1983 (1) TMI 44 - HC - Income Tax

Court allows full deduction of dividend income for assessee, rejecting net income approach. Precedents support non-retrospective effect.

The court ruled in favor of the assessee, holding that the entire amount of dividend income should be deductible for computing chargeable profits for the ... Chargeable Profits, Surtax Issues:Interpretation of the expression 'income by way of dividends' in clause (viii) of rule I of the First Schedule to section 2(5) of the Companies (Profits) Surtax Act, 1964.Analysis:The case involved a reference by the Income-tax Appellate Tribunal regarding the deduction of dividend income for the assessment year 1968-69 under the Companies (Profits) Surtax Act, 1964. The question was whether the entire amount of dividend of Rs. 59,944 or only Rs. 23,976 should be deductible from the total income in computing the chargeable profits. The Tribunal allowed the deduction of the entire amount, contrary to the Income Tax Officer's decision to deduct only 60% of the gross dividend income. The key issue revolved around the interpretation of the term 'income by way of dividends' in clause (viii) of rule I of the First Schedule.The definition of 'chargeable profits' under section 2(5) of the Companies (Profits) Surtax Act, 1964, refers to the total income of the assessee computed under the Income Tax Act and adjusted as per the First Schedule. Clause (viii) of rule I of the First Schedule deals with the exclusion of income by way of dividends from Indian companies. The Department argued that 'income by way of dividends' should be interpreted as net income and not gross income, contending that the amount already deducted under section 80M of the Income Tax Act cannot be deducted again for computing chargeable profits. However, the court disagreed with this interpretation, stating that there was no clear legislative intent to limit the deduction to net income only.The court referenced decisions from Punjab & Haryana and Himachal Pradesh High Courts, along with a Supreme Court ruling, to support the view that 'income by way of dividends' in clause (viii) includes gross income. The court highlighted that subsequent amendments introduced by the Finance Act, 1980 and Finance Act, 1981, clarified the treatment of income for future assessment years but were not retrospective. Therefore, for the assessment year 1968-69, the deduction under clause (viii) should be based on gross income as the retrospective effect of the amendments did not apply.In conclusion, the court ruled in favor of the assessee, holding that the entire amount of dividend income should be deductible for computing chargeable profits for the assessment year 1968-69. The court's decision was based on the interpretation of the term 'income by way of dividends' and the non-retrospective nature of the relevant amendments. The assessee was awarded costs for the reference, and the judgment clarified the application of the law in this context.