Gross dividend treatment under surtax rules prevails; section 80AA does not control earlier chargeable profits computation.

For computation of chargeable profits under the Companies (Profits) Surtax Act, 1964, the expression "income by way of dividends" in rule 1(viii) of the First Schedule was treated as referring to gross dividend rather than net dividend. Section 80AA of the Income-tax Act, 1961, was described as a clarification for deduction under section 80M and not as a definition controlling surtax computation. The later Explanation inserted in rule 1 of the First Schedule by the Finance Act, 1981 was made effective only from 1-4-1981, indicating that the retrospective amendment to section 80AA did not govern earlier surtax years.

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Issues: Whether, for computation of chargeable profits under the Companies (Profits) Surtax Act, 1964, the expression "income by way of dividends" in rule 1(viii) of the First Schedule required exclusion only of the net dividend on the basis of section 80AA of the Income-tax Act, 1961, or the gross dividend.

Analysis: The Tribunal noted that prior judicial interpretation of rule 1(viii) treated "income by way of dividends" as referring to the gross dividend received, not the net amount after expenses. It further held that section 80AA of the Income-tax Act, 1961, was enacted to clarify the computation of deduction under section 80M and could not be read as a definition provision governing the Surtax Act. The Tribunal relied on the fact that the specific Explanation inserted in rule 1 of the First Schedule to the Surtax Act by the Finance Act, 1981 was made operative only prospectively from 1-4-1981, which showed that the earlier retrospective amendment to section 80AA did not control surtax computation for the years in question.

Conclusion: The gross dividend was required to be excluded in computing chargeable profits under rule 1(viii), and the assessee succeeded on this issue.

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