Surtax dividend exclusion and bonus share capital adjustment were both denied under the prevailing legal position.

For surtax computation under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, only the portion of dividend income actually included in total income under section 80M of the Income-tax Act, 1961, can be excluded; the gross dividend is not excludible once the deduction operates only to the extent of inclusion in total income. Earlier contrary authority could not be followed after the Supreme Court decision disapproving that line of reasoning. On the capital-employed issue, pro rata increase for bonus shares issued during the year was also disallowed because the jurisdictional High Court precedent went against the assessee.

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Issues: (i) Whether, under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the whole of the gross dividend income or only the portion actually included in total income under section 80M of the Income-tax Act, 1961, was excludible while computing chargeable profits; (ii) Whether the assessee was entitled to increase capital employed on a pro rata basis in respect of bonus shares issued during the year.

Issue (i): Whether, under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the whole of the gross dividend income or only the portion actually included in total income under section 80M of the Income-tax Act, 1961, was excludible while computing chargeable profits.

Analysis: The relevant scheme of the First Schedule contemplates exclusion from total income only of items that have already entered the computation of total income. Since section 80M allowed deduction only to the extent of 60% and only 40% of the dividend formed part of total income, the exclusion under rule 1(viii) could extend only to that included portion. The earlier view supporting exclusion of the gross dividend could not be followed after the Supreme Court decision disapproving the underlying line of authority, and the jurisdictional High Court decision relied on by the assessee was held not to govern the issue in the changed legal position.

Conclusion: The claim for exclusion of the entire gross dividend was rejected and only the dividend actually included in total income was held excludible, against the assessee.

Issue (ii): Whether the assessee was entitled to increase capital employed on a pro rata basis in respect of bonus shares issued during the year.

Analysis: This ground was covered by binding precedent of the jurisdictional High Court, which held the issue against the assessee.

Conclusion: The claim for pro rata increase in capital employed on account of bonus shares was rejected, against the assessee.

Final Conclusion: The common question concerning dividend exclusion under the surtax computation was decided against the assessee, and the additional ground regarding bonus shares was also rejected, leaving no relief in any of the appeals.

Ratio Decidendi: For surtax computation, only the portion of dividend income actually included in total income can be excluded under the First Schedule, and earlier contrary interpretations cannot be relied on once the Supreme Court has overruled the foundational precedent.

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