Surtax computation under the First Schedule turns on dividend actually included in total income, not gross dividend received.

Under the Companies (Profits) Surtax Act, deductions under Chapter VI-A of the Income-tax Act do not justify a proportionate reduction of capital base under rule 4 of the Second Schedule, and excess provision for taxation is includible in capital base for surtax computation. For chargeable profits under rule 1(viii) of the First Schedule, the exclusion applies only to the dividend actually included in total income, namely the amount remaining after deductions under sections 80K and 80M, not the gross dividend. The stated position favours the assessee on the first two issues and the Revenue on the dividend-computation issue.

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Issues: (i) Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 could be invoked to reduce the capital base proportionately because the assessee had obtained deductions under Chapter VI-A of the Income-tax Act, 1961; (ii) whether excess provision for taxation was includible in the capital base for surtax assessment; (iii) whether, in computing chargeable profits under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the gross dividend received had to be excluded from total income or only the dividend remaining after deductions under sections 80K and 80M of the Income-tax Act, 1961.

Issue (i): Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 could be invoked to reduce the capital base proportionately because the assessee had obtained deductions under Chapter VI-A of the Income-tax Act, 1961.

Analysis: The issue was concluded by reference to binding Supreme Court authority holding that the deductions allowed under Chapter VI-A did not justify a proportionate reduction of the capital base under rule 4 of the Second Schedule. The statutory scheme did not support the Revenue's attempt to diminish the capital base on that footing.

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

Issue (ii): Whether excess provision for taxation was includible in the capital base for surtax assessment.

Analysis: The issue was also governed by binding Supreme Court precedent, which treated excess provision for taxation as forming part of the capital base for the purpose of surtax computation. The position urged by the Revenue was therefore not accepted.

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

Issue (iii): Whether, in computing chargeable profits under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the gross dividend received had to be excluded from total income or only the dividend remaining after deductions under sections 80K and 80M of the Income-tax Act, 1961.

Analysis: The relevant expression in rule 1(viii) was read in the context of the scheme of the Surtax Act, under which chargeable profits are derived from total income computed under the Income-tax Act and then adjusted in accordance with the First Schedule. The Court held that the exclusion under rule 1(viii) extends only to the amount of dividend that actually formed part of the total income, namely the dividend after the Income-tax Act deductions under sections 80K and 80M. The earlier decision dealing with another clause in rule 1 was treated as applicable in principle to the present clause.

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

Final Conclusion: The reference succeeded for the assessee on the first two questions but failed on the dividend-computation issue, leaving the Revenue's view to prevail on that point.

Ratio Decidendi: For surtax purposes, exclusions under the First Schedule operate only on the amount of income actually included in total income under the Income-tax Act, and deductions under Chapter VI-A do not, by themselves, warrant any further notional adjustment to the capital base or the excluded amount.

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