Gross dividend exclusion and Chapter VI-A deductions in surtax computation were applied in favour of the assessee.

For surtax computation under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, the dividend exclusion operated on the gross dividend, not the net dividend, because the statutory deduction applies to the dividend amount as a whole. For rule 4 of the Second Schedule, deductions under sections 80K and 80M of the Income-tax Act did not convert those amounts into sums not includible in total income, as Chapter VI-A deductions do not alter the character of the sums for capital-employed computation. Both issues were answered for the assessee.

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Issues: (i) Whether, for computing income-tax assessment under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the gross dividend or the net dividend was to be excluded from the assessee's total income; (ii) Whether deductions allowed under sections 80K and 80M of the Income-tax Act, 1961, could be treated as sums not includible in total income for the purpose of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, while computing capital employed.

Issue (i): Whether, for computing income-tax assessment under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the gross dividend or the net dividend was to be excluded from the assessee's total income.

Analysis: The question was governed by the interpretation already accepted in the connected reference decided the same day, and the exclusion contemplated by the rule was held to operate on the dividend amount as a whole rather than after deducting income-tax effects from it.

Conclusion: The gross dividend was to be excluded, not the net dividend, and the issue was decided in favour of the assessee.

Issue (ii): Whether deductions allowed under sections 80K and 80M of the Income-tax Act, 1961, could be treated as sums not includible in total income for the purpose of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, while computing capital employed.

Analysis: The issue was covered by the view taken in earlier High Court decisions that deductions under Chapter VI-A do not alter the character of the sums for the purpose of the surtax computation under rule 4 of the Second Schedule.

Conclusion: Such deductions could not be treated as sums not includible in total income, and the issue was answered in favour of the assessee.

Final Conclusion: Both referred questions were answered for the assessee, and the reference stood concluded without costs.

Ratio Decidendi: For surtax computation, dividend exclusion and capital-employed calculations must be made according to the specific statutory formula, and Chapter VI-A deductions do not by themselves become sums not includible in total income for rule 4 purposes.

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