Net dividend only, not gross dividend, may be excluded while computing chargeable profits under the Surtax Act.

For computing chargeable profits under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, dividend income is excluded only to the extent it was actually included in the assessee's total income under the Income-tax Act. The deduction scheme under section 80M, read with section 80AA, links relief to dividend income computed and brought into total income after statutory deductions, not to the gross dividend amount. In view of Distributors (Baroda), the earlier gross-dividend approach based on Cloth Traders no longer applies. The exclusion under rule 1(viii) is therefore confined to net dividend included in total income.

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Issues: Whether, for computing chargeable profits under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, dividend income is to be excluded in its gross form or only to the extent of the net dividend included in the assessee's total income under the Income-tax Act.

Analysis: Chargeable profits under the Surtax Act are computed with reference to the total income as assessed under the Income-tax Act and adjusted under the First Schedule. The dividend deduction scheme under section 80M of the Income-tax Act operates on income by way of dividends as computed in accordance with the Act, and section 80AA clarifies that the deduction is to be linked to the dividend income actually included in the computation of total income, not the gross amount. On that basis, the dividend component relevant for exclusion under the Surtax Act is the amount that entered the total income after Income-tax Act deductions, namely the net dividend. The contrary view based on earlier authority resting on Cloth Traders no longer survived after Distributors (Baroda).

Conclusion: The exclusion under rule 1(viii) is limited to the net dividend included in the total income, not the gross dividend, and the question was answered against the assessee.

Ratio Decidendi: For computing chargeable profits under the Surtax Act, only the dividend income actually forming part of the total income under the Income-tax Act can be excluded, and the exclusion cannot exceed the amount already included after statutory deductions.

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