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Rule 1(viii) of the first schedule to the companies (profits) Surtax Act, 1964 Chargeable profits-Computation of ITO excluded from chargeable profits net dividend income for computing surtax liability-ACC and tribunal accepted assessee's claim for excluding gross dividend income-Whether tribunal was right in law in such exclusion-Held, yes Facts For the period relevant to the assessment year 1970-71, the assessee-company was liable to surtax. The total income computed under the Income-tax Act was Rs. 17,64,730, which included Rs. 89,894 towards dividend as calculated below: Rupees 1. Dividend income gross 2,25,734 Less Rupees a.deduction under section 80L 1,000 b.deduction under section 80M 1,34,840 1,35,840 2. Net dividend 89,894 While the assessee claimed deduction of the entire gross dividend income under rule 1(viii) of the First Schedule, the ITO excluded only Rs. 89,894 representing dividends. In appeals, the AAC and Tribunal restored the entire deduction of Rs. 2,25,734. On reference by the Revenue: Held 1. Rule 1(viii) of the First Schedule has to be interpreted so as to include not only the quantum of dividend only but also the category of dividend. The words "income by way of dividend" in that rule refer to gross income shown in the assessee's books and not the actual net income. 2. The Tribunal was, therefore, justified in holding that the gross dividend was excludible from the total income computed for arriving at the chargeable profits for purposes of surtax. Case review Mohan Meakin Breweries Ltd. v. CIT [1979] 2 Taxman 160 (HP) and Cloth Traders (P.) Ltd. v. AMI. CIT [1979] 1 Taxman 335 (SC) followed. Cases referred to Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 (SC) and Mohan Meakin Breweries Ltd. v. CIT [1979] 118 ITR 300(HP). Judgment B.S. Dhillon, J.-The facts giving rise to this reference are that the assessee-company derives income from the grinding of wheat. For the previous year relevant to the assessment year 1970-71, it had "chargeable profits" liable to surtax under the Companies (Profits) Surtax Act, 1964 (hereinafter called "the Act"). The total income of the company under the Income-tax Act was determined at Rs.…

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