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Issues Involved:
1. Interpretation of Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964. 2. Whether the gross or net dividend should be excluded from total income for computing chargeable profits under the Surtax Act. Issue-wise Detailed Analysis: 1. Interpretation of Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964: The court was tasked with interpreting Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, which states that "income by way of dividends from an Indian company" should be excluded from the total income computed under the Income-tax Act for arriving at chargeable profits. The assessee contended that this should mean the gross amount of dividends before any deductions under sections 57 and 80M of the Income-tax Act, 1961. Conversely, the revenue argued that it should mean the net amount after such deductions. 2. Gross vs. Net Dividend Exclusion: The court examined whether the gross or net dividend should be excluded from the total income for computing chargeable profits under the Surtax Act. The assessee argued for the exclusion of the gross dividend, while the revenue contended for the net dividend. The court noted that the language used in Rule 1(viii) of the First Schedule to the Surtax Act, 1964, referred to "income by way of dividends," which should be interpreted as the gross dividend received by the company. This interpretation was supported by several judicial decisions, including CIT v. Madras Motor & General Insurance Co. Ltd., CIT v. Jupiter General Insurance Co., and CIT v. Emcete & Sons (P.) Ltd. The court further observed that the legislative intent behind the Surtax Act was to avoid double taxation. If only the net dividend were to be excluded, the remaining part of the dividend would be subject to surtax, resulting in double taxation. This would contradict the principle of avoiding double taxation and the legislative intent to encourage investment by companies in shares of other companies. The court also referred to the principle of stare decisis, emphasizing the need to follow the majority view of other High Courts (Madras, Bombay, and Kerala) on this issue, given that the Surtax Act is an all-India statute. The court respectfully differed from the view taken by the Gujarat High Court in Addl. CIT v. Cloth Traders (P.) Ltd., which had interpreted similar provisions under section 85A of the Income-tax Act differently. Conclusion: The court concluded that the Tribunal was not justified in upholding the action of the ITO in excluding the reduced amounts of Rs. 13,685 and Rs. 11,576 instead of the gross amounts of Rs. 34,212 and Rs. 29,441 for the assessment years 1968-69 and 1969-70, respectively. The court held that the gross dividend should be excluded from the total income for computing chargeable profits under the Surtax Act. The record was sent back to the Tribunal with this opinion for further action, and the parties were directed to bear their own costs.
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