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TMI Blog1989 (8) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 80M of the Income-tax Act, 1961 ?" The second question is concluded by the decision of this court in Income-tax Reference No. 131 of 1978 (CIT v. Britannia Industries Co. Ltd. [1990] 182 ITR 113) where judgment was delivered on April 10, 1989, holding that rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, cannot be invoked for proportionately reducing the capital apportionable to deduction made under Chapter VI-A of the Income-tax Act, 1961. Following the said decision, we answer the second question in the negative and in favour of the assessee. The facts so far as relevant to the controversy raised in the first question are that the assessee earned dividend income totalling Rs. 27,500 which was credited to the profit and loss account. A deduction of Rs. 16,500 out of the said dividend income was allowed under section 80 of the Act in the income-tax assessment of the assessee. The Income-tax Officer, while computing the chargeable profit in the surtax assessment of the assessee, has taken the said net dividend of Rs. 11,000 only as deductible from the chargeable profit against the stand of the assessee that the gross and not the net divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act, 1961, in respect of which deduction is allowed under Chapter VI-A should be deducted from such dividend income. Dr. Pal argued that the decision of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120, has no application to the facts of this case. According to Dr. Pal, the income by way of dividend, whether it means gross or net dividend, must be the whole of the dividend without any deduction in respect of the dividend which is exempt under section 80M of the Act. The Explanation to rule 1(viii) of the First Schedule of the Companies (Profits) Surtax Act relied on by the Revenue was introduced by the Finance Act of 1981, which is as follows : "Explanation.-Notwithstanding anything contained in any clause of this rule, the amount of any income or profits and gains which is required to be excluded from the total income under that clause shall be only the amount of such income or profits and gains as computed in accordance with the provisions of the Income-tax Act (except Chapter VI-A thereof) and in a case where any deduction is required to be allowed in respect of any such income or profits and gains under the said Chapter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5] 155 ITR 120 (SC) did not at all consider the question whether the deduction in respect of intercorporate dividend which is allowed under section 80A appearing in Chapter VI-A should also be deducted from the dividend income. The said decision decides only the question that the expression appearing in section 80M, viz., "where the gross total income of an assessee ... includes any income by way of dividends from a domestic company" describes the condition which must be fulfilled in order to attract the applicability of the provision contained in section 80M of the Income-tax Act. The condition is that the gross total income of the assessee must include income by way of dividends from domestic company. Therefore, the expression "such income by way of dividends" must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. In other words, the dividend income as computed in accordance with the provisions of the Income-tax Act has to be taken into account and not the gross dividend. No question was raised in that case as to whether the dividend income should also be reduced by the deduction which is allowabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian company. It is true that the Supreme Court in Cloth Traders (P.) Ltd.'s case [1979] 118 ITR 243 was considering the case of deduction under section 80M of the Income-tax Act, 1961, but the principles laid down in that case will apply in construing the provisions of rule 1 (viii) of the First Schedule. We may add that in Cloth Traders (P.) Ltd.'s case [1979] 118 ITR 243, the Supreme Court held that, in computing the taxable income for purposes of the Income-tax Act, the deduction in respect of intercorporate dividends should be allowed on the gross amount of such dividends received by the company and not with reference to the net amount. With view to grant such deduction with reference to the net income by way of dividends only, the Finance (No. 2) Act, 1980, inserted a new section 80AA to the Income-tax Act, 1961, with retrospective effect from 1st April, 1968. Since in several cases, the High Courts, following the said decision of the Supreme Court, held that even for purposes of determining the chargeable profits under the Companies (Profits) Surtax Act, the gross amount of dividend should be excluded from the total income, rule 1 has since been amended by the Finance Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment of the total income determined under the Income-tax Act, 1961. In other words, the question is whether the dividend income as computed under the Income-tax Act and before allowing any deduction under Chapter VI-A (section 80M in this case) should be excluded. As indicated earlier, Dr. Pal has made his submission only on this aspect that the dividend income as computed after allowing the expenditure in connection therewith should be excluded from the order of assessment under the Income-tax Act for the purpose of determining the chargeable profit. In other words, his contention is that the relief which is granted under section 80M at the prescribed percentage shall be ignored and only the dividend before the deduction under Chapter VI-A but as computed under the other provisions of the Act shall be taken into account. It has been contended that although the decision in Cloth Traders (P.) Ltd. [1979] 118 ITR 243 (SC) has been overturned by the Supreme Court in its subsequent decision in Distributors (Baroda) P. Ltd. [1985] 155 ITR 120, in view of the decision of this court in Jiyajeerao Cotton Mills Ltd. [1985] 154 ITR 323, the Explanation added to rule 1 by the Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [1979] 118 ITR 243 (SC). Firstly, in that case, this court proceeded to construe the provisions of the Explanation in the light of the decision of the Supreme Court in Cloth Traders Pvt. Ltd. [1979] 118 ITR 243. The said decision had been overturned. Accordingly, the reasoning and conclusion based on the said decision in Cloth Traders Pvt. Ltd. [1979] 118 ITR 243 (SC) must be held to be not correct. Secondly, the Supreme Court, in Distributors (Baroda) Pvt. Ltd. [1985] 155 ITR 120, affirmed the decision in Cambay Electric Supply Co.'s case [1978] 113 ITR 84, a decision rendered in 1978 which would hold the field. It is no doubt true that the amendment to the Surtax Act has been incorporated with effect from April 1, 1981, but, as held by the Supreme Court, if such amendment is only declaratory in nature, the declaration of the law as it always was, in that event, cannot be said to be statement of law on the date of insertion of the Explanation. In any event, the Division Bench in Jiyajeerao Cotton Mills Ltd. [1985] 154 ITR 323 (Cal) did not have any occasion to consider the second aspect of net dividend so far as is material for the surtax assessment. It proceeded on the footin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause what sub-section (1) of section 80M requires is that the deduction of the whole or a specified percentage must be made from 'such income by way of dividends' and not from the gross total income. Sub section (1) of section 80M provides that in computing the total income of the assessee, there shall be allowed a deduction from 'such income by way of dividends' of an amount equal to the whole or a specified percentage of such income. Now, when, in computing the total income of the assessee, deduction has to be made from 'such income by way of dividends', it is elementary that 'such income by way of dividends' from which deduction has to be made must be part of the gross total income. It is difficult to see how the language of this part of sub-section (1) of section 80M can possibly fit in if 'such income by way of dividends' were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income ; what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en into account. But that is not the intention of the Legislature. The total income as computed must, in the context, mean the total income as assessed after all reliefs and deductions are allowed. This view which we have taken is also supported by the provisions contained in rule 2 of the First Schedule. It provides as follows : "The balance of the total income arrived at after making the exclusions mentioned in rule I shall be reduced by (i) the amount of income-tax payable by the company in respect of its total income under the provisions of the Income-tax Act after making allowance for any relief, rebate or deduction in respect of income-tax to which the company may be entitled under the provisions of the said Act or the annual Finance Act and after excluding from such amount (a) the amount of income-tax, if any, payable by the company in respect of any income referred to in clause (i) or clause (ii) or clause (iii) or clause (viii) of rule 1 included in the total income ; (b) the amount of income-tax, if any, payable by the company under the provisions of the annual Finance Act with reference to the relevant amount of distributions of dividends by it." Therefore, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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