Law:

Section:

Rule 1(viii) of the first schedule to the companies (profits) surtax act, 1964-Chargeable profits-Computation of-Whether, for purposes of computing chargeable profits of assessee-Company, for assessment years preceding assessment year 1981-82, gross dividend received by it from Indian companies and not net dividend income, after allowing deduction, under section 80m, was deductible from total income-Held, yes Words and phrases-'Income by way of dividends' occurring in rule 1(viii) of the first schedule to the companies (profits) surtax act, 1964 Facts For the assessment year 1968-69, the assessee-company had received certain dividend income from Indian companies. In computing its chargeable profits for purposes of surtax, the ITO allowed deduction of only the net dividend on the ground that 60 per cent of the gross dividend income had already been deducted under section 80M of the Income-tax Act while computing the assessee's total income. On second appeal, the Tribunal, however, held that the entire amount of dividend was deductible from the total income in computing the chargeable profits as provided under clause (viii) of rule 1 of the First Schedule. On reference: Held There is no reason for limiting the expression "income by way of dividends" to net income by way of dividends. If the Legislature had intended that only net income should be deducted under clause (viii ), it would have said so clearly. Hence, the expression 'income by way of dividends' in clause (viii ) refers to gross income. By the Finance Act, 1980, the Parliament has introduced section 80AA to the Income-tax Act, 1961, with retrospective effect from 1-4-1968 to get over the ruling of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979]118 ITR 243, wherein it was held that income by way of dividends in clause (viii) refers to gross income and by section 43 of the Finance Act, 1981, an Explanation has been added to rule 1. The Explanation, however, has not been given any retrospective effect and so it will have application only for the assessment year 1981-82 and subsequent years. After the coming into force of the Explanation, no doubt, the deduction under rule…

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