dividend amount received while computing chargeable profits. Each party was directed to bear its own costs, and both judges concurred with the decision.

This detailed analysis of the judgment showcases the legal interpretation, arguments presented by both parties, relevant court decisions cited, and the final ruling by the High Court on the issue at hand.