Surtax computation treats Chapter VI-A deductions differently from exempt income, and dividend deductions apply to gross dividends.

For surtax computation, Chapter VI-A deductions under the Income-tax Act are not treated as income not includible in total income for rule 4 of the Second Schedule, because such amounts are first included in total income and relief is granted later; rule 4 therefore applies only to income excluded from the computation itself, such as Chapter III exemptions. On chargeable profits, rule 1(viii) of the First Schedule was construed to refer to dividends as a gross category, so the deduction was to be computed on gross dividends rather than net dividends. The reference was answered wholly in favour of the assessee.

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Issues: (i) Whether deductions allowed under Chapter VI-A of the Income-tax Act, 1961 could be treated as income not includible in total income so as to attract rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 while computing capital base; (ii) Whether rule 4 of the Second Schedule applied only to income wholly exempt under Chapter III and not to deductions under Chapter VI-A; (iii) Whether, for computing chargeable profits, the deduction under rule 1(viii) of the First Schedule had to be made with reference to gross dividends or net dividends.

Issue (i): Whether deductions allowed under Chapter VI-A of the Income-tax Act, 1961 could be treated as income not includible in total income so as to attract rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 while computing capital base.

Analysis: The computation of capital base under rule 4 depends on whether the relevant part of the company's income, profits and gains is truly not includible in total income. Amounts allowed as deductions under Chapter VI-A are first included in the total income computation and relief is then granted at the stage of that chapter. They are not in the nature of income excluded ab initio from total income. The applicable principle was that rule 4 operates only where income is not includible at all in total income, not where a deduction is later allowed from income already included.

Conclusion: The issue was answered in the affirmative and against the Revenue.

Issue (ii): Whether rule 4 of the Second Schedule applied only to income wholly exempt under Chapter III and not to deductions under Chapter VI-A.

Analysis: The same statutory scheme showed that the expression relevant to rule 4 covers only income not includible in total income in the strict sense. The income subject to Chapter VI-A deduction remains part of total income before the deduction is worked out, whereas Chapter III exemptions stand on a different footing because such income is excluded from the computation itself. On that distinction, rule 4 had no application to Chapter VI-A deductions.

Conclusion: The issue was answered in the affirmative and against the Revenue.

Issue (iii): Whether, for computing chargeable profits, the deduction under rule 1(viii) of the First Schedule had to be made with reference to gross dividends or net dividends.

Analysis: The expression used in rule 1(viii) was construed in the same manner as the corresponding language considered in the dividend-deduction cases under the Income-tax Act, 1961. The governing principle was that the reference is to the category of income by way of dividends and not to the reduced net amount after deductions. The later retrospective amendment to section 80M of the Income-tax Act, 1961 did not govern the surtax assessments for the years in question, and for those years the deduction had to be computed on the gross dividend figure.

Conclusion: The issue was answered in the affirmative and against the Revenue.

Final Conclusion: The reference was answered wholly in favour of the assessee, and the Revenue's challenge to the Tribunal's view failed on all the questions referred.

Ratio Decidendi: For surtax computation, income that is first included in total income and then deducted under Chapter VI-A is not income not includible in total income for the purpose of rule 4, and a statutory reference to income by way of dividends denotes the gross dividend category unless the relevant provision expressly requires otherwise.

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