Gujarat High Court
Commissioner Of Surtax vs Atul Products Ltd. on 17 January, 1994
Equivalent citations: [1994]208ITR515(GUJ)
Author: M.B. Shah
Bench: M.B. Shah
JUDGMENT M.B. Shah, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Ahmedabad Bench 'A', has referred the following questions for our opinion under section 18 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as "the Surtax Act"), read with section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Income-tax Act") :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that dividend of Rs. 52,17,625 and not the balance after sections 80K and 80M deductions, i.e., Rs. 20,79,050, should be excluded while computing chargeable profits under rule 1(viii) of the First Schedule to the Surtax Act, 1964 ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, the proportionate capital is to be reduced only in respect of income not includible as per Chapter III of the Income-tax Act, without including the deduction allowed under sections 80K, 80M and 80J ?"
2. The aforesaid questions arise in the background of the fact that for the assessment year 1974-75, the assessee, Atul Products Limited, received dividend income of Rs. 52,17,625. From the said dividend income, the assessee was entitled to certain reliefs under sections 80K and 80M of the Income-tax Act and, accordingly, dividend income for the purpose of income-tax was worked out at Rs. 20,79,050. In the surtax proceedings the Income-tax Officer, while computing the chargeable profits, deducted the net amount of dividend of Rs. 20,79,050 from the total income. It is the contention of the assessee that, while computing the chargeable profits, the gross dividend income of Rs. 52,17,625 ought to have been deducted. The assessee challenged the said order before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner allowed the appeal by holding that the gross dividend income was required to be excluded from the total income in order to determine the chargeable profits. That order of the Appellate Assistant Commissioner was challenged by the Revenue before the Tribunal. The Tribunal, relying upon the judgments of the Madras High Court in the case of Addl. CIT v. Bimetal Bearings Ltd. [1977] 110 ITR 131, and of the Karnataka High Court in the case of Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1977] 106 ITR 399, arrived at the conclusion that, as per rule 1(viii) of the First Schedule to the Surtax Act, for the purpose of calculating the chargeable profits, the dividend income which forms part of the total income before deductions contemplated under sections 80K and 80M of the Income-tax Act, is required to be taken into consideration. Before the Tribunal, it was also contended that under rule 4 of the Second Schedule to the Surtax Act, the proportionate capital is to be reduced only in respect of income not includible as per Chapter III of the Income-tax Act without including the deduction allowed under sections 80K, 80M and 80J. The Tribunal rejected the said contention also after relying upon the aforesaid judgments. Against the judgment of the Tribunal, the Revenue sought a reference and, at the instance of the Revenue, the aforesaid two questions are referred for our opinion.
3. Re : Question No. 1 :
Under the Surtax Act, the chargeable provision is section 4. It, inter alia, provides that there should be charged on every company for every assessment year commencing on and from the first day of April, 1964, but before the first day of April, 1988, a tax (surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule.
The words "chargeable profits" and "statutory deduction" are defined under sections 2(5) and 2(8) of the Surtax Act, which read as under :
"2.(5) 'chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (43 of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule.
2.(8) 'statutory deduction' means an amount equal to ten (fifteen) per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater :
Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of ten (fifteen) per cent. or, as the case may be, of two hundred thousand rupees shall be increased or decreased proportionately :
Provided further that where a company has different previously years in respect of its income, profits and gains, the aforesaid increase or decrease, as the case may be, shall be calculated with reference to the length of the previous year of the longest duration."
(The words 'ten per cent.' are substituted by Finance Act No. 66 of 1976) In view of the aforesaid definition of the words "chargeable profits", the first thing which is required to be taken into consideration is the total income of an assessee computed under the Income-tax Act. Thereafter, the said total income is required to be adjusted in accordance with the provisions of the First Schedule. The First Schedule to the Surtax Act provides rules for computing the chargeable profits and the total income computed for the purpose of the Income-tax Act for the assessment year is required to be adjusted as provided therein. Rule 1 provides for exclusion; rule 2 provides for reduction and rule 3 provides for increase of the said income as stated therein. The relevant part of the First Schedule is as under :
"THE FIRST SCHEDULE (See section 2(5)) RULES FOR COMPUTING THE CHARGEABLE PROFITS In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows :
1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely :- .....
(viii) income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India; . . . .
(Explanation. - Notwithstanding anything contained in any clause of this rule, the amount of any income or profits and gains which is required to be excluded from the total income under that clause shall be only the amount of such income or profits and gains as computed in accordance with the provisions of the Income-tax Act (except Chapter VI-A thereof), and in a case where any deduction is required to be allowed in respect of any such income or profits and gains under the said Chapter VI-A, the amount of such income or profits and gains computed as aforesaid as reduced by the amount of such deduction.) (The aforesaid Explanation is inserted by the Finance Act 16 of 1981, with effect from April 1, 1981)
2. The balance of the total income arrived at after making the exclusions mentioned in rule 1 shall be reduced by -
(i) the amount of income-tax payable by the company in respect of its total income under the provisions of the Income-tax Act after making allowance for any relief, rebate or deduction in respect of income-tax to which the company may be entitled under the provisions of the said Act or the annual Finance Act, and . . . .
Provided that . . . .
3. The net amount of income calculated in accordance with rule 2 shall be increased by the amount of any expenditure incurred on account of commission, entertainment and advertisement, to the extent such expenditure, in the opinion of the Assessing Officer, is excessive having regard to the circumstances of the case :
Provided that the previous authority of the Deputy Commissioner is obtained for holding such expenditure to be excessive."
Now, we would refer to the contentions raised by learned counsel for the parties. Mr. Thakore, learned counsel for the Revenue, vehemently submitted that the Tribunal ought to have considered the language used by the Legislature in the aforesaid rules. Rule 1 of the First Schedule clearly provides that from the total income computed under the Income-tax Act, certain deductions as provided in clauses (i) to (xii) are to be excluded. It is his contention that income which is shown for the purpose of taxation is required to be excluded if the said income falls within the definition of the said clauses and that there is no question of taking into consideration exclusion of gross income (that is income prior to deduction provided under the Income-tax Act). It is his contention that the word "excluded" used by the Legislature merely reveals the intention that what is included in the total income is required to be excluded and not the amount which is not included. Otherwise, there is no necessity of providing the word "excluded". He further submitted that this would be clear if we refer to rules 1, 2 and 3 of the First Schedule. In rule 2, the Legislature has used the word "reduced" and not "excluded". Similarly, in rule 3, the Legislature has used the word "increased". He also relied upon the decision of the Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 and submitted that the Supreme Court has overruled its earlier decision in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. He, therefore, submitted that the reliance placed by the Tribunal on the decisions of the Madras High Court in the case of Addl. CIT v. Bimetal Bearings Limited [1977] 110 ITR 131 and of the Karnataka High Court in the case of Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1977] 106 ITR 399 has no relevance in the facts of the present case.
As against this, Mr. Shah, learned counsel for the assessee, submitted that -
(i) the words "income by way of dividends from an Indian company" in clause (viii) of rule 1 of the First Schedule to the Surtax Act are simple words which are to be merely read to be understood :
(ii) rule 1 is a part of the charging section and if at all it requires interpretation, it should be interpreted having regard to the strict letter of law and not merely upon the spirit of the statute or substance of law. If the case is not covered within the four corners of the provision, no tax can be imposed by inference or on the basis of the presumed intention of the Legislature;
(iii) the contention of the Revenue that rule 1 necessarily requires the exclusion of only that income which has been taxed is patently fallacious if one bears in mind that under clause (vii) of rule 1 what is required to be deducted is not the income but the expenditure or the outgoing which is already deducted while computing taxable income. Donation, which is required to be excluded under the said clause (vii) is an outgoing and not an income;
(iv) the decision in the case of Distributors (Baroda) Pvt. Ltd. is limited and it only considers the language of section 80M of the Income-tax Act. In that case, the court was concerned with the following language :
'. . . . where the gross total income . . . . includes any income by way of dividends . . . . there shall . . . . be allowed . . . . a deduction from such income by way of dividends . . .' He submitted that in that case the Supreme Court has emphasised that section 80M should be considered on its own language and the true interpretation arrived at according to the plain natural meaning of the words used by the Legislature. He, therefore, contended that, applying the said principles, the plain and natural meaning of the words "income by way of dividends" would only mean the income received by the assessee by way of dividend and not the income by way of dividend less statutory deductions provided under the Income-tax Act, otherwise, it would amount to rewriting of the charging provisions. The Legislature has used different phrases in clauses (i), (vi) and (viii). In clause (i), the words used are "income chargeable" under the head "Capital gains". In clause (vi), the words used are "income chargeable" but in clause (vii), the word "chargeable" is patently absent. This would also mean that, wherever the Legislature wanted to provide that, from the income chargeable, if something is required to be deducted, it has provided for it. This also would indicate that, as per clause (viii), income received by the assessee by way of dividend, is required to be excluded. For computing the capital of the company for the purpose of the statutory deduction, the cost of the shares is required to be taken into consideration even though 60 per cent. of the dividend from the shares is exempt for the purpose of the Income-tax Act and this interpretation is given to rule 4 by this court in the case of CIT v. Alembic Chemical Works Co. Ltd. [1982] 133 ITR 578, by the Karnataka High Court in the case of Stumpp, Schuele and Somappa P. Ltd. [1977] 106 ITR 399, and by the Madras High Court in the case of Bimetal Bearings Limited [1977] 110 ITR 131, which was approved by the Supreme Court in the case of Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1991] 187 ITR 108. It is strange logic to think that 15 per cent. on the cost of such shares will be allowed from the chargeable profits as standard deduction but the actual income of dividend from such 60 per cent. shares will not be allowed. Such an anomalous and absurd result must preferably be avoided.
In our view, it would be difficult to accept the contentions raised by learned counsel for the assessee. As stated earlier, the term "changeable profits" means the total income of the assessee computed under the Income-tax Act and adjusted in accordance with the provisions of the First Schedule. The words "total income" are not defined under the provisions of the Surtax Act. However, sub-section (9) of section 2 provides that all other words and expressions used in the Surtax Act but not defined and defined in the Income-tax Act shall have the meanings respectively assigned to them in that Act. Under the Income-tax Act, the words "total income" are defined under section 2(45) to mean the total amount of income referred to in section 5, computed in the manner laid down in the Income-tax Act. So, the words "total income" indicate the total amount of income computed in the manner laid down under the Income-tax Act, meaning thereby the income worked out after making necessary deductions as provided under the Income-tax Act. Chapter VI-A provides for deductions which are to be made in computing the total income of the assessee. Section 80A(1) inter alia, provides that in computing the total income of an assessee there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C or 80U. The words "gross total income" are defined under section 80B to mean the total income computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VI-A. This would clearly mean that the total amount of income of dividend computed in the manner laid down under the Income-tax Act would be the amount after making necessary deductions as provided under sections 57, 80M and other relevant provisions. Without making deduction as provided under section 80M, income from dividend would be gross total income as defined under section 80B(5) and not the total income as defined under section 2(45) of the Income-tax Act. For the purpose of the Surtax Act, the total income of an assessee computed under the Income-tax Act is required to be taken into consideration and not the gross total income. From that total income, income or other sums as mentioned under rule 1 are to be excluded. Therefore, the phrase "excluded from the total income" in the context would only mean that specified income which is included in the total income (which is exigible to income-tax) is to be excluded. The income, say a dividend income, which is not exigible to income-tax, would not be a component of the total income. Therefore, "exclusion", in this case, is of the income which is included, i.e., which is in or which is a constituent element or part of the total income exigible to tax.
It would be further clear from the different words used in the First Schedule such as "adjusted", "excluded", "reduced" and "increased". Under rule 1, the Legislature has used the word "excluded" to eliminate or take out what is already in or to get rid of what is already in, especially, as a constituent element or part. The Legislature has not used the word "reduced", that is to say, total income shall be reduced by income by way of dividend, even though the word "reduced" is used in rule 2 of the First Schedule. In our view, this meaning would be in consonance with the dictionary meaning of the word "exclude". The following meanings are given to the word "Exclude" in Webster's New World Dictionary :
"Exclude :
1. to refuse to admit, consider, include, etc.; shut out; keep from entering, happening, or being; reject; bar
2. to put out; force out; expel -
3. syn-exclude implies a keeping out or prohibiting of that which is not yet in (to exclude someone from membership);
4. debar connotes the existence of some barrier, as legal authority or force which excludes someone from a privilege, right, etc. (to debar certain groups from voting);
5. disbar refers only to the expulsion of a lawyer from the group of those who are permitted to practise law;
6. eliminate implies the removal of that which is already in, usually connoting its undesirability or irrelevancy (to eliminate waste products);
7. suspend refers to the removal, usually temporary, of someone from some organisation, institution, etc., as for the infraction of some rule."
Applying the meaning assigned to the word "exclude" in the present case, the result would be that the income of dividend which is included as a component part of the total income exigible to income-tax is required to be excluded or eliminated. There is no question of excluding the income which is not a component part of the total income.
While interpreting section 80E, which provided deduction in respect of profits and gains from specified industries in the case of certain companies, the Supreme Court has, in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, observed as under (as page 90) :
"It was not disputed before us that the aforesaid provision contained in section 80E(1) has been enacted for the purpose of providing for certain special deduction to be made in computing the total income in the case of specified industries, over and above the other general deductions contemplated by the Act. It was further not disputed before us that the assessee being an Indian company engaged in the business of generation and distribution of electricity is a company to which the section applies and is entitled to claim the deduction of eight per cent. contemplated by that provision and the only question is how and in what manner the said deduction should be computed. On reading sub-section (1), it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except section 80E; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity); and, thirdly, if there be profits and gains so attributable, deduct eight per cent. thereof from such profits and gains so attributable, deduct eight per cent. thereof from such profits and gains and then arrive at the net total income exigible to tax. As regards the first step mentioned above, the important words in sub-section (1) are those that appear in parenthesis, namely, 'as computed in accordance with the other provisions of this Act' and these words clearly contain a mandate that the total income of the concerned assessee must be computed in accordance with the other provisions of the Act without reference to section 80E and since in the instant case, it is income from business the same as per section 29 will have to be computed in accordance with sections 30 or 43A which would include section 41(2). It is also clear that under the second step the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) forms a component of the total income spoken of in the first step. Reading these two steps together, therefore, it is obvious that in computing the total income of the concerned assessee the balancing charge arising as a result of the sale of old machinery and buildings and worked out as per section 41(2), irrespective of its real character, will have to be taken into account and included as income of the business."
Applying the said tests, it would be apparent that total income as computed in accordance with the provisions of the Income-tax Act would mean net total income computed after making all permissible deductions under the Act. The aforesaid decision in the case of Cambay Electric Supply Industrial Company [1978] 113 ITR 84 (SC) is referred to and relied upon by the Supreme Court in the case of Distributors (Baroda) P. Ltd. [1985] 155 ITR 120, while interpreting section 80M of the Income-tax Act.
Mr. Shah, learned counsel for the assessee, submitted that in the case of Distributors (Baroda) P. Ltd. [1985] 155 ITR 120, the Supreme Court has observed that section 80M is different in its structure, language and content from clause (iv), sub-section (1), of section 99 of the Indian Income-tax Act, 1922, and, therefore, the interpretation given to section 80M by the Supreme Court in Distributors (Baroda) P. Ltd.'s case [1985] 155 ITR 120, would have no bearing in interpreting rule 1 of the Surtax Act. He relied upon the following observations made by the Supreme Court in the case of Distributors (Baroda) P. Ltd. [1985] 155 ITR 120, 130 :
"It is most unsafe to try to arrive at the true meaning of a statutory provision by reference to an interpretation which might have been placed on an earlier statutory provision which is not only couched in different language but is also structurally different."
With regard to the aforesaid principle, there cannot be any dispute. We are required to interpret rule 1 on its own language and to arrive at the true interpretation according to the plain and natural meaning of the words used by the Legislature. On its plain interpretation, clause (viii) of rule 1 would mean that "income by way of dividends" form an Indian company is to be excluded from such total income. The question is : what is the income by way of dividend from an Indian company included in the total income which is required to be excluded; and the answer would obviously be - the income by way of dividends computed in accordance with the provisions of the Income-tax Act, i.e., gross total income of dividend less deductions provided under section 80M of the Income-tax Act. That net dividend income is the component of the total income which is exigible to tax. The gross amount of "income by way of dividends" cannot be taken as the total income computed in accordance with the provisions of the Income-tax Act. Only a component part of the total income is required to be excluded for computing the chargeable profits as provided under rule 1(viii) of the First Schedule to the Surtax Act.
However, Mr. Shah, learned counsel for the assessee, submitted that income by way of dividends from an Indian company would mean the income by way of dividend less statutory deductions as provided under section 57 of the Income-tax Act only and not less reliefs or deductions which are provided under section 80M of the Income-tax Act and this would be the plain meaning of the said phrase used in clause (viii) of rule 1 of the Surtax Act. In our view, this contention cannot be accepted because income by way of dividend is to be computed not only by making deductions as provided under section 57 of the Income-tax Act, but also it is further required to be reduced by making deductions as provided under section 80M of the Income-tax Act. For the purposes of the Income-tax Act, for levying income-tax on the said income, income by way of dividends would be the income as computed after taking into consideration all the relevant provisions of the Income-tax Act, i.e., after making deductions as provided not only under section 57, but also under section 80M of the Income-tax Act. Income by way of dividend, without making deductions under section 80M, would be gross income by way of dividends for the purposes of the Income-tax Act.
As stated earlier, while considering the scheme and rules for computing the chargeable profits as provided under the First Schedule to the Surtax Act, it is apparent that the Legislature has used different words in rules 1, 2 and 3. Firstly, it provides that in computing the chargeable profits, the total income computed under the Income-tax Act is required to be adjusted as mentioned in rules 1, 2 and 3. In the First Schedule, the word "adjusted" is used to indicate that from the total income, some part is to be excluded, some part is to be reduced and some part is to be increased. Rule 1 of the First Schedule provides for exclusion of income, profits and gains and other sums falling within clauses (i) to (xii). Under rule 2, the Legislature has used the word "reduced" by stating that the balance of the total income arrived at after making the exclusions mentioned in rule 1 shall be reduced by the amounts of income-tax payable as provided in clauses (i) and (ii) of rule 2. The third step is that the net amount of income calculated in accordance with rule 2 shall be increased by the amount of any expenditure incurred on account of commission, entertainment and advertisement, to the extent such expenditure, in the opinion of the Assessing Officer, is excessive having regard to the circumstances of the case. The third step indicates that, while computing the total income if any expenditure incurred on account of commission, entertainment and advertisement is deducted, then the said sum is to be added back. So, to that extent, total income would be increased. However, in a case where entertainment and advertisement expenditure is disallowed or is not deducted, it cannot be stated that the total income is to be increased by the said amount. Hence, in the context of all these different words, i.e., "adjusted", "excluded" "reduced" and "increased", used in the First Schedule, the word "excluded" is to be interpreted. Interpreting the word "excluded" in the aforesaid context, it would only mean that from the total income computed in accordance with the provisions of the Income-tax Act, the net total income by way of dividend (which is a component part of the total income by way of dividend) is to be excluded. Therefore, it would be difficult to accept the contention of learned counsel for the assessee that the phrase "income by way of dividends from an Indian company" is a mathematical exercise of two steps, i.e., the amount of dividends from an Indian company less expenditure like interest, for example, to earn that dividend is equal to income. It is not possible to accept this contention because "income from dividend" would be the total amount of dividend received by the assessee. If deductions as provided under the Income-tax Act are not to be taken into consideration, then there is no reason to deduct the expenditure like interest and other deductions as provided under section 57 of the Income-tax Act. Further, using the phraseology used by learned counsel in his contention, it would mean that the income by way of dividend from an Indian company, even if it is a mathematical exercise of two steps, i.e., amount of dividends from an Indian company less expenditure like interest, that is to earn dividend less deductions as provided under section 80M would be income by way of dividend for the purpose of the Income-tax Act. For the purpose of tax liability, that is the income from dividend.
The aforesaid view is in conformity with the consistent view taken by other High Court in the following cases :
(i) CIT v. Hindustan Gum and Chemicals Ltd. [1990] 182 ITR 396; (ii) CIT v. Andhra Bank Ltd. [1990] 186 ITR 192 (AP); (iii) CIT v. R. B. Multanimal Modi and Sons [1991] 189 ITR 730 (All); (iv) CIT v. Kil Kotagiri Tea and Coffee Estates Ltd. [1991] 191 ITR 283 (Ker); (v) CST v. Modi Industries Ltd. (No. 2) [1993] 200 ITR 325 (Delhi).
In all the judgments rendered in the aforesaid cases, the High Courts have relied upon the interpretation given by the Supreme Court to section 80M of the Income-tax Act in the case of Distributors (Baroda) P. Ltd. [1985] 155 ITR 120.
However, Mr. Shah, learned counsel for the assessee, submitted that, in all the aforesaid decisions, pointed attention of the courts was not drawn to the interpretation given by the Supreme Court in the case of Stumpp, Schuele and Somappa P. Ltd. [1991] 187 ITR 108. By the aforesaid decision, the Supreme Court has approved the decision of the Karnataka High Court in Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1977] 106 ITR 399, wherein it is held that the reliefs allowed under section 80-I (priority industry) and section 80J (newly established industrial undertaking) of the Income-tax Act, 1961, were not "income, profits and gains not includible in the total income" of the company under rule 4 of Schedule II to the Surtax Act and would not go to diminish the capital of the company to be computed for the purposes of the Surtax Act. The court observed that there is a preponderance of judicial opinion in favour of the assessee. In our view, the contention of learned counsel for the assessee is without any substance. Rule 4 of the Second Schedule provides that where a part of the income, profits and gains of a company "is not includible" in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3 diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains. For the purpose of explaining this rule, take for an illustration that a company is having capital of Rs. 1 crore. The said company is also owning agricultural land worth Rs. 10 lakhs. The income from the said agricultural land worth Rs. 1 lakh. In computing the total income of the company, the agricultural income is not includible as provided under section 10(1) of the Income-tax Act. The company's total income apart from the agricultural income is Rs. 10 lakhs. In that set of circumstances, the capital invested by the company for owning the agricultural land shall be required to be diminished by an amount of Rs. 10 lakhs, i.e., in proportion of 1 to 10. Various High Courts have interpreted the phrase "not includible in its total income" to mean the income which is not capable of being included in computing the total income chargeable to income-tax under the provisions of the Income-tax Act. Chapter III provides for incomes which do not form part of total income and section 10 of the Income-tax Act specifically provides for incomes not to be included in total income. Section 10 further provides that in computing the total income of a previous year of any person, any income falling within the clause mentioned therein shall not be included. Therefore, various heads of income which are mentioned in the different clauses of section 10 are to be excluded for the purposes of levying income-tax. On the other hand, there are certain allowances, reliefs, rebates and deductions under different provisions of the Income-tax Act. In cases of allowances, reliefs, rebates, deductions, etc., the income is capable of being included in the total income of the assessee but by specific provisions of the Act, that income or part of that income of the assessee is specifically excluded or reduced while computing the total income of that assessee. Therefore, so far as the Income-tax Act is concerned, there are certain sections which indicate what types of income are "not capable of being included" in the total income of the assessee while computing the total income in accordance with the provisions of the Income-tax Act. Barring Chapter III, the concept of "income not capable of being included in the total income" does not find place anywhere in the Income-tax Act and the rest of the provisions of the Income-tax Act deal with one aspect or another of the computation of the total income including deductions and reliefs. Rule 4 of the Second Schedule to the Surtax Act speaks of income which is not includible and not the income which is to be included for computing the total income or gross total income by making certain deductions or reliefs. Therefore, the interpretation of rule 4 of the Second Schedule, would have no bearing in interpreting the First Schedule, more particularly rule 1(viii) of the First Schedule. It is nobody's case that income by way of dividend is not includible income for computing the total income under the provisions of the Income-tax Act. The computation of capital is mainly for allowing statutory deduction as provided under section 4 read with section 2(8). Hence, it would be difficult for us to accept the contention of learned counsel for the assessee that the decisions of other High Courts which are approved by the Supreme Court in Stumpp, Schuele and Somappa P. Ltd.'s case [1991] 187 ITR 108 would have any bearing on the interpretation of rule 1 of the First Schedule to the Surtax Act.
In the result, it is held that, while computing the chargeable profits from the total income computed for the purpose of income-tax, the income which is included is required to be excluded, i.e., the income which is a component part of the total income computed for the purpose of income-tax is to be excluded. Hence, the Tribunal erred in law in holding that dividend of Rs. 52,17,625 and not the balance after sections 80K and 80M deductions, i.e., Rs. 20,79,050, should be excluded while computing chargeable profits under rule 1(viii) of the First Schedule to the Surtax Act, 1964.
Hence question No. 1 is answered in the negative, i.e., in favour of the Revenue and against the assessee.
4. Re : Question No. 2 :
At the time of hearing of this reference, it is admitted that the aforesaid question is concluded by the decision of the Supreme Court in the case of Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1991] 187 ITR 108. In the said judgment, the Supreme Court has observed that there is preponderance of judicial opinion in favour of the assessee and has approved the interpretation given by the various High Courts including the Karnataka High Court and the Gujarat High Court in the case of CIT v. Alembic Chemical Works Co. Ltd. [1982] 133 ITR 578. After discussing in detail the contentions raised by the parties, this court in the case of Alembic Chemical Works [1982] 133 ITR 578 had observed that any income falling under Chapter VI-A of the Income-tax Act, since that Chapter deals with deductions, is includible, that is, is capable of being included in the total income but by virtue of the special provisions relating to deductions in Chapter VI-A, is taken out and excluded from the total income computed in accordance with the provisions of the Income-tax Act. This court further observed that deductions allowed to the assessee under Chapter VI-A of the Income-tax Act are not income, profits and gains not includible in the total income as contemplated by rule 4 of Schedule II to the Surtax Act. Such deductions are not taken out for proportionate diminution of the capital of the company computed under rules 1 to 3 as provided under rule 4 of the Second Schedule to the Surtax Act.
Hence, question No. 2 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
5. The reference stands disposed of accordingly with no order as to costs.