Capital redemption reserve and net dividend deduction govern surtax capital base and chargeable profits computation.

Amounts standing to the credit of capital redemption reserve were held includible in the capital base, the point being treated as covered by an earlier decision involving the same assessee. For surtax computation under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, only the dividend actually included in the computed total income under the Income-tax Act is deductible, not the gross dividend received. The Explanation to the rule was treated as declaratory and consistent with that construction. The reference was thus disposed of with the first issue in favour of the assessee and the dividend issue in favour of the Revenue.

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Issues: (i) Whether amounts standing under capital redemption reserve are includible in computing the capital base. (ii) Whether, for computing chargeable profits under the Companies (Profits) Surtax Act, gross dividends or only net dividends are deductible under rule 1(viii) of the First Schedule.

Issue (i): Whether amounts standing under capital redemption reserve are includible in computing the capital base.

Analysis: The question was treated as covered by an earlier decision involving the same assessee for a prior year. No fresh reasoning was required on this reference.

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

Issue (ii): Whether, for computing chargeable profits under the Companies (Profits) Surtax Act, gross dividends or only net dividends are deductible under rule 1(viii) of the First Schedule.

Analysis: Rule 1(viii) requires exclusion from total income of dividend income that has gone into the computation of total income under the Income-tax Act. The relevant adjustment is therefore to the amount actually included in computed total income, not the entire gross dividend received. The Explanation inserted to the rule was treated as declaratory and consistent with this construction. On that interpretation, only the net dividend, after permissible deductions under the Income-tax Act, is excludible while computing chargeable profits.

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

Final Conclusion: The reference was disposed of with one question decided for the assessee and the other against it, and the Tribunal's view on gross dividend deduction was disapproved.

Ratio Decidendi: Under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, only the amount of dividend actually included in the computed total income under the Income-tax Act is to be excluded for surtax purposes, and not the gross dividend received.

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