Commissioner of Income Tax vs T.T. (P.) Ltd.

Bhat, J.—In these references, u/s 256(2) of the income tax Act, 1961 (''the Act'') the following question requires to be answered:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee is entitled to deduct gross dividends and not net dividends for the purpose of computing chargeable profit under rule 1(viii) of First Schedule?"

The assessment years are 1979-80 and 1980-81.

The contention of the assessee which was accepted by the Tribunal was that the total dividends received by the assessee shall have to be deducted while computing the chargeable profits of the assessee under the provisions of the Companies (Profits) Surtax Act (''Surtax Act''), while the contention of the revenue has been that the net dividend arrived at after the deductions permitted under the provisions of the income tax Act is the dividend that will have to be deducted under the aforesaid Surtax Act. The question pertains to the interpretation of rule l (viii) of the First Schedule to the Surtax Act.

Section 4 of the Surtax Act charges every company a tax in respect of its chargeable profits of the previous year. The term ''chargeable profits'' is defined u/s 2(5) of the Surtax Act, according to which the total income of an assessee computed under the income tax Act for any previous year is adjusted in accordance with the provisions of the First Schedule. The First Schedule to the Act is, thus, part of the Act containing the rules for computing the chargeable profits. It opens with the statement "in computing a chargeable profit of a previous year the total income computed for that year under the income tax Act shall be adjusted as follows". Thereafter, the three rules are found. Therefore, the computation is the result of the adjustment made as per the rules in the Schedule with reference to the ''total income'' of the company computed under the income tax Act. Rule 1(viii) reads:

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

(i) to (vii) ****

(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,"

Thus, the income by way of dividends shall be excluded from the total income of the company in computing the chargeable profits as per this rule. The indication about the scope of this rule is also found on a perusal of a few other sub-clauses of this rule. Whatever has gone into the computation of the total income, a part is excluded for the purpose of charging the profits under the Surtax Act. Section 80M of the income tax Act provides for deduction in respect of the dividends while computing the income of an assessee for the levy of income tax. According to this, a deduction of an amount equal to 60 per cent of such income from the dividends is envisaged. Therefore, for the purpose of charging the income of a company for the purpose of income tax, its income from the dividends is reduced by 60 per cent and only 40 per cent of the total dividend is included in the taxable income. The language of section 80M itself is that "in computing the total income of the assessee", sixty per cent of the total income of the assessee which includes income from dividend is to be deducted. In other words, the term ''total income'' u/s 80M is different from the phrase ''gross total income''. It is in this background the concept of phrase ''net dividend'' in contradiction to gross dividend has been used in the question referred to us. Since the phrase ''total income'' is repeated in section 80M as also in the First Schedule to the Surtax Act and since it can be said that both the Acts are supplemental to each other, normally the meaning attributable to similar terms should be the same in both the Acts. While computing the total income for the purpose of income tax only the net dividend is added. If so, whatever is to be deducted again for the purpose of charging the profits under the Surtax Act cannot go beyond what was added earlier. The same idea is conveyed by section 80AA of the income tax Act which was inserted by the Finance Act, 1980 with retrospective effect from 1-4-1968 which reads thus:

"Computation of deduction u/s 80M -Where any deduction is required to be allowed u/s 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends."

In Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, the Supreme Court had to consider the question as to how the deductions under Chapter VI-A of the income tax Act are to be made with reference to income from dividend. In the said decision the Supreme Court was concerned mainly with the correctness of an earlier decision of the same Court rendered in Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, at a time when section 80AA was not found in the income tax Act. For this purpose the scope of section 80M had to be considered by the Supreme Court afresh and ultimately the Supreme Court held that its earlier view was not correct which was rendered in Cloth Traders (P.) Ltd.''s case (supra). In Cloth Traders (P.) Ltd.''s case (supra) the Supreme Court had held that the deduction required to be allowed u/s 80M must be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act. This gave a larger relief to the assessees which resulted in considerable loss of revenue and compelled the insertion of section 80AA of the Act with retrospective effect. In Distributors (Baroda) (P.) Ltd. ''s case (supra) after referring to the entire history the Supreme Court held thus:

"Section 80M, sub-section (1), opens with the words ''where the gross total income of an assessee... includes any income by way of dividends from a domestic company'' and proceeds to say that in such a case, there shall be allowed in computing the total income of the assessee, a deduction ''from such income by way of dividends'' of an amount equal to the whole of such income or 60 per cent of such income, as the case may be, depending on the nature of the domestic company from which the income by way of dividends is received. The opening words describe the condition which must be fulfilled in order to attract the applicability of the provision contained in subsection (1) of section 80M. The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company. ''Gross total income'' is defined in section 80B, clause (5), to mean the ''total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or u/s 280O''. Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or, in other words, forms part of the gross total income, the condition specified in the opening part of sub-section (1) of section 80M would be fulfilled and the provision enacted in that sub-section would be attracted." (p. 135)

Therefore, the Supreme Court held that the insertion of section 80AA was a clarificatory amendment of an existing law and even without the said provision the result would be the same by construing section 80M properly as has been done in Distributors (Baroda) (P.) Ltd.'' s case (supra). This decision, though not a decision under the Surtax Act, has great relevancy to understand the scope of the dividend income which went into the making of the total income of the assessee, which again is sought to be excluded for the purpose of the Surtax Act. In Commissioner of Income Tax Vs. Hindustan Gum and Chemicals Ltd., the Calcutta High Court also has taken a similar view, with which we respectfully agree. The Bench held thus:

"Under the First Schedule, in computing the chargeable profits of the previous year, the total income computed under the income tax Act for that year has to be adjusted and income by way of dividend shall be excluded. In computing the total income under the income tax Act, deduction under Chapter VI-A has to be allowed and it is the net dividend after such deduction that forms part of the total income as computed. In the gross total income, the dividend after allowing any deduction under the provisions of income tax Act excepting Chapter VI-A has to be included and from the net dividend included in the gross total income, deduction under Chapter VI-A is allowed for the purpose of arriving at the total income. Accordingly, the dividend included in the total income is liable to be excluded under the First Schedule. The Surtax Officer has to take into account the total income as computed under the provisions of the income tax Act for the purpose of adjustment under the Surtax Act. Therefore, whatever has not been included in the assessment cannot be excluded. In other words, only the amount which has been included can be excluded. Otherwise, although net dividend is included in the total income, the assessee gets adjustment of a higher amount being the amount of dividend included in the gross total income. What Dr. Pal says is that the total income as computed before allowing deduction u/s 80M shall be taken 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." (p. 406)

In Commissioner of Income Tax Vs. Andhra Bank Ltd., a Division Bench of the Andhra Pradesh High Court also has taken an identical view on an interpretation of the rule in question.

According to Shri Sarangan, the learned counsel for the assessee, the question has not been concluded directly by the decision of the Supreme Court in any manner and the learned counsel placed before us a few decisions taking a contrary view. A few of them are: (1) Commissioner of Income Tax, Tamil Nadu-IV, Madras Vs. Sundaram Industries (P) Ltd., ; wherein the Madras High Court held that the gross dividend is to be excluded under rule 1 of the Schedule while computing the chargeable profits. But, this is based on the decision of the Supreme Court in Cloth Traders (P.) Ltd.''s case (supra) which is no longer good law. The earlier view of the Calcutta High Court in Commissioner of Income Tax Vs. Jiyajeerao Cotton Mills Ltd., which again is based on the decision of the Supreme Court in Cloth Traders (P.) Ltd.''s case (supra). Commissioner of Income Tax Vs. United India Fire and General Insurance Co., where Madras High Court has simply followed its earlier decision based on Cloth Traders (P.) Ltd.''s case (supra). In view of the decision of the Supreme Court in Distributors (Baroda) (P.) Ltd.''s case (supra) the ratio of the Cloth Traders (P.) Ltd.''s case (supra) no longer survives for application and, consequently, the question referred to us is answered in the negative and against the assessee.