Gross dividend exclusion for surtax purposes applies in full, without reduction under Income-tax Act deduction provisions.

For surtax computation under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion for "income by way of dividends" was held to apply to the gross dividend received. The adjustment under the Surtax Act was treated as independent of the deduction machinery under the Income-tax Act, so sections 57 and 80M could not be imported to limit the dividend exclusion unless the surtax provision expressly said so. The result was that dividend income was to be fully excluded from chargeable profits, rather than only the net amount after Income-tax Act deductions.

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Issues: Whether, for computing chargeable profits under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the entire dividend received by a company is to be excluded, or only the dividend remaining after reduction under sections 57 and 80M of the Income-tax Act, 1961.

Analysis: The computation of chargeable profits under the Surtax Act is linked to total income computed under the Income-tax Act, but the Surtax Act then requires an independent adjustment under the First Schedule. Rule 1(viii) excludes "income by way of dividends" and contains no words limiting the exclusion to dividend income after allowance of deductions under section 57 or section 80M. The Court held that the ordinary breadth of the expression could not be cut down by importing the deduction machinery of the Income-tax Act once total income had been determined for income-tax purposes.

Conclusion: The assessee was entitled to exclusion of the full dividend amount under rule 1(viii), and not merely the reduced net dividend; the question was answered in favour of the assessee.

Final Conclusion: The dividend exclusion for surtax purposes is to be computed on the gross dividend received, unaffected by the deductions allowed under sections 57 and 80M of the Income-tax Act, 1961.

Ratio Decidendi: Where a surtax charging provision adopts total income computed under the Income-tax Act but the adjustment clause uses unqualified words such as "income by way of dividends", the exclusion must be given its full natural meaning and cannot be restricted by deductions available under the Income-tax Act unless the surtax provision expressly so provides.

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