Dividend exclusion for surtax applies only to income as finally computed after Chapter VI-A deductions, not gross dividend.

For surtax computation under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, dividend income from an Indian company is excluded only to the extent it is finally included in assessed total income under the Income-tax Act after Chapter VI-A deductions, not on a gross basis. The construction treats section 80M deduction as part of the income computation and rejects reliance on the earlier Cloth Traders view after Distributors (Baroda). Rule 4 of the Second Schedule cannot be used to proportionately reduce the capital apportionable to the section 80M deduction, as that point was already settled against such adjustment.

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Issues: (i) Whether, for purposes of rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, dividend income from an Indian company is to be excluded on a gross basis or only to the extent of the dividend income as computed under the Income-tax Act, 1961 after deduction under Chapter VI-A. (ii) Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 can be applied to proportionately reduce the capital apportionable to dividend deduction under section 80M of the Income-tax Act, 1961.

Issue (i): Whether, for purposes of rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, dividend income from an Indian company is to be excluded on a gross basis or only to the extent of the dividend income as computed under the Income-tax Act, 1961 after deduction under Chapter VI-A.

Analysis: The expression "income by way of dividends" in rule 1(viii) was construed in the context of the total income as finally computed under the Income-tax Act, 1961. The deduction under section 80M is part of the computation of total income, and the surtax computation must proceed from the assessed total income after all permissible deductions. The court held that the earlier view based on Cloth Traders no longer survived after Distributors (Baroda), and that only the dividend income actually included in total income after Chapter VI-A deductions could be excluded for surtax purposes. The scheme of rule 2 of the First Schedule and the return form under the Surtax Rules also supported this construction.

Conclusion: The exclusion under rule 1(viii) is confined to dividend income as finally computed under the Income-tax Act, 1961 after Chapter VI-A deductions. The answer to the first question is in the negative and in favour of the Revenue.

Issue (ii): Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 can be applied to proportionately reduce the capital apportionable to dividend deduction under section 80M of the Income-tax Act, 1961.

Analysis: The issue was governed by the earlier decision of the same court, which had already held that rule 4 of the Second Schedule cannot be invoked to reduce capital proportionately in relation to deduction under Chapter VI-A. The court followed that binding view and treated the point as concluded.

Conclusion: Rule 4 of the Second Schedule cannot be applied for proportionately reducing the capital apportionable to the section 80M deduction. The answer to the second question is in the negative and in favour of the assessee.

Final Conclusion: The reference was answered by holding that, for surtax computation, dividend income is excluded only as finally computed under the Income-tax Act after Chapter VI-A deductions, while the capital-reduction contention under the Second Schedule failed.

Ratio Decidendi: For surtax computation, the amount of dividend to be excluded from total income is only the dividend income as finally included in assessed total income under the Income-tax Act after Chapter VI-A deductions, and not the gross dividend or a pre-deduction figure.

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