1993 (3) TMI 51 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for reducing the capital base proportionately.
2. Inclusion of excess provision for taxation in the capital base for surtax assessments.
3. Computation of chargeable profits under the First Schedule to the Surtax Act, specifically regarding dividend income.

Detailed Analysis:

Issue 1: Applicability of Rule 4 of the Second Schedule
The first issue pertains to whether Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, can be invoked to proportionately reduce the capital base considering the deductions obtained under Chapter VI-A of the Income-tax Act, 1961. The court, referencing the Supreme Court decisions in ITO (Second) v. Stumpp, Schuele and Somappa P. Ltd. [1991] 187 ITR 108 and Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, held that Rule 4 could not be invoked for this purpose. Thus, the Tribunal's decision was upheld, and the question was answered in the affirmative, favoring the assessee.

Issue 2: Inclusion of Excess Provision for Taxation
The second issue concerns whether the excess provision for taxation should be included in the capital base for surtax assessments. The court, again referencing the same Supreme Court decisions, held that the excess provision for taxation is includible in the capital base. Therefore, the Tribunal's decision was upheld, and the question was answered in the affirmative, favoring the assessee.

Issue 3: Computation of Chargeable Profits (Dividend Income)
The third issue involves the computation of chargeable profits under the First Schedule to the Surtax Act, specifically whether the gross dividend received should be excluded or the net dividend after deductions under sections 80K and 80M of the Income-tax Act, 1961.

In the case of Messrs. Voltas Ltd., the aggregate dividend received was Rs. 6,69,450 and Rs. 6,51,678 for the assessment years 1974-75 and 1975-76, respectively. After deductions under sections 80K/80M, the amounts were Rs. 2,48,800 and Rs. 4,09,007. Similarly, for Messrs. Standard Mills Co. Ltd., the aggregate dividend received was Rs. 9,43,144 for the assessment year 1975-76, and after deductions, it was Rs. 17,258.

The Surtax Officers (STOs) excluded only the net dividend amounts from the total income, while the assessees argued that the gross dividend should be excluded. Both the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal sided with the assessees, stating that the income by way of dividend, prior to deductions under sections 80K/80M, should be excluded.

The court, however, referred to its decision in CIT v. Banque Nationale De Paris [1992] 194 ITR 167, which supported the Revenue's stance. The court noted that the Explanation added to Rule 1 of the First Schedule by the Finance Act, 1981, clarified that only the net income should be excluded. The court emphasized that an Explanation is generally added to clear ambiguities and should harmonize with the main section.

The court concluded that the words "income by way of dividend" refer to the net dividend after deductions under sections 80K/80M of the Income-tax Act, 1961. Therefore, the net dividend amounts of Rs. 2,48,800, Rs. 4,09,007, and Rs. 17,258, which formed part of the total income, should be excluded in determining the chargeable profits for the Surtax Act.

In conclusion, the court answered question No. 3 in the case of Messrs. Voltas Ltd. and question No. 1 in the case of Messrs. Standard Mills Ltd. in the negative, against the assessee and in favor of the Revenue. No order as to costs was made.