Gross dividend exclusion for surtax computation applies to dividend income as such, not merely the net taxable amount.

For computing chargeable profits under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the expression "income by way of dividends" refers to dividend income as a category and not merely the net amount left after applying the section 80M exemption under the Income-tax Act, 1961. The relevant exclusion is therefore the gross dividend income, because the surtax computation scheme contemplates deduction of dividend income in the form in which it is received, rather than only the portion that entered taxable total income after income-tax adjustments.

---

---

Issues: Whether, for computing chargeable profits under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion applies to the gross dividend received by the assessee or only to the net dividend that actually entered the total income after the exemption under section 80M of the Income-tax Act, 1961.

Analysis: The expression "income by way of dividends" was construed in the settled line of authority to refer to the category of dividend income and not to the reduced amount left after applying the exemption under section 80M. Since the total income for surtax purposes was to be adjusted by excluding dividend income in the manner contemplated by the First Schedule, the relevant amount was the dividend as such and not merely the portion that formed part of taxable total income after income-tax computation. The Court followed the view that the legislative reference is to the gross amount of dividend income.

Conclusion: The gross dividend was required to be excluded, and not merely the net dividend that actually formed part of the total income.

Final Conclusion: The reference was answered in favour of the assessee, affirming that dividend income for surtax computation is to be excluded on a gross basis.

Ratio Decidendi: Where a surtax provision directs exclusion of "income by way of dividends," the expression denotes the gross dividend income and not the amount remaining taxable after a separate exemption provision is applied under the Income-tax Act.

---