JUDGMENT
THANIKKACHALAM, J. :
At the instance of the Department, the Tribunal referred the following common question of law for the asst. yrs. 1975-76 to 1979-80, for the opinion of this Court under s. 256(1) of the IT Act, 1961, r/w s. 18 of the Companies (Profits) Surtax Act, 1964 :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that while computing the chargeable profits for purposes of surtax assessment the deductions contemplated in sub-cls. (viii) and (ix) of cl. 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, should be allowed at their gross amounts ?”
2. The assessee is a company in which the public are substantially interested and the assessment years involved are 1975-76 to 1979-80 for which the respective financial years are the accounting years. The point for consideration relates to adjustment of dividends and royalty for the purpose of computing the chargeable profits in terms of rr. 1(viii) and 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964. The rule provides for adjustment of income by way of dividends and income by way of royalties. A plain reading of the rules gives the impression that the income contemplated in the aforesaid rule refers to gross and not net income. This is the view of Kerala, Punjab & Haryana and Himachal Pradesh High Courts. However, the Tribunal found that the Supreme Court has granted special leave to the Department to appeal against the judgment, dt. 21st June, 1979 of the Karnataka High Court in ITRC No. 2 of 1976 whereby the High Court following the decision of the Supreme Court in the case of Cloth Traders (P) Ltd. vs. CIT (1979) 118 ITR 243 (SC) answered in favour of the assessee-company the question whether for the purpose of assessment under the Companies (Profits) Surtax Act, 1964 the assessee was entitled to deduction under r. 1(viii) of the First Schedule of the full amount of dividend or only the lesser amount (vide CIT vs. Consolidated Coffee Co. Ltd. – SLP Civil No. 10350 of 1980 decided on 15th April, 1983).
3. While finalising the assessment, the ITO has adjusted only the net income assessed under ss. 80M and 80MM of the IT Act, 1961, as against the gross amounts claimed by the assessee.
4. On appeal, the CIT(A) accepted the plea of the assessee that only gross income by way of dividends and royalties should be adjusted and not net income as taken by the ITO. On further appeal by the Revenue, the Tribunal upheld the decision of the CIT(A).
5. Insofar as the first part of the question relating to deduction claimed under r. 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, is concerned, the assessee claimed that the gross dividend income received should be allowed as deduction and not the net income after deducting the expenditure. A similar question came up for consideration before the Calcutta High Court in CIT vs. Hindustan Gum & Chemicals Ltd. (1990) 182 ITR 396 (Cal), wherein the Calcutta High Court, by following the decision of the Supreme Court in the case of Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 155 ITR 120 (SC) held that where the assessee deriving dividend income from another Indian company is not entitled to exclusion of the gross dividend income, but only the net dividend after the deduction of the amount allowed under s. 80M of the Act.
6. A similar view was taken by the Kerala High Court in the case of CIT vs. Kil Kotagiri Tea & Coffee Estates Ltd. (1991) 191 ITR 283 (Ker), by the Karnataka High Court in CIT vs. T. T. (P) Ltd. (1992) 195 ITR 614 (Kar), by the Delhi High Court in Trade Links (P) Ltd. vs. CIT (1993) 200 ITR 575 (Del), by the Andhra Pradesh High Court in CIT vs. Vazir Sultan Tobacco Co. Ltd. (1995) 212 ITR 624 (AP), by the Allahabad High Court in CIT vs. R. B. Multanimal Modi & Sons (1991) 189 ITR 30 (All), by the Gujarat High Court in Commr. of Surtax vs. Atul Products Ltd. (1994) 208 ITR 515 (Guj), and by the Madras High Court in CIT vs. Stanes & Co. Ltd. (1995) 216 ITR 127 (Mad), wherein the Madras High Court followed the earlier decision of its own in Tax Case Nos. 136 and 137 of 1979, judgment dt. 19th June, 1986 (Virudhunagar Textile Mills Ltd.) A similar view was also taken by this Court in Tax Case No. 1518 of 1984, judgment dt. 22nd April, 1996. In all these decisions, rendered by various High Courts, they have followed the judgment of the Supreme Court in Distributors (Baroda) (P) Ltd. vs. Union of India (supra). In view of the abovesaid uniform view taken by the various High Courts and the Supreme Court, we hold that the Tribunal was not correct in coming to the conclusion that for the purpose of surtax assessment the deduction contemplated in sub-cl. (viii) of r. 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, should be given with regard to the gross dividend. Accordingly, we answer the first part of the question referred to us in the negative and in favour of the Department.
7. Insofar as the second part of the question referred to us is concerned, it relates to deduction contemplated in sub-cl. (ix) of cl. 1 of First Schedule to the Companies (Profits) Surtax Act, 1964. According to the assessee, royalty amount received from the Government should be allowed as deduction while computing the chargeable profits for the purpose of surtax assessment. But according to the Department, in view of the various decisions rendered by various High Courts and the Supreme Court, the deduction should be given only with regard to the net royalty income, so far as the deduction contemplated under sub-cl. (ix) of cl. 1 of the First Schedule to the Companies (Profits) Surtax Act, is concerned.
8. The Tribunal, while deciding this issue, held that the gross royalty income received by the assessee from the Government should be allowed as deduction, while computing the chargeable profits for the purpose of surtax assessment. The learned standing counsel appearing for the Department submitted that in view of Expln. to r. 1 of the First Schedule of the Companies (Profits) Surtax Act, which came into effect from 1st April, 1981, which is clarificatory in nature, according to the judgment of the Supreme Court in Distributors (Baroda) (P) Ltd. vs. Union of India (supra) the Explanation is applicable to the earlier assessment years, including the assessment years under consideration and accordingly the assessee is entitled to deduction of net royalty income received from the Government while computing the chargeable profits for the purpose of surtax assessment. This Explanation was introduced under the Companies (Profits) Surtax Act, 1964, in order to make the Companies (Profits) Surtax Act, 1964, in line with the law obtaining under the IT Act, 1961. Under the IT Act, s. 80AA was added to the IT Act with retrospective effect from 1st April, 1968. This provision made it clear that only the net dividend could be deducted under Chapter VIA of the IT Act, 1961. Therefore, the assessee is not entitled to ask for deduction of the gross royalty income received from the Government while computing the chargeable profits for the purpose of surtax assessment.
9. However, the learned counsel appearing for the assessee submitted that in the decision rendered by the Supreme Court in Distributors (Baroda) (P) Ltd. (supra) the Boards circular to the effect that the Explanation brought out to the Companies (Profits) Surtax Act, r. 1 would be applicable only from the asst. yr. 1981-82, was not brought to the notice of the Supreme Court. Therefore, according to the learned counsel, the abovesaid Explanation would be applicable only from the asst. yr. 1981-82 onwards. So also, the learned counsel submitted that the Bombay High Court, while rendering its decision in CIT vs. Banque Nationale De Paris (1992) 194 ITR 167 (Bom) which had the occasion to consider cl. (x) of r. 1 of Companies (Profits) Surtax Act, 1964, held that only the net income received by way of interest or fees received for any technical service alone should be taken into consideration. According to the learned counsel, cl. (x) is pari materia with cl. (ix) of r. 1 of the First Schedule to the Companies (Profits) Surtax Act. In the abovesaid decision also the learned counsel submitted that the circular issued by the CBDT, as stated above, was not considered. Therefore, according to the learned counsel for the assessee, or a plain reading of sub-cl. (ix) of r. 1 of Companies (Profits) Surtax Act, while computing the chargeable profits, only the gross royalty received by the assessee from the Government should be taken into consideration and not the net royalty amount. In order to support this line of argument, the learned counsel appearing for the assessee, relied upon the decision of the Madhya Pradesh High Court in CIT vs. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. (1984) 146 ITR 178 (MP) wherein the Madhya Pradesh High Court held that Expln. to r. 1(viii) of Sch. I to the Companies (Profits) Surtax Act, 1964 has not been given any retrospective effect, and so, it will have application only for the asst. yr. 1981-82 and subsequent years. After the coming into force of the Explanation, the deduction under cl. (viii) of r. 1, for computing chargeable profits would be of the net income received from dividends. As the Explanation has no application to the asst. yr. 1968-69, the gross income from dividends has to be deducted in computing the chargeable profits for that year. While rendering this decision, the Madhya Pradesh High Court followed the decision of the Supreme Court in Cloth Traders (P) Ltd. vs. Addl. CIT (supra). This decision was reversed by the Supreme Court in Distributors (Baroda) (P) Ltd. (supra). Further, this decision is concerned with sub-cl. (viii) of r. 1 and not with regard to sub-cl. (ix) of r. 1.
10. While considering the Expln. to r. 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the Andhra Pradesh High Court in CIT vs. Andhra Bank Ltd. (1990) 186 ITR 192 (AP), held that the Explanation is only clarificatory or declaratory in nature, declaring the law, which was already in existence, and, therefore, an Explanation would be applicable to the earlier assessment years also, even though it came into effect from 1st April, 1981. This amendment was brought out to the Companies (Profits) Surtax Act, 1964, r. 1, in line with s. 80AA, which was brought out by an Amending Act to the IT Act, 1961. A similar view was taken by the Calcutta High Court in the case of CIT vs. Hindustan Gum & Chemicals Ltd. (1990) 182 ITR 396 (Cal), by the Karnataka High Court in CIT vs. T. T. (P) Ltd. (1992) 195 ITR 614 (Kar) and by the Delhi High Court in Commr. of Surtax vs. Modi Industries ( (1993) 200 ITR 325 (Del). Again by the Andhra Pradesh High Court in CIT vs. Vazir Sultan Tobacco Co. Ltd. (1995) 212 ITR 624 (AP). So also the Bombay High Court in the case of CIT vs. Banque Nationale De Paris (supra), while considering sub-cl. (x) of r. 1 of First Schedule of Companies (Profits) Surtax Act, 1964, held, that while granting deduction from the income derived by a company from securities of the Central Government constitutes income by way of interest from the Government as contemplated under r. 1(x) of the First Schedule to the Companies (Profits) Surtax Act, 1964, and while granting deduction, the net interest income derived alone should be deducted while computing the chargeable profit under the Companies (Profits) Surtax Act, 1964. In the abovesaid decision, while considering the Explanation brought out to r. 1 of the First Schedule to the Companies (Profits) Surtax Act, the Bombay High Court observed that an Explanation may be appended to a section to explain the meaning of the words used in the section. There is no presumption that an Explanation which is inserted subsequently introduces something new, which was not present in the section before. Ordinarily, an Explanation is inserted to clear up any ambiguity in the section and it should be so read as to harmonise it with the section and to clear up any ambiguity in the main section. Here also the Bombay High Court followed the judgment of the Supreme Court in 155 ITR 120 (SC) cited supra.
In view of the various decisions cited supra rendered by various High Courts wherein it was held that the Explanation brought out to r. 1 of First Schedule to the Companies (Profits) Surtax Act, 1964, is clarificatory in nature, and, therefore, it is applicable for the earlier assessment years also we cannot accept the argument advanced by the learned counsel appearing for the assessee that while computing the chargeable profits, only the gross royalty income should be taken into consideration in view of the decision of the Madhya Pradesh High Court in (1984) 146 ITR 178 (MP) cited supra, wherein the Madhya Pradesh High Court followed the decision of the Supreme Court in the case of Cloth Traders (P) Ltd. vs. Addl. CIT (supra), which decision was reversed by the Supreme Court in the case of Distributors (Baroda) (P) Ltd. (supra). In view of the foregoing discussion, we are of the opinion that the Tribunal was not correct in holding that while computing the chargeable profits, the gross royalty income should be deducted. In that view of the matter, we answer the second part of the question referred to us in the negative and in favour of the Department. No costs.
