Commissioner of Income Tax vs Pure Drinks (New Delhi) Pvt. Ltd.

S.S. Sodhi, J.—The matter here concerns "chargeable profits" liable to surtax under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as "the Act"), in the context of the income received by the assessee as dividend from other companies. The point at issue is whether, in the computation of the total income of the assessee, for the purposes of surtax, the gross dividend or only that which, as is not exempt u/s 80M of the Income Tax Act, 1961, is to be included for this purpose.

The assessee, Pure Drinks (New Delhi) Pvt. Ltd., held shares in other companies during the relevant accounting period pertaining to the assessment year 1972-73. The assessee received dividends from such companies which had made the prescribed arrangements for the declaration and payment of dividends within India This amount being Rs. 1,17,000, 60 per cent. of this dividend was exempt from Income Tax under the provisions of Section 80M of the Income Tax Act, 1961. The Income Tax Officer, therefore, included only 40 per cent, of the dividend received in computing the total income of the assessee. This 40 per cent. was quantified at Rs. 46,800. The balance Rs. 70,200 was not included in the total income of the assessee, and, consequently, while considering the case of the assessee for purposes of surtax, the Income Tax Officer deducted only 40 per cent. of the dividend received by the assessee from his total income in calculating the "chargeable profits" under the Act. The Appellate Assistant Commissioner, on appeal, however, allowed the claim of the assessee and included the entire amount of the dividend received. This was later upheld by the Tribunal in appeal.

It is in this factual background that the following question of law has been referred to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the gross dividend and not the net dividend which actually formed part of the total income of the assessee was to be excluded from the total income of the assessee computed for the purposes of Income Tax assessment ?"

In order to appreciate the controversy raised, it would be pertinent to set out the relevant provisions of the Act. The First Schedule to the Act contains the rules for computing "chargeable profits." It, inter alia, provides that in computing the "chargeable profits" of a previous year, the total income computed for that year under the Income Tax Act, 1961, shall be adjusted as follows :--

"1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely :--

(viii) income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India ..."

The Supreme Court in Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, held that the words "income by way of dividends" refers only to the category of the income included in the total income and not to the quantum of the income so included. Following this judgment, our court in Commissioner of Income Tax Vs. Patiala Flour Mills Co. P. Ltd., held that when the Legislature speaks of "income by way of dividends", it refers to the gross income shown in the books of the assessee and not the net dividend which actually forms part of the total income of the assessee. A similar view has been taken in a string of authorities, namely, Commissioner of Income Tax Vs. Jiyajeerao Cotton Mills Ltd., Commissioner of Income Tax, Tamil Nadu-IV, Madras Vs. Sundaram Industries (P) Ltd., Commissioner of Income Tax Vs. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd., and A.V. Thomas and Co. Vs. Commissioner of Income Tax, . It is clear, therefore, that what had to be excluded were gross dividends.

Such, thus, being the settled position in law, the reference is answered in the affirmative, in favour of the assessee and against the Revenue. There will be no order as to costs.