1996 (8) TMI 26 - HC - Income Tax

High Court rules dividends not fully excluded in chargeable profits calculation under Income Tax Act, sets precedent.

Commissioner Of Income-Tax Versus Midland Rubber And Produce Co. Ltd.

Commissioner Of Income-Tax Versus Midland Rubber And Produce Co. Ltd. - [1998] 231 ITR 958 Issues:- Exclusion of dividend amount from reckoning in computing chargeable profits for the assessment years 1977-78 and 1978-79.Analysis:The primary issue in this case pertains to the exclusion of dividend income from the computation of chargeable profits for the assessment years 1977-78 and 1978-79. The dispute revolves around whether the assessee, a limited company, is entitled to have the entirety of the dividend excluded from reckoning for the purpose of computing its chargeable profits. The Income Tax Officer (ITO) initially allowed a deduction of 60% of the dividend income under section 80M of the Income Tax Act. However, the Department, in proceedings under the Companies (Profits) Surtax Act, 1964, argued that dividends in their entirety should be excluded while computing chargeable profits. The assessee contended that since the Surtax Act provided for entire deduction of dividends, there was no need to resort to the provisions of section 80M of the Income Tax Act. The matter was taken to the Commissioner of Income Tax (Appeals) [CIT(A)], who agreed with the ITO's approach and allowed only 40% of the income for exclusion under the Surtax Act. The Tribunal, relying on a previous decision, granted exclusion of the entire dividend income for computing chargeable profits, leading to the case being brought before the High Court.In a significant precedent, the High Court referred to a previous judgment in CIT vs. Kil Kotagiri Tea & Coffee Estates Ltd. and concluded that the entire dividend income cannot be excluded while computing chargeable profits. The Court emphasized that the total income computed under the Income Tax Act must be adjusted, and income by way of dividend should be excluded after allowing deductions under Chapter VI-A. It was clarified that only the amount included in the assessment can be excluded, and the Surtax Officer must consider the total income as computed under the Income Tax Act for adjustment under the Surtax Act. Therefore, the Court held that the entire dividend income should not be excluded from the income assessed under the relevant provision of the Surtax Act. Consequently, the Court answered the question in the negative, in favor of the Revenue and against the assessee, with directions for the Tribunal to adjust the necessary details accordingly. This decision provides clarity on the treatment of dividend income in computing chargeable profits and sets a precedent for similar cases in the future.