Dividend TDS is not income-tax payable by the company for surtax computation under the First Schedule rule.

Rule 2(i)(b) of the First Schedule allows exclusion only of income-tax actually payable by the company under the relevant Finance Act in respect of dividend distribution. Tax deducted at source from dividends is only a collection mechanism under the Income-tax Act and is not tax payable by the company on dividend distribution. As no tax was imposed by the Finance Act on dividend distribution, the deducted amount could not be treated as deductible income-tax payable; it had to be included in the surtax computation.

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Issues: Whether tax deducted at source from dividends paid to shareholders could be excluded as "income-tax payable" by the company under rule 2(i)(b) of the First Schedule while computing chargeable profits for surtax.

Analysis: The allowance under rule 2(i)(b) applies only to the amount of income-tax actually payable by the company under the annual Finance Act with reference to the distribution of dividends. The tax deducted from dividends paid to shareholders is merely a collection mechanism under the Income-tax Act and is not a tax payable by the company on its own in respect of dividend distribution. As the relevant Finance Act did not impose any tax on dividend distribution, the deducted amount could not be treated as the deductible tax contemplated by the rule. The construction advanced by the revenue was held to be inconsistent with the legislative scheme and purpose of the exclusion.

Conclusion: The deduction of the tax deducted at source from dividends was not permissible, and the assessee was entitled to inclusion of that amount in the income-tax payable computation.

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