Gross dividend receipt and Chapter VI-A deductions under surtax rules were interpreted in favour of the assessee.

ITAT Chandigarh held that, for clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion applies to the gross dividend received, not merely the portion remaining after Chapter VI-A deductions in the income-tax computation, applying a taxpayer-favourable construction where the provision is reasonably capable of two meanings. It further held that rule 4 of the Second Schedule does not extend to Chapter VI-A deductions such as those under sections 80K and 80M, because those deductions are not amounts of income not includible in total income. The Revenue's appeals failed on both issues.

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Issues: (i) Whether, for the purpose of clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion is confined to dividend income actually included in the total income computed under the Income-tax Act, 1961, or extends to the gross dividend received; (ii) Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applies to deductions allowed under Chapter VI-A of the Income-tax Act, 1961 while computing the capital of the company.

Issue (i): Whether, for the purpose of clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the exclusion is confined to dividend income actually included in the total income computed under the Income-tax Act, 1961, or extends to the gross dividend received.

Analysis: The relevant surtax rule was read in the context of the scheme of the Act and its amendments, particularly the continued use of the expression relating to income by way of dividends. The Court treated the clause as referring to the whole receipt of dividend income from the specified company, not merely the portion that survived after deductions under Chapter VI-A in the income-tax computation. It also applied the settled principle that where a taxing provision is reasonably capable of two interpretations, the interpretation favourable to the subject should be preferred.

Conclusion: The exclusion under clause (viii) of rule 1 covers the gross dividend received by the assessee. The issue is decided in favour of the assessee.

Issue (ii): Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applies to deductions allowed under Chapter VI-A of the Income-tax Act, 1961 while computing the capital of the company.

Analysis: The expression referring to income, profits and gains not includible in total income was held to relate to items exempt from inclusion in total income, not to amounts already included in total income and later allowed as deductions under Chapter VI-A. Deductions under sections like 80K and 80M were therefore not treated as sums not includible in total income for the purpose of capital reduction under rule 4.

Conclusion: Rule 4 of the Second Schedule does not apply to Chapter VI-A deductions. The issue is decided in favour of the assessee.

Final Conclusion: The Revenue's appeals fail on both issues, and the assessee's treatment of dividend exclusion and capital computation under the surtax scheme stands upheld.

Ratio Decidendi: Where the surtax rules use the expression "income by way of dividends," it denotes the gross dividend receipt, and amounts allowed as deductions under Chapter VI-A of the Income-tax Act do not constitute income not includible in total income for the purpose of reducing capital under the Second Schedule.

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