1993 (8) TMI 122 - AT - Income Tax

Summary

Issues:
Interpretation of rule 2(b) of the First Schedule for computing chargeable profits under the Surtax Act of 1964.

Analysis:
The appeal before the Appellate Tribunal ITAT DELHI-D arose from an assessment made for surtax for the assessment year 1983-84. The dispute centered around the interpretation of rule 2(b) of the First Schedule, specifically regarding the deduction of income-tax payable on the distribution of dividends from the total income for levy of surtax. The Surtax Officer deducted a sum representing tax on dividends distributed to shareholders from the income-tax payable, a decision upheld by the Commissioner of Income-tax (A) and now subject to appeal.

For income-tax purposes, the assessed income was Rs. 1.30 crores, with tax payable at Rs. 79,90,412. The Surtax Officer deducted an additional sum as tax on dividend distribution. The Tribunal, upon appeal, disagreed with the department's interpretation, setting aside the assessment for reassessment. However, the reassessment reiterated the same view without substantial discussion, leading to the current appeal.

The crux of the matter lies in the interpretation of rule 2(b) of the First Schedule, which outlines deductions to be made from the total income for computing chargeable profits. The rule specifies that the income-tax payable by the company under the Finance Act with reference to dividend distributions should be reduced. However, the Finance Act of 1984 did not levy any tax on dividend distributions, rendering the deduction of tax on dividends paid to shareholders as erroneous. The tax deducted at source on dividends is not the tax payable by the company on its own, as it is a mechanism for tax collection from shareholders, not a penalty on dividend distribution.

The rationale behind excluding certain amounts from income-tax payable is to compute chargeable profits accurately. The exclusion of tax payable on specific types of income, such as capital gains or dividends, aligns with the concept that such income is not part of the regular business earnings. Similarly, the tax payable by a company on dividend distributions should not be considered as it is an expenditure absorbed by the company, akin to any other business expense. Therefore, the deduction of tax deducted at source from dividend payments is incorrect, and the sum should be included in the income-tax payable calculation, leading to the allowance of the assessee's appeal.