Gross dividend deduction under surtax rules applies for dividend income, with later restrictive explanation treated as prospective only.

For computing chargeable profits under clause (viii) of Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion for dividend income from Indian companies was held to apply to the gross dividend amount and not merely the net amount after Section 80M deduction. The provision was read according to its plain language, which did not limit the exclusion to net income, and the later Explanation inserted by the Finance Act, 1981 was treated as prospective only, so it did not govern the relevant assessment year. The deduction was therefore available on the full dividend income.

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Issues: Whether, for computing chargeable profits under clause (viii) of Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the deduction in respect of dividend income from Indian companies is to be allowed on the gross amount of dividends or only on the net amount after deduction under Section 80M of the Income-tax Act, 1961.

Analysis: Section 2(5) of the Companies (Profits) Surtax Act, 1964 defines chargeable profits as total income computed under the Income-tax Act and adjusted in accordance with the First Schedule. Clause (viii) of Rule 1 permits exclusion of income by way of dividends from an Indian company. The Court held that the expression does not, by its language, confine the exclusion to net dividend income and that if Parliament intended such a limitation it would have said so expressly. The later Explanation inserted by Section 43 of the Finance Act, 1981, which restricts the exclusion to income computed under the Income-tax Act and reduced by Chapter VI-A deductions, was not given retrospective effect and therefore did not apply to assessment year 1968-69. The earlier deduction under Section 80M did not prevent deduction of the full dividend amount under clause (viii) for that year.

Conclusion: The deduction under clause (viii) of Rule 1 had to be allowed on the gross dividend income for the relevant assessment year, and the question was answered in favour of the assessee.

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