Dividend income absorbed by interest: no income-tax exclusion needed in computing chargeable profits under surtax rules.

Rule 2(i)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964 requires exclusion of income-tax only where tax is actually payable by the company on dividend income covered by rule 1(viii). If the dividend is wholly absorbed by interest attributable to the same shares, the dividend does not bear tax and no adjustment for income-tax is called for in computing chargeable profits. On the facts stated, no income-tax was payable on the gross dividend income, so nothing was required to be excluded from the tax component used in the computation, and the assessee succeeded.

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Issues: Whether, in computing chargeable profits under rule 2(i)(a) of the First Schedule to the Companies (Profits) Surtax Act, 1964, any income-tax on the gross dividend income had to be excluded where the dividend was fully absorbed by interest and no tax was payable on that income.

Analysis: Rule 2(i)(a) requires exclusion only of the amount of income-tax, if any, payable by the company in respect of dividend income covered by clause (viii) of rule 1. The statutory adjustment comes into play only when some income-tax is actually payable on the dividend income. On the facts found, the dividend was wholly absorbed by interest attributable to the very shares yielding the dividend, so the dividend income did not bear and could not have borne any tax. As no income-tax was payable on that dividend income, there was no amount to exclude from the tax component used in the computation of chargeable profits.

Conclusion: No tax on the gross dividend income was required to be excluded under rule 2(i)(a), and the assessee succeeded.

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