JUDGMENT
Ramanujam, J.
1. At the instance of the Revenue, the following common questions in relation to the assessment years 1969-70, 1970-71 and 1971-72, have been referred to this court for its opinion by the Income-tax Appellate Tribunal :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was not justified in diminishing the capital base with reference to the deductions allowed under Chapter VI from the total income ?
2. Whether the Tribunal’s view that for the purpose of the computation of capital base, the provisions of rule 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 ?
3. 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 rule 1(viii) of the First Schedule should be made only with reference to gross dividends, but not the net dividends as done by the Income-tax Officer ?”
2. In all the three assessment years, the assessee was allowed certain deductions under the relevant provision of Chapter VI-A of the I.T. Act which incorporates ss. 80A to 80D. For the purpose of determining the capital base in accordance with the Companies (Profits) Surtax Act, 1964, the ITO held that the amount of capital attributable to the amounts excluded had to be deducted in terms of rule 4 of the Second Schedule to that Act. According to him, the amounts for which deduction was given under Chapter VI-A constituted part of the income, profits and gains of the company which is not includible in its total income.
3. The assessee took the matter in appeal to the AAC who, following the decision of the Tribunal in S.T.A. Nos. 6 and 7 of 1970-71 in the case of Messrs. Bimetal Bearing Limited, held that in working out the capital base under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, rule 4 cannot be invoked in respect of deductions made under Chapter VI-A of the I.T. Act, as those deductions are only in the nature of concession or allowance in tax calculation.
4. Aggrieved against the order of the AAC, the Revenue went before the Tribunal in appeal. In the appeals filed by the Revenue, it was contended that according to rule 4 of the Second Schedule to the Act, where a part of the income, profits and gains of a company is not includible in the total income as computed under the I.T. Act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3 as 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, that the total income for purposes of rule 4 is the total amount of income computed in the manner laid down in the Act and after deducting the items listed in Chapter VI-A of the I.T. Act, and that the AAC had gone wrong in holding that in working out the capital base, rule 4 cannot be invoked in respect of deductions made under Chapter VI-A of the I.T. Act, 1961. The Tribunal, relying on its earlier decision in the case of Messrs. Bimetal Bearings Limited, in S.T.A. Nos. 6 and 7 of 1970-71 as also the decision in the assessee’s own case in S.T.A. Nos. 29 and 30 of 1973-74, rejected the contention of the Revenue and dismissed its appeals. Aggrieved by the orders of the Tribunal, the Revenue has sought and obtained the reference on questions Nos. 1 and 2 set out above.
5. As already stated, the Tribunal in this case has followed its earlier decision in the case of Messrs. Bimetal Bearings Limited, Madras, in S.T.A. Nos. 6 and 7 of 1970-71. The said decision of the Tribunal was the subject-matter of a reference before this court in Addl. CIT v. Bimetal Bearings Ltd. [1977] 110 ITR 131 and this court has held that part of the profits of company “not includible in its total income” that is contemplated by rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, is what is not includible under the provisions of s. 10 of the I.T. Act, 1961, that as far as the deductions made under the provisions of Chapter VI-A of the I.T. Act are concerned the position is that up to the stage when we reach the computation for purpose of Chapter VI-A, the amount which is eligible to be considered under that Chapter forms part of or is included in the total income and the deduction is given only because of the inclusion, and that in such a case, the provisions of rule 4 do not have any scope for operation because it cannot be stated that the said profits were not at all includible in the total income of the company computed under the I.T. Act. In other words, in making the computation for the purpose of applying Chapter VI-A, the amount which is the subject-matter of relief is included in the total income and, therefore, it cannot be treated to be a case of profits and gains of a company not includible in the total income. In that case, this court referred to the decision of the Karnataka High Court in Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1977] 106 ITR 399, as supporting its view. Following the said decision of this court in the case of Bimetal Bearing Ltd. [1977] 110 ITR 131, questions Nos. 1 and 2 are answered in the affirmative and against the Revenue.
6. Another point that was in controversy between the parties was whether the assessee was entitled to the deduction of gross or only net dividends in arriving at the chargeable profits. The ITO held that only the net dividends were deductible, while the AAC held that gross amount of dividends are deductible. The Tribunal agreed with the view of the AAC. The Revenue has questioned the view of the Tribunal on question No. 3 referred to us.
7. In Cloth Traders (P.) Ltd. v. Addl. CIT , the Supreme Court, while construing the scope of s. 80M occurring in Chapter VI-A held that the deduction permissible under s. 80M is to be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, i.e., after making the deductions provided under the Act, that the words “where the gross total income of an assessee….. includes any income by way of dividends from a domestic company” in s. 80M merely prescribe a condition for the applicability of the section, viz., that the gross total income must include the category of income described by the words “income by way of dividends from a domestic company”, that if the gross total income includes this particular category of income, whatever be the quantum of such income included, the condition would be satisfied and the assessee would be eligible for the deduction of the whole of 60% of “such income”, as the case may be, that the words “such income” cannot have reference to the quantum of the income included but refer to the category of income included, namely, income by way of dividends from a domestic company. This decision supports the stand taken by the assessee. The said decision of the Supreme Court has been neutralised and has been made ineffective by a retrospective amendment of s. 80M by the Finance (No. 2) Act, 1980, with effect from June 1, 1968. However, no corresponding amendment has been made in the Surtax Act until the Finance Act, 1981, with effect from April 1, 1981. Since the assessment years in this case are earlier to the said amendment to the Surtax Act with effect from April 1, 1981, the principle laid down by the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT will apply here.
8. The learned counsel for the assessee also relies on the decisions of this court in CIT v. Madras Motor and General Insurance Company Ltd. [1975] 99 ITR 243 as also the decision in Madras Auto Service v. ITO [1975] 101 ITR 589. In the first case, it has been held that the rebate under s. 99(1)(iv) of the I.T. Act, 1961, is available on the gross dividends in view of the words “received by it” having been deleted by s. 31(3) of the Finance Act with effect from April 1, 1962, and that the assessee in that case is not liable for surtax under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, in view of the language contained therein similar to s. 99(1)(iv) of the I.T. Act as amended. In Madras Auto Service v. ITO , the question arose as to whether an assessee is entitled to relief under ss. 80K and 80M on the gross dividend income or on the net dividend income. This court relying on the decision in CIT v. Madras Motor and General Insurance Co. Ltd. [1975] 99 ITR 243 (Mad) held that the relief under ss. 80K and 80M has to be arrived at on the basis of the gross dividend income and not on the basis of the net dividend income. The decision in CIT v. Madras Motor and General Insurance Co. Ltd. [1975] 99 ITR 243 (Mad) and Madras Auto Service v. ITO are in accord with the view expressed by the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. The learned counsel for the assessee also refers to the decisions in Mohan Meakin Breweries Ltd. v. CIT and CIT v. Patiala Flour Mills Co. (P.) Ltd. as throwing light on the question referred. In Mohan Meakin Breweries Ltd. v. CIT , the Himachal Pradesh High Court held that the definition of “chargeable profits” provided in s. 2(5) of the Companies (Profits) Surtax Act, 1964, deals with the total income of an assessee computed under the I.T. Act, and the total income is further required to be adjusted in accordance with the provisions of the First Schedule by excluding “income by way of dividends” which expression refers to the gross income shown in the books of the assessee, and not the actual net income computed by the assessee, that if the Legislature intended that only net dividend is to be excluded, they would have used some language other then the expression “income by way of dividend” and, therefore, if the company which had declared divided had paid the tax on the gross dividend and if for computation of surtax the net dividend is only reduced from the total income, the remaining part of the dividend would again the subjected to surtax and that would result in double taxation which has to be avoided and that, therefore, the gross dividend is to be excluded under rule 1(viii) of the First Schedule from the total income computed for that year under the I.T. Act in order to arrive at the chargeable profits for payment of surtax. In CIT v. Patiala Flour Mills Co. (P.) Ltd. [1980] 123 ITR 273, the Punjab and Haryana High Court has taken the same view. In that case, it had been held that when the Legislature speaks of “income by way of dividend”, it refers to the gross income shown in the books of the assessee and not the net dividend which actually forms part of the total income of the assessee, that if the Legislature intended that only the net dividend is to be excluded, they would not have used the expression “income by way of dividend”, that the definition of “chargeable profits” provided in s. 2(5) of the Companies (Profits) Surtax Act, 1964, deals with the total income of an assessee computed under the I.T. Act and the total income is further required to be adjusted in accordance with the provision of rule 1(viii) of the First Schedule by excluding “income by way of dividends” and, therefore, rule 1 (viii) of the First Schedule has to be interpreted as to refer not to the quantum of dividend but to the category of dividend.
9. Following the decision of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT , we answer question No. 3 in the affirmative and against the Revenue.
10. The Revenue will pay the costs of the assessee. Counsel’s fee Rs. 500 (Rupees five hundred only) one set.
11. The learned counsel for the Revenue makes an oral application for the grant of leave to appeal to the Supreme Court against the judgment just now pronounced. It is seen that leave to appeal to the Supreme Court has already been granted on November 13, 1978, in S.C.P. No. 55 of 1978, against the decision of this court in Addl. CIT v. Bimetal Bearing Ltd. [1977] 110 ITR 131 which has been followed in this case. It is also been that in relation to the scope and ambit of rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the Supreme Court has already granted special of the matter from the Karnataka High Court in S.L.P. (Civil) No. 10350 of 1980 (CIT v. Consolidated Coffee Co. Ltd. – See [1983] 142 ITR (St.) 5), by its order dated April 15, 1983. In view of the fact that on the two questions involved in these cases, leave to appeal to the Supreme Court has already been granted, we grant leave to appeal to the Supreme Court in these cases also.
