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TMI Blog1994 (2) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding that capital employed could not be diminished proportionately with reference to the income exempted under sections 80M and 80J of the Income-tax Act, 1961 ? 2. Whether, the Appellate Tribunal has not erred in law and on facts of the case in holding that gross dividend income is deductible in computing the chargeable profits ? 3. Whether, the entire amount of debentures issued to the public is required to be treated as capital under the Second Schedule to the Surtax Act, 1964 ? " The relevant assessment year is 1976-77. As regards question No. 1, the controversy therein is covered by the decision of the Supreme Court in the case of Second ITO v. Stumpp Schuele and Somappa P. Ltd. [1991] 187 ITR 108. In the said judgment, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein, we have arrived at the conclusion that, in computing the chargeable profits, the net income by way of dividend which is a component part of the total income computed under the Income-tax Act, is required to be excluded and not the gross income by way of dividend. We, therefore, hold that the Tribunal has erred in holding that the gross dividend income is deductible in computing the chargeable profit and hence, question No. 2 is answered in the negative, in favour of the Revenue and against the assessee. Regarding question No. 3, for appreciating the controversy involved the provisions of rules 1(iv) and 3 of the Second Schedule to the Act for computing the capital of a company for the purposes of surtax contained in the Second Sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal in this context only when the debentures are redeemed. There is no provision for reducing the capital in cases of purchase by the company of its own debentures which is not barred under the provisions of the Companies Act, 1956. The debentures were not redeemable within a period of seven years. They were purchased and later sold at a profit to the Unit Trust of India which indicates that they were transferable. This is not a case of redemption of the debentures. The fact that the company had bought the debentures would not mean that the debentures were not issued to the public. The debentures bore the stamp and character of having been at one time issued to the public. In this view of the matter, we are of the opinion that the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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