Gross dividend income governs surtax exclusion, and the related capital adjustment cannot be based on a net-dividend approach.

For exclusion under clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, income by way of dividends was construed as gross dividend income, not merely the net amount included in total income, so the exclusion applied on the gross basis. On the connected capital computation under rule 4 of the Second Schedule, the corresponding reduction made on account of the dividend amount excluded from chargeable profits was not sustained on a contrary net-dividend approach, and the prior adjustment was left undisturbed in favour of the assessee.

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Issues: (i) Whether, for exclusion under clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the amount to be excluded is the gross dividend received or only the dividend income included in the total income; (ii) Whether proportionate capital was correctly reduced under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 on account of the dividend amount excluded from chargeable profits.

Issue (i): Whether, for exclusion under clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the amount to be excluded is the gross dividend received or only the dividend income included in the total income.

Analysis: The exclusion provision speaks of income by way of dividends, and the computation was considered in light of the earlier decision in the assessee's own case and the later support from the Kerala High Court decision. The construction accepted was that the expression refers to gross dividend income and not the net amount alone.

Conclusion: The issue was decided against the Revenue and in favour of the assessee; gross dividend income was to be excluded.

Issue (ii): Whether proportionate capital was correctly reduced under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 on account of the dividend amount excluded from chargeable profits.

Analysis: The second ground was governed by the same statutory setting and the prior decision in the assessee's own case, as reinforced by the authorities cited by the assessee. On that basis, the reduction made by the Surtax Officer was not sustained.

Conclusion: The issue was decided against the Revenue and in favour of the assessee; the proportional capital reduction was not upheld.

Final Conclusion: The Revenue's challenge failed on both grounds, and the assessment order as modified by the appellate authority was left undisturbed.

Ratio Decidendi: For purposes of exclusion under clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, income by way of dividends means gross dividend income, and the corresponding capital adjustment cannot be sustained on a contrary net-dividend basis.

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