Surtax computation turns on net dividend deduction and no proportional capital reduction for Chapter VI-A relief.

In surtax computation, the dividend deductible from total income is the net dividend after section 80M relief, not the gross dividend, and this approach was applied against the assessee on that issue. On capital computation under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, capital is not to be reduced proportionately merely because relief is allowed under Chapter VI-A of the Income-tax Act, 1961, and this issue was decided in favour of the assessee. The reference was thus disposed of with mixed answers on the two surtax questions.

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Issues: (i) Whether, for surtax assessment, gross dividend or net dividend was to be deducted from total income while computing chargeable profits; (ii) whether capital computed under the surtax law was required to be reduced proportionately by the relief allowed under Chapter VI-A of the Income-tax Act, 1961, in terms of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether, for surtax assessment, gross dividend or net dividend was to be deducted from total income while computing chargeable profits.

Analysis: The Court applied the principle that, in computing chargeable profits, the dividend figure relevant for deduction is the amount actually retained after the tax relief under section 80M of the Income-tax Act, 1961. It followed the view that the income available for surtax purposes is not the gross dividend but the net dividend, and held that the principle earlier accepted for income-tax computation could properly be extended to the surtax context.

Conclusion: This issue was answered against the assessee and in favour of the Revenue.

Issue (ii): Whether capital computed under the surtax law was required to be reduced proportionately by the relief allowed under Chapter VI-A of the Income-tax Act, 1961, in terms of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The Court accepted the line of authority holding that capital under the surtax computation scheme is not to be reduced in proportion to relief granted under Chapter VI-A. It relied on the preponderance of judicial opinion and the view previously adopted in analogous cases, concluding that rule 4 did not require such proportional reduction.

Conclusion: This issue was answered in favour of the assessee.

Final Conclusion: The reference was disposed of with one issue answered for the Revenue and the other for the assessee, leaving the surtax computation to be determined accordingly.

Ratio Decidendi: In computing chargeable profits under the Companies (Profits) Surtax Act, the relevant dividend deduction is the net dividend after section 80M relief, while capital under rule 4 of the Second Schedule is not to be proportionately reduced merely because relief is allowed under Chapter VI-A of the Income-tax Act, 1961.

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