Dividend exclusion and capital computation under surtax law depend on net income treatment and Chapter VI-A deductions.

Under the Companies (Profits) Surtax Act, 1964, dividend income excluded in computing chargeable profits under the First Schedule is the net dividend after permissible deductions under the Income-tax Act, not the gross receipt. The expression "income by way of dividends" is read as part of total income already computed under the Income-tax Act, so the exclusion applies only to dividend income remaining after sections 80K and 80M deductions. For capital computation under rule 4 of the Second Schedule, Chapter VI-A deductions do not convert includible income into income not includible in total income; they are deductions or reliefs and do not trigger reduction of capital.

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Issues: (i) whether dividend income to be excluded while computing chargeable profits under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964 is the gross dividend or the net dividend after deductions under the Income-tax Act, 1961; (ii) whether, for computing capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, deductions allowed under Chapter VI-A of the Income-tax Act, 1961 are to be treated as income not includible in total income.

Issue (i): whether dividend income to be excluded while computing chargeable profits under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964 is the gross dividend or the net dividend after deductions under the Income-tax Act, 1961.

Analysis: Chargeable profits under section 2(5) of the Companies (Profits) Surtax Act, 1964 are based on the total income computed under the Income-tax Act, 1961 and then adjusted under the First Schedule. The expression "income by way of dividends" in rule 1(viii) was read in the context of total income as computed under the Income-tax Act, meaning income after permissible deductions. The court held that the word "excluded" refers to something already forming part of total income, and the dividend component relevant for surtax computation is the net dividend income after deductions under sections 80K and 80M, not the gross receipt.

Conclusion: The question was answered in the negative. The exclusion under rule 1(viii) is of the net dividend income, and the Revenue succeeded on this issue.

Issue (ii): whether, for computing capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, deductions allowed under Chapter VI-A of the Income-tax Act, 1961 are to be treated as income not includible in total income.

Analysis: Rule 4 applies only where income is not includible in total income, which was distinguished from income that is includible but later deducted under Chapter VI-A. Deductions such as those under sections 80J and 80M do not convert includible income into income outside total income. Following the settled position approved by the Supreme Court, Chapter VI-A deductions do not trigger proportionate reduction of capital under rule 4 because they are allowances and reliefs, not income excluded from the total income in the Chapter III sense.

Conclusion: The question was answered in the affirmative. The assessee succeeded on this issue.

Final Conclusion: The reference was disposed of by holding that the dividend component relevant for surtax computation must be taken after income-tax deductions, while Chapter VI-A deductions do not reduce capital under rule 4 of the Second Schedule.

Ratio Decidendi: For surtax purposes, only that part of income which forms part of the total income computed under the Income-tax Act is capable of exclusion under the First Schedule, whereas Chapter VI-A deductions do not amount to income not includible in total income for the purpose of capital reduction under the Second Schedule.

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