S.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the ITO was not justified in diminishing the capital base with reference to the deductions allowed under Chapter VI-A from the total income ?

Decision in favour of Assessee Partly, Revenue Partly 1198 of 1977, reported as CIT vs. Sundaram Industries (P) Ltd. (1984) 42 CTR (Mad) 316: (1985) 151 ITR 769 (Mad)

ORDER

BY THE COURT :

The Revenue is in appeal against the judgment of a Division Bench of the High Court at Madras delivered upon a reference application by the Revenue. The three questions that the High Court considered read as follows :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the ITO was not justified in diminishing the capital base with reference to the deductions allowed under Chapter VI-A from the total income ?

Whether the Tribunal’s view that for the purpose of the computation of capital base, the provisions of r. 4 of the Second Schedule would apply only to items of income which are wholly exempt under Chapter III and that those provisions would not apply to the deduction allowed under Chapter VI-A is sustainable in law ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for the purpose of the computation of chargeable profits, the deduction under r. 1(viii) of the First Schedule should be made only with reference to gross dividends but not the net dividends as done by the ITO ?”

The High Court answered the questions in the affirmative and in favour of the assessee.

2. It is not in dispute that the first two questions are covered against the Revenue by the judgment of this Court in Second ITO & Anr. vs. Stumpp and Schuele & Somappa (P) Ltd. (1991) 94 CTR (SC) 160 : (1991) 187 ITR 108 (SC). The question to consider, therefore, is the third question. The judgment of this Court in Distributors(Baroda) (P) Ltd. vs. Union of India & Ors. (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) : TC 24R.516 delivered in respect of a similar provision was considered by the Delhi High Court in the case of Commr. of Surtax vs. Modi Industries Ltd. (1992) 105 CTR (Del) 132 : (1993) 200 ITR 325 (Del). The question before the Delhi High Court was akin to question No. 3 before us. The Delhi High Court considered the judgment in Distributors (Baroda) (P) Ltd. and noted that following that judgment, several High Courts had taken the view that on a correct interpretation of r. 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, it was only the net dividend which was included in the total income and, therefore, it was this amount which was deductible in arriving at the figure of the chargeable profits. In our view, having regard to the language or the rule, this is the correct position and, accordingly, we affirm the view taken by the Delhi High Court in the case of Modi Industries Ltd. (supra). The third question is, therefore, answered in the negative and in favour of the Revenue. The civil appeals are allowed to that extent.

No order as to costs.

[Citation : 248 ITR 179]