Law:

Section:

Rule 2(i)(a ) of the first schedule to the companies (profits) Surtax Act, 1964-Chargeable profits-Computation of-Income from dividend included in assessee's total income was a loss due to allowance of interest on capital borrowed to earn such dividends, with the result that no Income-tax was payable on dividend income-Whether, while computing assessee's chargeable profits, gross dividend should be deducted under rule 1(viii), but no adjustment towards proportionate Income-tax on such income is required under rule 2(1)(a)-Held, yes Facts The total income of the assessee-company for the assessment year 1972-73 for purposes of Income-tax was a positive figure. In the relevant previous year, the assessee had, inter alia, derived certain dividend income which was less than the interest paid and allowed on capital borrowed for earning this dividend income. The assessee claimed that while computing its chargeable profit for surtax purposes, its entire (gross) dividend income should be deducted from its total income as per rule 1(viii) of the First Schedule to the Act. The ITO negatived the assessee's claim. On appeal, the AAC accepted the assessee's claim in respect of deduction of dividend income but held that while reducing the balance of total income by the amount of Income-tax in terms of rule 2(i), the proportionate Income-tax payable on the dividend income would be excluded from the amount of Income-tax in view of rule 2(i)( a). On second appeal, the Tribunal held that on a proper application of rule 2(i)( a) and on a proper calculation of the figures, the proportionate income-tax payable on the dividend income would be found to be nil and that, therefore, it would not affect the chargeable profits arrived at after deducting the dividend. It, therefore, allowed the assessee's claim in its entirety. On reference: Held Under rule 2( i)(a ) if no income-tax is payable on the dividend income, then the entire income-tax liability will go to reduce the total income for arriving at the chargeable profits. It is only in a case where some income-tax is payable on the dividend income, that the amount of such income-tax will have to be excluded from the tax which will go…

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