JUDGMENT
K.S. Paripoornan, J.
1. At the instance of the Revenue, this court in O.P. No. 10928 of 1987 and 10703 of 1987 (see [1989] 177 ITR 458) directed the Income-tax Appellate Tribual (in short, “the Tribunal”) to refer the following two questions of law for the decision of this court:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire development allowance reserve should be included in the computation of the capital ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire dividend income was to be excluded from the income assessed under Rule 1(viii) of the First Schedule ?”
2. The respondent is a public limited company owning tea and coffee estates. We are concerned with the assessment years 1977-78 and 1978-79. The accounting period ended by March 31, 1977 and March 31, 1978 respectively. Both the assessments relate to the surtax assessment for the two assessment years. The assessee-company was eligible for development rebate in its income-tax assessment. For the year 1977-78, the “development allowance reserve” as per the books of account was Rs. 1,27,264. For the year 1978-79, it was Rs. 1,31,008. In the computation of capital under Schedule II to the Surtax Act, the assessee claimed that this amount be treated as a reserve. The Income-tax Officer declined to accept the assessee’s plea. He held that the “development allowance reserve” required to be made under the Income-tax Act alone would be considered as “development allowance reserve” for the purpose of computation of capital and since the assessee owns tea estates, the income which will be liable under the Central Income-tax Act will be only 40%. So, he held that only 40% of the reserve created would be eligible for consideration as reserve. The Income-tax Officer fixed the amount admissible at Rs. 86,036 for the assessment year 1977-78 and at Rs. 87,292 for the assessment year 1978-79. In appeal, the Commissioner of Income-tax (Appeals), disposing of the
appeals, by a common order, followed the decision of the Appellate Tribunal in Peermedu Tea Co. Ltd.’s case and held that the entire “development allowance reserve” should be taken into consideration for the purpose of Schedule II to the Surtax Act. The Revenue took up the matter in appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal held that the case is governed by the decision in Peermedu Tea Co. Ltd.’s case (S.T.A. No. 4 & 5/Coch of 1981) and upheld the order passed by the Commissioner of Income-tax (Appeals). These aspects are reflected in question No. 1. Regarding question No, 2, referred to this court, it concerns the computation of profits under the First Schedule to the Surtax Act. The assessee-company is having dividend income. The assessee claimed that the entire dividend income should be excluded from the computation of chargeable profits under Rule 1(viii) of the First Schedule to the Act. The Income-tax Officer rejected this plea. He held that only 40% Can be excluded. In appeal, the Commissioner of Income-tax (Appeals) followed the decision of this court in A. V. Thomas and Co. v. CIT [1977] 110 ITR 515 and directed the Income-tax Officer to exclude the entire dividend income from the chargeable profits. The Revenue took up the matter in appeal before the Tribunal. Before the Tribunal, the Revenue placed reliance on Section 80AA of the Act and contended that the decision of the Kerala High Court in A. V. Thomas and Co. [1977] 110 ITR 515 will no longer hold the field. The Tribunal declined to accept the plea. It held that the identical provision for the purpose of the Surtax Act was introduced only in 1981 and so the amendment will not apply. The Tribunal upheld the order passed by the Commissioner of Income-tax (Appeals) who followed the decision of the Kerala High Court in A. V. Thomas and Co.’s case [1977] 110 ITR 515. It is thereafter, at the instance of the Revenue, that the above two questions of law have been referred to this court as directed by this court in O.P. Nos. 10928 of 1987 and 10703 of 1987 (see [1989] 177 ITR 458).
3. We heard counsel for the Revenue and also counsel for the res-pondent-assessee. The order passed by this court, dated January 13, 1989, allowing the original petitions filed by the Revenue and directing the Tribunal to refer the two questions of law, is reported as GIT v. Kil Kotagiri Tea and Coffee Estates Ltd. [1989] 177 ITR 458 (Ker). The facts are stated in sufficient detail therein. In holding that the Appellate Tribunal has failed to enter a definite finding with regard to the “development allowance reserve” and has only stated that, in view of the Peermedu Tea Co.’s case (S. T. A. Nos. 4 and 5/Coch of 1981), the entire “development allowance reserve” should be included in the computation of capital, this court held that the Tribunal has failed to enter a finding that the facts in this case are exactly identical to Peermedu Tea Co. Ltd.’s case (S.T.A. Nos. 4 and 5/Coch of 1981). In the absence of a finding on that score, there is no
basis or reason for the Tribunal to hold that the entire development reserve should be included in the computation of capital. In other words, the Tribunal has failed to adjudicate the issue properly. It simply stated that the matter is governed by the earlier decision in Peermedu Tea Co. Ltd.’s case (S. T. A. Nos. 4 and 5/Coch of 1981). As to whether the facts in these cases are identical with the facts of the Peermedu Tea Co. Ltd. ‘s case (S. T. A. Nos. 4 and 5/Coch of 1981), is anybody’s guess. There has been no proper adjudication of the matter. So we decline to answer question No. 1 referred to this court, but direct the Tribunal to restore the appeal to file and dispose of the issue relating to question No. 1 afresh and in accordance with law.
4. Regarding question No. 2, we noticed in our judgment dated January 13, 1989, (see [1989] 177 ITR 458) that Section 80AA was introduced in the Income-tax Act with effect from April 1, 1968, by the Finance (No. 2) Act, 1980, and the decision of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 has its impact to find whether the entire dividend income was to be excluded from the income assessed under Rule 1(viii) of the First Schedule. We find that in CIT v. Hindustan Gum and Chemicals Ltd. [1990] 182 ITR 396, a Bench of the Calcutta High Court has considered the matter in great detail and has held at pages 406 and 407 as follows :
“Under the First Schedule, in computing the chargeable profits of the previous year, the total income computed under the Income-tax Act for that year has to be adjusted and income by way of dividend shall be excluded. In computing the total income under the Income-tax 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 the Income-tax 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 the 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 Section 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….
Therefore, the amount of income-tax has to be excluded from the total income as adjusted under rule 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 Section 80M and not on the dividends included in the gross total income.”
5. In the light of Section 80AA of the Income-tax Act and the decision of the Supreme Court in Distributors (Baroda) P. Ltd.’s case [1985] 155 ITR 120 as explained by the Calcutta High Court in Hindustan Gum and Chemicals Ltd.’s case [1990] 182 ITR 396, we are of the view that the Tribunal was in error in holding that the entire dividend income was to be excluded from the income assessed under Rule 1(viii) of the First Schedule. We answer the question in the negative, against the assessee and in favour of the Revenue. It is for the Appellate Tribunal to work out the details afresh in the light of the above answer given by us to question No. 2.
6. The references are disposed of as above.
7. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.