Commissioner of Income Tax, Tamil Nadu, Central vs Express Newspaper Private Ltd.

Balasubrahmanyuan, J.—This reference arises under the Companies (Profits) Surtax Act, 1964. The point for consideration related to the

computation of chargeable profits under the First Schedule to that Act.

Under the Surtax Act, chargeable profits will have to be derived from e total income of the assessee-company as computed for Income Tax

assessment, but subject to certain adjustment. In the present case, the assessee is a private company by name Express Newspapers Private Ltd.,

Madras. Its total income for the assessment year 1972-73 for purpose of income tax assessment was Rs. 35,60,820. In the relevant previous

year, the assessee had derived dividend income of Rs. 2,47,315. For computing the assessee chargeable profits under the Surtax Act, the

assessee claimed that from the total income of Rs. 35,60,820 the dividend income of Rs. 2,47,315 must be deducted. The ITO did not do so. On

appeal however, the AAC granted the assessee claim for deduction, While, doing so, however, the Asst. Commissioner directed the ITO to apply

r. 2(i) (a) of the first Schedule to the Surtax Act. The net result of the AAC''s order was that while on the one hand, the dividend of Rs. 2,47,315

has to be deducted from the total income for arriving at the chargeable profits for surtax purpose, the proportionate Income Tax payable on the

dividend could not be excluded from the chargeable profits and the officer was asked to calculate the figure of the proportionate Income Tax on

dividends.

The assessee appealed to the Tribunal again the latter part of the direction issued by the AAC. The Tribunal accepted the plea of the assessee

that on a proper application of r. 2(i) (a) and on a proper calculation be found to be nil, therefore, it would not affect the chargeable profits arrived

at after deducting the dividend, In other words, according to the Tribunal, the practical application of r. 2(i) (a) to this case would not affect the

computation of chargeable profits in so far as the dedication of dividend was concerned, and the ""gross"" dividend, without deduction of any kind,

will have to be deducted from total income for arriving at the chargeable profits.

In this reference by the De; partner the order of the Tribunal is challenged on the following question of law :

Whether, on the facts and in the circumstances of the case, in applying the provision of rule 2(i) (a) of the First Schedule any tax on the gross

dividend of Rs. 2,47,315 has to be excluded :

We m, use confess that the order of the Tribunal makes for difficult reading. The rule in the First Schedule provided that while Income Tax payable

by the assessee on its total income will go in ""reduction "" of the total income to be taken into account for the proposes of competition of the

chargeable profits, from , the income tax which enters into the reconnecting as part of that ""reduction"", must be excluded the proportionate Income

Tax payable on the dividend income. The crucial words of r. 2(i) (a) are in the following terms :

... after excluding from such amount the amount of Income Tax if any, payable by the company in respect of any income referred to in.... clause

(viii) of rule 1. ..

The income referred to in clause (viii) of r. 1 is the dividend income, Rule 2(i) (a) thus speaks of the amount of Income Tax, if any, payable by

very clear. If no Income Tax is a payable on the dividend income, then the entire Income Tax liability will go to reduce the total income for arriving

at the chargeable profit, It is only in a case where some Income Tax is payable on the dividend into that the amount of such Income Tax will have

to be excluded from the tax which will go in reduction of e total income for arriving at the chargeable profits for surtax purposes.

The question in the present case, is therefore, simple enough. In practical terms and in order of minimise our figure work, we will have to find out

as to what was the tax treatment given to this dividend income of Rs. 2,47,315 in the Income Tax assessment order. The relevant portion of the

Income Tax assessment order has been extracted by the Tribunal. this extract shows that while the dividend income of Rs. 2,47,315 figures in the

Income Tax assessment under the head ""Other sources"", that amount is offset and more that absorbed by the allowance of interest in the sum of

Rs. . 11,44,635. It is common ground that the assessee liability for interest in this sum of Rs. 11,44,635 arises out of borrowings effected by the

assessee for investing in the very shares from which the dividend income of Rs. 2,47,315 was divide in the relevant year of account. According tot

he computation contained in the Income Tax assessment order, net result of the assessment of dividend income is not a positive figure of Rs.

2,47,315 or any lesser positive figure, but a loss of Rs. 8,97,320 after setting off the dividend income against interest. As the AAC pointed out,

the entire gross dividend income of Rs. 2,47,315 must be taken to have been more than absorbed by a negative income by way of net interest

computed at Rs. 11,44,635 under other sources.

The position, therefore, its undeniable that in the circumstance, of the assessee case, no part of the dividend income of Rs. 2,47,315 has borne

Income Tax or could have borne Income Tax in any amount. Rule 2(i) (a) of the First Schedule to the Surtax Act, as we earlier said only refers to

Income Tax, ""if any"", payable on the dividend income. It is true that in this case the dividend income has not borne tax only because of the interest

charges being of such about as to swallow the entire dividend income. Even so, the fact remains that no Income Tax is a payable on the dividend

income. It follows, therefore, that no adjustment can be made in terms of r. 2(i) (a) for arriving at the chargeable profits of the assessee in this case.

The conclusion of the Tribunal in their order was the no adjustment need be made under r. 2(i) (a) of the First Schedule having regard to the

facts of the present case. Our reasoning is fundamentally different, although it leads to the same conclusion. We have shown that on the facts and in

the circumstance of the present case, r. 2(i) (a) has no application at all for the simple reason that no tax is payable on the dividend income in this

case.

The results, however, is that the assessee succeeds in this reference, The Department will pay the assessee costs. Counsel, fee Rs. 500 (one

set).