Net dividend and royalty income, not gross receipts, is excluded from chargeable profits under the surtax rules.

For exclusion from chargeable profits under rule 1(viii) and rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964, dividend and royalty income is to be taken at the net amount after allowable deductions, because only income forming part of total income is eligible for exclusion. The interpretation of "income by way of dividends" as meaning income computed under the Act, rather than gross receipts, was applied to reject the gross-income view. The Explanation to rule 1 and the CBDT circular were treated as confirming that the exclusion extends only to the amount actually included in total income.

---

---

Issues: Whether, for exclusion from chargeable profits under rule 1(viii) and rule 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964, dividend and royalty income are to be taken at the gross amount or the net amount after deductions.

Analysis: The opening words of rule 1 show that only income forming part of total income is to be excluded. The later Supreme Court interpretation of the expression "income by way of dividends" in section 80M of the Income-tax Act, 1961 established that the expression refers not merely to the category of income but also to its quantum, namely income computed in accordance with the Act after allowable deductions. In the light of that construction, the earlier view that gross dividends were to be excluded under the surtax rules could not be sustained. The Explanation inserted to rule 1 and the CBDT circular were also treated as supporting the legislative intention to exempt only the amount actually included in total income.

Conclusion: The exclusion under rule 1(viii) and rule 1(ix) is of the net dividend and royalty income, not the gross amount, and the revenue's contention was accepted on this issue.

---