Commissioner of Income Tax vs Sundaram Industries Ltd.

N.V. Balasubramanian, J.—At the instance of the Revenue, the following questions of law relating to the asst. yr. 1969-70 have been

referred by the Tribunal for our opinion under s. 256(1) of the IT Act, 1961 r/w s. 18 of the Companies (Profits) Surtax Act, 1964 :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the tax payable on the dividend income as

contemplated in r. 2(i)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964 should be computed on the net amount of the dividend

income, i.e. after allowing relief under ss. 80K, 80M etc., despite the fact that under r. 1(viii) of the said Schedule, the gross amount of the

dividend has been reduced from the total income for purpose of computing chargeable profits ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the AAC was right in entertaining an appeal

against an order to give effect to an appellate order ?

The assessee is a private limited company and for the asst. yr. 1969-70, the assessee filed a return under the Companies (Profits) Surtax Act,

1964 (hereinafter referred to as ""Surtax Act"") showing the net chargeable profit of Rs. 12,30,015. The Surtax Officer, while computing the

chargeable profits excluded the net dividend income from the total income of the assessee. The Surtax Officer took the view that the dividend

income after granting deduction under ss. 80K and 80M of the IT Act, 1961, is subjected to tax and therefore, the net dividend income should be

taken into consideration. The assessee filed an appeal challenging the order of the Surtax Officer on the ground that under the provisions of r.

1(viii) of the First Schedule to the Surtax Act, only the gross dividend should be taken into consideration and that should be excluded from the total

income. The AAC accepted the contention of the assessee and directed the Surtax Officer to exclude the gross dividend income from the total

income of the assessee under r. 1(viii) of the First Schedule to the Surtax Act. The Surtax Officer on receipt of the order of the AAC gave effect to

the appellate order by excluding the gross dividend income from the total income. Simultaneously he also made certain adjustments in the Income

Tax under r. 2(i)(a) of the First Schedule to the Surtax Act. He calculated the Income Tax on the gross dividend of Rs. 4,61,112 which was

arrived at 59.38 per cent and excluded a sum of Rs. 2,73,838 from the Income Tax payable by the assessee. He determined the chargeable profit

at Rs. 2,46,464. The assessee filed an appeal challenging that part of the order of the Surtax Officer deducting gross dividend. The AAC, on

appeal by the assessee, held that the ITO has no jurisdiction to deduct the net dividend from the chargeable profit and that his action was not

warranted under law. The Revenue preferred an appeal before the Tribunal against the order of the AAC. A contention was raised before the

Tribunal that the direction of the AAC in the earlier appeal was only with reference to the gross dividend and he exceed his jurisdiction in adopting

Rs. 2,73,838 as tax to be deducted from the Income Tax. The Tribunal went into the merits of the lease and held that on a reading of r. 2(i)(a) of

the First Schedule to the Surtax Act, the tax that should be payable is only on the dividend income and only the tax in respect of that should be

taken into account in determining the figure under r. 2(i)(a) of the First Schedule to the Surtax Act. The Revenue questioned the order of the

Tribunal on both the points and hence, the above said two questions have been referred to us at the instance of the Revenue.

In so far as the second question of law referred to us is concerned, there is no difficulty in holding that the AAC was right in entertaining the

appeal against the order of the Surtax Officer to give effect to the appellate order. The order of the Surtax Officer giving effect to the appellate

order is an appealable order and if the assessee is aggrieved by such an order, it is open to the assessee to challenge the same by filing an appeal

before the AAC and therefore, the Tribunal is correct in law in holding that the assessee was justified in preferring an appeal and the AAC was

also correct in entertaining the appeal preferred against the order of the Surtax Officer giving effect to the appellate order.

In so far as the first question of law is concerned, Mr. C. V. Rajan, learned counsel for the Revenue submitted that this Court in the assessee''s

own case in Commissioner of Income Tax, Tamil Nadu-IV, Madras Vs. Sundaram Industries (P) Ltd., , held that only gross dividend is liable to

be excluded under r. 1(viii) of the First Schedule to the Surtax Act, from the total income computed in order to arrive at the chargeable profit. He,

therefore, submitted that when the gross dividend was directed to be excluded as per the decision of this Court cited supra, under r. 1(viii) of the

First Schedule to the Surtax Act, r. 2(i)(a) of the First Schedule to the Surtax Act should also be so construed that it refers to Income Tax that will

be payable on the gross dividend income that is excludible in the total income. He submitted that r. 1(viii) of the First Schedule to the Surtax Act is

closely connected with r. 2(i)(a) of the First Schedule of the said Act and if the gross dividend was excluded as per r. 1(viii), the Income Tax

payable on the gross dividend should be deducted from the amount of Income Tax mentioned in r. 2(i)(a) of the First Schedule.

Mr. S. A. Balasubramanian, learned counsel for the assessee, submitted that r. 2(i)(a) of the First Schedule refers to Income Tax payable by the

Company in respect of any income referred to in r. 1(viii) of the First Schedule and also refers to inclusion of the amount in the total income. He,

therefore, submitted that the Income Tax is payable only on the net dividend income and it is only on the income that is included in the total income

amount of Income Tax is payable and it is proper that the Income Tax payable on the net dividend income alone should be excluded from the

amount of Income Tax payable by the assessee under r. 2(i)(a) of the First Schedule to the Surtax Act.

We have carefully considered the submissions made by the learned counsel for the Revenue as well as the learned counsel for the assessee. It is

no doubt true that this Court in the case of Sundaram Industries (P) Ltd. (supra), namely, in the assessee''s own case relating to same assessment

order, held that under r. 1(viii) of the First Schedule to the Surtax Act, the only gross dividend income should be excluded from the total income

computed for the year in order to arrive at the chargeable profit under Surtax Act. It is also not disputed that as against the decision of this Court

cited supra, this Court has granted leave to file an appeal to the Supreme Court and the appeal is stated to be pending before the Supreme Court.

However, we are concerned with the interpretation of r. 2(i)(a) of the First Schedule to the Surtax Act. The said rule consists of two parts. The

first part used the expression ""the amount of Income Tax, if any, payable by the Company in respect of any income referred to in cl. (viii) of r. 1

and the second part uses the expression ""included in the total income"". The amount of Income Tax payable by the company on the income referred

to in cl. (viii) can only be on the net dividend income and it cannot be on the gross dividend income. It is well settled that the amount of Income Tax

payable by a company is always on the net dividend income and it cannot be on the gross dividend income. The above position is reinforced by the

latter expression used in the said rule, which reads as ""included in the total income"". The amount of dividend includible in the total income is only

the net dividend income after granting deductions provided for under ss. 80K, 80M etc. of the IT Act, 1961. We, therefore, hold that if what is

included in the total income is the net income and it is only with reference to that amount, the Income Tax is payable by the assessee-company

should be determined. Therefore, on the plain terms of r. 2(i)(a) of the First Schedule to the Surtax Act, the amount of Income Tax payable by the

company is on the net dividend income which included in the total income of the assessee-company. We are concerned only with the interpretation

of r. 2(i)(a) of the First Schedule to the Surtax Act and we are not concerned with the surtax assessment made by the Surtax Officer in pursuance

of the directions of this Court. In so far r. 2(i)(a) is concerned, under the terms of the said rule, the amount of Income Tax that is payable by the

company would be on the net dividend income which is included in the total income. The fact that the gross dividend income has been excluded

under r. 1(viii) of the First Schedule to the Surtax Act, for whatsoever reason, cannot stand in the way of this Court giving a proper interpretation

to r. 2(i)(a) of the First Schedule to the Surtax Act and it cannot vary for the purpose of the assessee''s case, because the Surtax assessment

proceeded in one way. The conclusion of the Tribunal that the tax payable on the net dividend income has to be taken into account under r. 2(i)(a)

of the First Schedule to the Surtax Act is in order and we hold that there is no infirmity in the order of the Tribunal, as r. 2(i)(a) refers to the

exclusion of the amount of Income Tax payable by the company in respect of net dividend income. In this view of the matter, we answer the first

question referred to us in the affirmative and against the Revenue. We also answer the second question referred to us in the affirmative and against

the Revenue. However, in the circumstances of the case, there will be no order as to costs.