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TMI Blog1994 (1) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... ht in law in holding that under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, the proportionate capital is to be reduced only in respect of income not includible as per Chapter III of the Income-tax Act, without including the deduction allowed under sections 80K, 80M and 80J ?" The aforesaid questions arise in the background of the fact that for the assessment year 1974-75, the assessee, Atul Products Limited, received dividend income of Rs. 52,17,625. From the said dividend income, the assessee was entitled to certain reliefs under sections 80K and 80M of the Income-tax Act and, accordingly, dividend income for the purpose of income-tax was worked out at Rs. 20,79,050. In the surtax proceedings, the Income-tax Officer, while computing the chargeable profits, deducted the net amount of dividend of Rs. 20,79,050 from the total income. It is the contention of the assessee that, while computing the chargeable profits, the gross dividend income of Rs. 52,17,625 ought to have been deducted. The assessee challenged the said order before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner allowed the appeal by holding that the gross dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of two hundred thousand rupees, whichever is greater: Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of ten (fifteen) per cent. or, as the case may be, of two hundred thousand rupees shall be increased or decreased proportionately : Provided further that where a company has different previous years in respect of its income, profits and gains, the aforesaid increase or decrease, as the case may be, shall be calculated with reference to the length of the previous year of the longest duration." (The words 'ten per cent.' are substituted by Finance Act No. 66 of 1976). In view of the aforesaid definition of the words "chargeable profits", the first thing which is required to be taken into consideration is the total income of an assessee computed under the Income-tax Act. Thereafter, the said total income is required to be adjusted in accordance with the provisions of the First Schedule. The First Schedule to the Surtax Act provides rules for computing the chargeable profits and the total income computed for the purpose of the Income-tax Act for the assessment year is required to be adjusted as provided therein. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised by learned counsel for the parties. Mr. Thakore, learned counsel for the Revenue, vehemently submitted that the Tribunal ought to have considered the language used by the Legislature in the aforesaid rules. Rule 1 of the First Schedule clearly provides that from the total income computed under the Income-tax Act, certain deductions as provided in clauses (i) to (xii) are to be excluded. It is his contention that income which is shown for the purpose of taxation is required to be excluded if the said income falls within the definition of the said clauses and that there is no question of taking into consideration exclusion of gross income (that is income prior to deduction provided under the Income-tax Act). It is his contention that the word "excluded" used by the Legislature merely reveals the intention that what is included in the total income is required to be excluded and not the amount which is not included. Otherwise, there is no necessity of providing the word "excluded". He further submitted that this would be clear if we refer to rules 1, 2 and 3 of the First Schedule. In rule 2, the Legislature has used the word "reduced" and not "excluded". Similarly, in rule 3, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e words used by the Legislature. He, therefore, contended that, applying the said principles, the plain and natural meaning of the words "income by way of dividends" would only mean the income received by the assessee by way of dividend and not the income by way of dividend less statutory deductions provided under the Income-tax Act, otherwise, it would amount to rewriting of the charging provisions. The Legislature has used different phrases in clauses (i), (vi) and (viii). In clause (i), the words used are "income chargeable" under the head "Capital gains". In clause (vi), the words used are "income chargeable" but in clause (vii), the word "chargeable" is patently absent. This would also mean that, wherever the Legislature wanted to provide that, from the income chargeable, if something is required to be deducted, it has provided for it. This also would indicate that, as per clause (viii), income received by the assessee by way of dividend, is required to be excluded. For computing the capital of the company for the purpose of the statutory deduction, the cost of the shares is required to be taken into consideration even though 60 per cent. of the dividend from the shares is exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total amount of income of dividend computed in the manner laid down under the Income-tax Act would be the amount after making necessary deductions as provided under sections 57, 80M and other relevant provisions. Without making deduction as provided under section 80M, income from dividend would be gross total income as defined under section 80B(5) and not the total income as defined under section 2(45) of the Income-tax Act. For the purpose of the Surtax Act, the total income of an assessee computed under the Income-tax Act is required to be taken into consideration and not the gross total income. From that total income, income or other sums as mentioned under rule 1 are to be excluded. Therefore, the phrase "excluded from the total income" in the context would only mean that specified income which is included in the total income (which is exigible to income-tax) is to be excluded. The income, say a dividend income, which is not exigible to income-tax, would not be a component of the total income. Therefore, "exclusion", in this case, is of the income which is included, i.e., which is in or which is a constituent element or part of the total income exigible to tax. It would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of specified industries, over and above the other general deductions contemplated by the Act. It was further not disputed before us that the assessee being an Indian company engaged in the business of generation and distribution of electricity is a company to which the section applies and is entitled to claim the deduction of eight per cent. contemplated by that provision and the only question is how and in what manner the said deduction should be computed. On reading sub-section (1), it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except section 80E; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) ; and, thirdly, if there be profits and gains so attributable, deduct eight per cent. thereof from such profits and gains and then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true meaning of a statutory provision by reference to an interpretation which might have been placed on an earlier statutory provision which is not only couched in different language but is also structurally different. " With regard to the aforesaid principle, there cannot be any dispute. We are required to interpret rule 1 on its own language and to arrive at the true interpretation according to the plain and natural meaning of the words used by the Legislature. On its plain interpretation, clause (viii) of rule 1 would mean that "income by way of dividends" from an Indian company is to be excluded from such total income. The question is : what is the income by way of dividend from an Indian company included in the total income which is required to be excluded ; and the answer would obviously be-the income by way of dividends computed in accordance with the provisions of the Income-tax Act, i.e., gross total income of dividend less deductions provided under section 80M of the Income-tax Act. That net dividend income is the component of the total income which is exigible to tax. The gross amount of "income by way of dividends" cannot be taken as the total income computed in accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax payable as provided in clauses (i) and (ii) of rule 2. The third step is that the net amount of income calculated in accordance with rule 2 shall be increased by the amount of any expenditure incurred on account of commission, entertainment and advertisement, to the extent such expenditure, in the opinion of the Assessing Officer, is excessive having regard to the circumstances of the case. The third step indicates that, while computing the total income if any expenditure incurred on account of commission, entertainment and advertisement is deducted, then the said sum is to be added back. So, to that extent, total income would be increased. However, in a case where entertainment and advertisement expenditure is disallowed or is not deducted, it cannot be stated that the total income is to be increased by the said amount. Hence in the context of all these different words, i.e., "adjusted", "excluded", "reduced" and "increased", used in the First Schedule, the word "excluded" is to be interpreted. Interpreting the word "excluded" in the aforesaid context, it would only mean that from the total income computed in accordance with the provisions of the Income-tax Act, the net total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and Somappa P. Ltd. [1977] 106 ITR 399, wherein it is held that the reliefs allowed under section 80-I (priority industry) and section 80J (newly established industrial undertaking) of the Income-tax Act, 1961, were not "income, profits and gains not includible in the total income" of the company under rule 4 of Schedule II to the Surtax Act and would not go to diminish the capital of the company to be computed for the purposes of the Surtax Act. The court observed that there is a preponderance of judicial opinion in favour of the assessee. In our view, the contention of learned counsel for the assessee is without any substance. Rule 4 of the Second Schedule provides that where a part of the income, profits and gains of a company "is not includible" in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3 diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains. For the purpose of explaining this rule, take for an illustration that a company is having capital of Rs. 1 crore. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and not the income which is to be included for computing the total income or gross total income by making certain deductions or reliefs. Therefore, the interpretation of rule 4 of the Second Schedule, would have no bearing in interpreting the First Schedule, more particularly rule 1(viii) of the First Schedule. It is nobody's case that income by way of dividend is not includible income for computing the total income under the provisions of the Income-tax Act. The computation of capital is mainly for allowing statutory deduction as provided under section 4 read with section 2(8). Hence, it would be difficult for us to accept the contention of learned counsel for the assessee that the decisions of other High Courts which are approved by the Supreme Court in Stumpp, Schuele and Somappa P. Ltd.'s case [1991] 187 ITR 108 would have any bearing on the interpretation of rule 1 of the First Schedule to the Surtax Act. In the result, it is held that, while computing the chargeable profits from the total income computed for the purpose of income-tax, the income which is included is required to be excluded, i.e., the income which is a component part of the total income computed for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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