Gross dividend exclusion under surtax rules applies to dividend income in full, not only the net amount assessed.

For Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion for income by way of dividends was interpreted to apply to the gross dividend received, not merely the net dividend forming part of assessed total income. The reasoning drew support from the meaning of chargeable profits under section 2(5), the treatment of dividends under section 80M and section 99(1)(iv), and the scheme of sections 80A and 80B, which indicate that deductions operate from gross total income. The broader reading was also reinforced by the absence of limiting language in Rule 1(viii) comparable to Rule 1(vii).

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Issues: Whether, for the purpose of Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion in respect of income by way of dividends is confined to the net dividend included in the assessed total income or extends to the entire gross dividend received by the assessee.

Analysis: The definition of chargeable profits under section 2(5) requires the total income computed under the Income-tax Act, 1961 to be adjusted in accordance with the First Schedule. The expression "income by way of dividends" in Rule 1(viii) was read in light of the corresponding language in section 80M and the judicial understanding of section 99(1)(iv), where dividend was treated as gross dividend and not merely the amount remaining after deductions. The scheme of sections 80A and 80B also showed that deductions operate from gross total income, supporting the view that dividend income is to be considered in its gross form for the relevant adjustment. The absence of any limiting language in Rule 1(viii), unlike Rule 1(vii), further supported the broader construction.

Conclusion: The exclusion under Rule 1(viii) applies to the gross dividend of Rs. 2,25,734 and not merely to the net dividend of Rs. 89,894; the assessee's contention succeeds.

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