Calcutta H.C : Whether, on the facts and in the circumstances of the case and on a correct interpretation of r. 1 (viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, in computing the chargeable profits under the said Act and the rules made thereunder, the assessee-company deriving income by way of dividend from another Indian company is entitled to the exclusion of the gross dividend amount received unaffected by the provisions of s. 80M of the IT Act, 1961 ?

AJIT K. SENGUPTA, J.:

In this reference under s. 256(1) of the IT Act, 1961, for the asst. yr. 1972-73, the following questions of law have been referred to this Court “(1) Whether, on the facts and in the circumstances of the case and on a correct interpretation of r. 1 (viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, in computing the chargeable profits under the said Act and the rules made thereunder, the assessee-company deriving income by way of dividend from another Indian company is entitled to the exclusion of the gross dividend amount received unaffected by the provisions of s. 80M of the IT Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, r. 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, is applicable for proportionately reducing the capital apportionable to dividend deduction under s. 80M of the IT Act, 1961 ?”

The second question is concluded by the decision of this Court in Income-tax Reference No. 131 of 1978 [CIT vs. Britannia Industries Co. Ltd. (1990) 182 ITR 113] where judgment was delivered on 10th April, 1989, holding that r. 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, cannot be invoked for proportionately reducing the capital apportionable to deduction made under Chapter VI-A of the IT Act, 1961. Following the said decision, we answer the second question in the negative and in favour of the assessee.

The facts so far as relevant to the controversy raised in the first question are that the assessee earned dividend income totalling Rs. 27,500 which was credited to the P&L a/c. A deduction of Rs. 16,500 out of the said dividend income was allowed under s. 80M of the Act in the income-tax assessment of the assessee. The ITO, while computing the chargeable profit in the surtax assessment of the assessee, has taken the said net dividend of Rs. 11,000 only as deductible from the chargeable profit against the stand of the assessee that the gross and not the net dividend should be so deducted.

Aggrieved by the said order of the ITO, the assessee brought the matter by way of appeal before the CIT(A) XII, Calcutta, who, following certain decisions, directed the ITO to allow the said sum of Rs. 27,500 as a deduction under r. 1 (viii) of the First Schedule to the Act for computing the chargeable profit.

In the appeal before the Tribunal, the arguments of the Departmental representative and the representative for the assessee proceeded on the same lines as were canvassed before the Tribunal in S.T.A. No. 6/Cal of 1974-75. In addition, the Departmental representative, basing his arguments on the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. 1978 CTR (SC) 50 : (1978) 113 ITR 84, urged that what had been excluded in computing the total income of the assessee under the IT Act could not be included for determining the chargeable profit as had been held by the AAC. This stand of the Revenue was controverted by the assessee. The Tribunal, however, upheld the order of the CIT (A).

The controversy relates to the interpretation of r. 1 (viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964. The First Schedule contains the rules for computing the chargeable profits of a previous year. It, inter alia, provides as follows : “In computing the chargeable profits of a previous year, the total income computed for that year under the IT 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 company which has made the prescribed arrangements for the declaration and payment of dividends within India.” Thus, r. 1 (viii) provides that 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 shall be excluded from the income, profits and gains.

The question for consideration is the true scope and meaning of the words “income by way of dividends”. In other words, the question is whether, in computing the income by way of dividend, the dividend income falling under s. 80M of the IT Act, 1961, in respect of which deduction is allowed under Chapter VI-A should be deducted from such dividend income. Dr. Pal argued that the decision of the Supreme Court in Distributors (Baroda) P. Ltd. vs. Union of India (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120, has no application to the facts of this case. According to Dr. Pal, the income by way of dividend, whether it means gross or net dividend, must be the whole of the dividend without any deduction in respect of the dividend which is exempt under s. 80M of the Act.

The Explanation to r. 1(viii) of the First Schedule of the Companies (Profits) Surtax Act relied on by the Revenue was introduced by the Finance Act of 1981, which is as follows: “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 IT 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 said Explanation has come into effect on and from 1st April, 1981.

The said Explanation provides that, where any income or profits or gains are required to be excluded from the total income under any clause of r. 1, the amount of such income or profits or gains as computed in accordance with the provisions of the IT Act and in a case where any deduction is required to be allowed under Chapter VI-A in respect of such income or profits or gains, the amount of such income or profits and gains computed as aforesaid as reduced by the amount of such deduction, shall alone be deemed to be the amount of income or profit or gain required to be excluded from such total income.

Dr. Pal has drawn our attention to s. 80AA of the IT Act inserted by the Finance (No. 2) Act of 1980 w.e.f. 1st April, 1968. The said section lays down that where any deduction is required to be allowed under s. 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of the IT Act, before making any deduction under Chapter VI-A and not with reference to the gross amount of such dividends. It is urged that significantly the Finance Act of 1981 which introduced the Explanation to r. 1 of the First Schedule to the Companies (Profits) Surtax Act, unlike s. 80AA of the IT Act, 1961, has not been, given retrospective effect. The said Explanation comes into force only w.e.f. 1st April, 1981.

It is also contended that in the Explanation, for the first time, it has been introduced that in a case where any deduction is required to be allowed in respect of any such income or profit and gain under Chapter VI-A, the amount of such income or profit or gain computed as aforesaid is to be reduced by the amount of such income. Therefore, the said portion of the Explanation does not appear in s. 80AA of the IT Act. The said portion of the Explanation can be given effect only from 1st April, 1981, and not for any earlier period. The decision in Distributors (Baroda) P. Ltd., (supra) did not at all consider the question whether the deduction in respect of intercorporate dividend which is allowed under s. 80A appearing in Chapter VI-A should also be deducted from the dividend income. The said decision decides only the question that the expression appearing in s. 80M, viz., “where the gross total income of an assessee … includes any income by way of dividends from a domestic company” describes the condition which must be fulfilled in order to attract the applicability of the provision contained in s. 80M of the IT Act. The condition is that the gross total income of the assessee must include income by way of dividends from domestic company. Therefore, the expression “such income by way of dividends” must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. In other words, the dividend income as computed in accordance with the provisions of the IT Act has to be taken into account and not the gross dividend. No question was raised in that case as to whether the dividend income should also be reduced by the deduction which is allowable under s. 80M of the IT Act in respect of intercorporate dividend. In fact, the said question could not be raised and was not decided in the aforesaid decision because that case was concerned only with the interpretation of s. 80M of the IT Act itself. It is, therefore, submitted that the decision in Distributors (Baroda) P. Ltd. (supra) does not cover the present question and is no authority for the point which is to be decided in the present reference.

It has been contended that this question is concluded by the decision of this Court in CIT vs. Jiyajeerao Cotton Mills Ltd. (1987) 59 CTR (Cal) 163 : (1985) 154 ITR 323. There, the following question was referred to this Court (at page 324) : “Whether, on the facts and in the circumstances of the case and on a correct interpretation of r. 1 (viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, in computing the chargeable profits under the said Act and the rules made thereunder, the assessee-company deriving income by way of dividends from another Indian company is entitled by the exclusion of the gross dividend amount received, unaffected by the provisions of ss. 57, 80K, 80L and 80M of the IT Act, 1961?”

16. There the Division Bench held as follows (at page 327): “It appears to us that the real controversy centres round the word ‘such income by way of dividends’. If the words ‘such income by way of dividends’ are referable to the quantum of income included in the total income, then the contention of the Revenue has to be accepted inasmuch as what is included in the total income should be excluded in view of r. 1 (viii) of the 1964 Act. However, the interpretation as contended by the Revenue cannot be accepted in view of the judgment of the Supreme Court in the case of Cloth Traders (P.) Ltd. (1979) 10 CTR (SC) 393 : (1979) 118 ITR 243. The Supreme Court held that the words ‘income by way of dividends’ refer only to the category of the income included in the total income, and not to the quantum of the income so included. It, therefore, follows that if the total income includes a particular category of income, e.g., income by way of dividends from an Indian company, whatever might be the quantum of such income included in the income-tax assessment, the company would be entitled to exclusion of the entire dividend income, that is to say, the gross dividend received from an Indian company. It is true that the Supreme Court in Cloth Traders (P.) Ltd.’s case (supra) was considering the case of deduction under s. 80M of the IT Act, 1961, but the principles laid down in that case will apply in construing the provisions of r. 1 (viii) of the First Schedule.

We may add that in Cloth Traders (P.) Ltd.’s case (supra), the Supreme Court held that, in computing the taxable income for purposes of the IT Act, the deduction in respect of intercorporate dividends should be allowed on the gross amount of such dividends received by the company and not with reference to the net amount. With view to grant such deduction with reference to the net income by way of dividends only, the Finance (No. 2) Act, 1980, inserted a new s. 80AA to the IT Act, 1961, with retrospective effect from 1st April, 1968. Since in several cases, the High Courts, following the said decision of the Supreme Court, held that even for purposes of determining the chargeable profits under the Companies (Profits) Surtax Act, the gross amount of dividend should be excluded from the total income, r. 1 has since been amended by the Finance Act, 1981, adding an Explanation at the end of r. 1. This Explanation provides that in computing the chargeable profits, the amount of income or profits and gains referred to in r. 1, which stands included in the total income, will alone be deducted from the chargeable profits.

The amendment takes effect from 1st April, 1981, and will apply in relation to the asst. yr. 1981-82 and the subsequent years. The Explanation added by the Finance Act, 1981, cannot be construed as clarifying the legislative intent. It declares the legislative intent to exempt from surtax the amount of dividends which has actually been included in the total income from the asst. yr. 1981-82.”

The Revenue has contended to the contrary. Heavy reliance has been placed on Distributors (Baroda) P. Ltd. (supra).

We have given our anxious consideration to the rival contentions. The concept of net dividend in the Explanation added to r. 1 of the First Schedule has two distinct aspects. The first aspect is that the net dividend is the dividend computed in accordance with the provisions of the IT Act (except Chapter VI-A). Such computation is made allowing expenditure, if any, incurred in earning such dividend income. This is relevant for the purpose of the income-tax assessment. Dr. Pal does not dispute that in view of the decision in Distributors (Baroda) P. Ltd. (supra), the full amount of dividend received by the assessee would not be included in the gross total income, but what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. In other words, the net dividend, after allowing any expenditure for earning such dividend income, shall be included. The deduction required to be allowed under s. 80M is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee.

The second aspect is that the net dividend will mean the net dividend computed under the provisions of the Act but as reduced by the amount of deduction under Chapter VI-A. We are concerned with the second type of net dividend. The question is whether the deduction which is allowed under s. 80M should be excluded for the purpose of adjustment of the total income determined under the IT Act, 1961. In other words, the question is whether the dividend income as computed under the IT Act and before allowing any deduction under Chapter VI-A (s. 80M in this case) should be excluded.

As indicated earlier, Dr. Pal has made his submission only on this aspect that the dividend income as computed after allowing the expenditure in connection therewith should be excluded from the order of assessment under the IT Act for the purpose of determining the chargeable profit. In other words, his contention is that the relief which is granted under s. 80M at the prescribed percentage shall be ignored and only the dividend before the deduction under Chapter VI-A but as computed under the other provisions of the Act shall be taken into account.

It has been contended that although the decision in Cloth Traders (P.) Ltd. (supra) has been overturned by the Supreme Court in its subsequent decision in Distributors (Baroda) P. Ltd. (supra), in view of the decision of this Court in Jiyajeerao Cotton Mills Ltd. (supra), the Explanation added to r. 1 by the Finance Act, 1981, cannot be construed as clarifying the legislative intent. On the other hand, the contention of the Revenue is that the Division Bench proceeded to decide the case in Jiyajeerao Cotton Mills Ltd. (supra) on the basis of the decision in Cloth Traders (P.) Ltd. (supra), and in that context, the Court also considered the Explanation added by the Finance Act, 1981. The Supreme Court in Distributors (Baroda) (P) Ltd. (supra) held (at page 141) : “The decision in Cloth Traders’ case is inconsistent with that in Cambay Electric Supply Co.’s case. Both cannot stand together. If one is correct, the other must logically be wrong and vice versa. It is, therefore, necessary to resolve the conflict between these two decisions and harmonise the law and that necessitates an inquiry into the correctness of the decision in Cloth Traders’ case. It is for this reason that we have reconsidered and reviewed the decision in Cloth Traders’ case and on such reconsideration and review, we have come to the conclusion that the decision in Cloth Traders’ case is erroneous and must be overturned.

It is obvious that, on this view, it becomes unnecessary to consider the question of constitutional validity of the retrospective operation of s. 80AA. Sec. 80AA in its retrospective operation is merely declaratory of the law as it always was since 1st April, 1968, and no complaint can validly be made against it.”

It will be evident from the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. (supra) that the Supreme Court considered the scope and effect of s. 80M not with reference to the amendment which was effected with retrospective effect from 1st April, 1968, but on the true interpretation of s. 80M itself. The Supreme Court also held that the amendment which was effected was only clarificatory in nature. In our judgment, in view of the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. (supra), the decision of this Court in Jiyajeerao Cotton Mills Ltd. (supra) must be held to be no longer good law. The law declared by the Supreme Court must be deemed to be the law and accordingly Distributors (Baroda) Pvt. Ltd. (supra) shall have overriding effect on all the decisions rendered following the now overturned decision in Cloth Traders Pvt. Ltd. (supra).

Firstly, in that case, this Court proceeded to construe the provisions of the Explanation in the light of the decision of the Supreme Court in Cloth Traders Pvt. Ltd. (supra). The said decision had been overturned. Accordingly, the reasoning and conclusion based on the said decision in Cloth Traders Pvt. Ltd. (supra) must be held to be not correct. Secondly, the Supreme Court, in Distributors (Baroda) Pvt. Ltd. (supra), affirmed the decision in Cambay Electric Supply Co.’s case (supra), a decision rendered in 1978 which would hold the field. It is no doubt true that the amendment to the Surtax Act has been incorporated w.e.f. 1st April, 1981, but, as held by the Supreme Court, if such amendment is only declaratory in nature, the declaration of the law as it always was, in that event, cannot be said to be statement of law on the date of insertion of the Explanation. In any event, the Division Bench in Jiyajeerao Cotton Mills Ltd. (supra) did not have any occasion to consider the second aspect of net dividend so far as is material for the surtax assessment. It proceeded on the footing that if gross dividend was included for the purpose of income-tax assessment, then for the purpose of adjustment under r. 1, such gross dividend has to be excluded in arriving at the chargeable profit. Therefore, Jiyajeerao Cotton Mills Ltd. (supra) does not advance the case of the assessee.

The contention of the assessee cannot be accepted for more than one reason. The starting point of the assessment under the Surtax Act is the order of assessment under the IT Act. The ITO has to take the assessment order and has to find out the total income as computed under the provisions of the IT Act. In computing the total income, reliefs are granted to the assessee. One of such reliefs is by way of deduction from the net dividend under s. 80M. In the assessment, therefore, dividend income is first computed in accordance with the provisions of the IT Act and where any expenditure is incurred for earning the dividend, such expenditure is deducted from the gross dividend and the net dividend is included in the assessment. Thereafter, deduction under s. 80M is allowed. It is the net dividend after computation of the dividend income under the provisions of the Act and after allowing deduction under s. 80M which is included in the total income. This will be clear from the following observations of the Supreme Court in Distributors (Baroda) (P) Ltd. at page 137 of 155 ITR: “There is also one other strong indication in the language of sub-s. (1) of s. 80M which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the Court in Cloth Traders Pvt. Ltd. (supra), presumably because it was not brought to the attention of the Court. The Court observed in Cloth Traders’ case (supra), that the whole of the income by way of dividends from a domestic company or 60 per cent of such income, as the case may be, would be deductible from the gross total income for arriving at the total income of the assessee. We are afraid this observation appears to have been made under some misapprehension, because what sub-s. (1) of s. 80M requires is that the deduction of the whole or a specified percentage must be made from ‘such income by way of dividends’ and not from the gross total income. Sub-s. (1) of s. 80M provides that in computing the total income of the assessee, there shall be allowed a deduction from ‘such income by way of dividends’ of an amount equal to the whole or a specified percentage of such income. Now, when, in computing the total income of the assessee, deduction has to be made from ‘such income by way of dividends’, it is elementary that ‘such income by way of dividends’ from which deduction has to be made must be part of the gross total income. It is difficult to see how the language of this part of sub-s. (1) of s. 80M can possibly fit in if ‘such income by way of dividends’ were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income ; what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how for the purpose of computing the total income from the gross total income, any deduction should be required to be made from the full amount of the dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions of the Act which would be forming Part of the gross total income. It is, therefore, clear that whatever might have been the interpretation placed on cl. (iv) of sub-s. (1) of s. 99 and s. 85A the correctness of which is not in issue before us, so far as sub-s. (1) of s. 80M is concerned, the deduction required to be allowed under that provision is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee. ” (underlined by us).

Under the First Schedule, in computing the chargeable profits of the previous year, the total income computed under the IT Act for that year has to be adjusted and income by way of dividend shall be excluded. In computing the total income under the IT Act, deduction under Chapter VI-A has to be allowed and it is the net dividend after such deduction that forms part of the total income as computed. In the gross total income, the dividend after allowing any deduction under the provisions of IT Act excepting Chapter VI-A has to be included and from the net dividend included in the gross total income, deduction under Chapter VI-A is allowed for the purpose of arriving at the total income. Accordingly, the dividend included in the total income is liable to be excluded under the First Schedule. The Surtax Officer has to take into account the total income as computed under the provisions of the Income tax Act for the purpose of adjustment under the Surtax Act. Therefore, whatever has not been included in the assessment cannot be excluded. In other words, only the amount which has been included can be excluded.

Otherwise, although net dividend is included in the total income, the assessee gets adjustment of a higher amount being the amount of dividend included in the gross total income. What Dr. Pal says is that the total income as computed before allowing deduction under s. 80M shall be taken into account. But that is not the intention of the legislature. The total income as computed must, in the context, mean the total income as assessed after all reliefs and deductions are allowed.

This view which we have taken is also supported by the provisions contained in r. 2 of the First Schedule. It provides as follows : “The balance of the total income arrived at after making the exclusions mentioned in r. 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 IT 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 after excluding from such amount— (a) the amount of income-tax, if any, payable by the company in respect of any income referred to in cl. (i) or cl. (ii) or cl. (iii) or cl. (viii) of r. 1 included in the total income ; (b) the amount of income-tax, if any, payable by the company under the provisions of the annual Finance Act with reference to the relevant amount of distributions of dividends by it.

Therefore, the amount of income-tax has to be excluded from the total income as adjusted under r. 1 but after excluding from such amount, the amount of income-tax payable on the dividend included in the total income. The reason is this that from the income which is excluded, proportionate tax on that income shall also be excluded. The company has to pay income-tax only on the dividend which is included in the total income as assessed after allowing all permissible deductions including the deduction under s. 80M and not on the dividend included in the gross total income. If the amount of tax on the gross dividend is deducted, the result will be that although the assessee has not paid tax on such dividend, the chargeable profits will thereby get further reduced. The assessee will get a deduction of tax which it has not paid.

We may also refer to the form of return to be submitted under the Surtax Rules. Part II provides as follows [See (1964) 53 ITR (St.) 41]: “PART II COMPUTATION OF CHARGEABLE PROFITS. (Copies of the audited profit and loss account and balance-sheet must be attached to this return). .. .Rs. Rs. 1. Total income computed in accordance with Profit + . . . the provisions of the IT Act, 1961 Loss -. . . (i) Interest on securities + . . . (ii) Income from house property + . . . (iii) Profits and gains of business + . . . (iv) Capital gains + . . . (v) Income from other sources + . . . Total income . . . Please see Note 2. Note 2 (See item 1 of Part II) Against each of the entries (i) to (v), there should be shown the income as computed under the respective heads of income under the IT Act, 1961, after taking into account all deductions permissible under that Act. ” (Emphasis supplied)

It will, therefore, be evident that the dividend income as computed after taking into account all deductions permissible under the IT Act will only be shown and taken into account under item No. (v), i.e., “income from other sources”. Therefore, the amount which will be deducted is the dividend income so computed and which has to be shown and included in the return against item No. (v) in Part II of the form prescribed under the Surtax Rules.

For the foregoing reasons, we are unable to accept the contentions of Dr. Pal. In the result, the first question in this reference is answered in the negative and in favour of the Revenue.

There will be no order as to costs.

J. N. HORE, J.:

I agree.

[Citation :182 ITR 396]