JUDGMENT
U.T. Shah, J.
1. Since, inter alia, a common issue is involved in these references, they are heard together and are being disposed of by a common judgment for the sake of convenience.
2. The assessees are companies to which the provisions of the Companies (Profits) Surtax Act, 1964 (“the Surtax Act”), are applicable. The assessment years in the case of Messrs Voltas Ltd. are 1974-75 and 1975-76 while, in the case of Messrs Standard Mills Co. Ltd., it is 1975-76.
3. The questions referred to us under section 256(1) of the Income-tax Act, 1961 (“the 1961 Act”), read with section 18 of the Surtax Act at the instance of the Revenue in the case of Messrs Voltas Ltd., are as follows :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, could not be invoked for the purpose of reducing the capital base proportionately having regard to the deductions the assessee-company had obtained in terms of Chapter VI-A of the Income-tax Act in the computation of its total income ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the excess provision for taxation is includible in the capital base of the assessee-company for the purpose of surtax assessments ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that in computing the chargeable profits under the First Schedule to the Act, the total income computed under the Income-tax Act, 1961, should be adjusted by excluding the total amount of dividend received and not the reduced dividend after deduction of allowances under section 80K and 80M in computing the income for income-tax Purposes ?”
4. At the outset, Shri Mistry, learned counsel for the assessee, and Dr. Balasubramaniam, learned counsel for the Revenue, stated that, in view of the decisions of the Supreme Court in the cases in ITO (Second) v. Stumpp, Schuele and Somappa P. Ltd. [1991] 187 ITR 108 and Vazir Sultan tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, the answer to both questions Nos. 1 and 2 should be in the affirmative and in favour of the assessee. These questions are, therefore, answered accordingly.
5. The questions referred to us at the instance of the Revenue in the case of Messrs Standard Mills Co. Ltd., are as follows :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the gross dividend amounting to Rs. 9,43,144 should be deducted from the total income of the assessee for computing the chargeable profits, and not the net dividend of Rs. 17,258 as deducted by the Surtax Officer ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that, for the assessee’s surtax assessment, rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, cannot be applied in respect of the deduction obtained by the assessee in is income-tax assessment under Chapter VI-A of the Income-tax Act, 1961 ?”
6. At the outset, Shri Dwarkadas, learned counsel for the assessee, and Dr. Balasubramaniam, learned counsel for the Revenue, stated that, in view of the decisions of the Supreme Court in the case of Second ITO v. Stumpp, Schuele and Somappa P. Ltd. [1991] 187 ITR 108, question No. 2 should be answered in the affirmative and in favour of the assessee. This question is, therefore, answered accordingly.
7. Now, we are left with the common issue taken up in question No. 3 in the case of Messrs Voltas Ltd. and question No. 1 in the case of Standard Mills Co. Ltd. The material data for the purpose of the determination of the issue is as under :
In the case of Messrs Voltas Ltd. :
Assessment year 1974-75 1975-76
Rs. Rs.
Aggregate dividend received 6,69,450 6,51,678
After deduction under
section 80K/80M 2,48,800 4,09,007
In the case of Messrs Standard Mills Co. Ltd. :
Assessment year 1975-76
Aggregate dividend received 9,43,144
After deduction under section 80K/80M 17,258
1. It may be mentioned that "aggregate dividend received" is worked out after deducting expenses, etc., under section 57(iii) of the 1961 Act, from the aggregate of the gross dividend received by the assessees from various companies.
2. The income by way of dividend (after deduction under section 80K/80M of the 1961 Act) of Rs. 2,48,800, Rs. 4,09,007 and Rs. 17,258 was included in the total income of the respective years under reference in the assessments framed under the 1961 Act.
8. In the assessment proceedings under the Surtax Act, the assessees claimed before their respective Surtax Officers (“the S.T. O.”), that in computing their chargeable profits as per the First Schedule to the Surtax Act, the aggregate dividend of Rs. 6,69,450, Rs. 6,51,678 and Rs. 9,43,144, respectively, should be excluded from the total income worked out under section 143(3) of the 1961 Act by virtue of rule 1(viii) of the said Schedule. The Surtax Officer, however, was of the view that the income by way of dividend (after deduction under section 80K/80M of the 1961 Act) of Rs. 2,48,800, Rs. 4,09,007 and Rs. 17,258, respectively, only could be excluded. In appeal, however, both the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal accepted the assessees’ stand that the income by way of dividend, prior to deduction under section 80K/80M of the 1961 Act, should be excluded from the total income of the assessee for the respective years in view of the clear provision of rule 1(viii) of the First Schedule to the Surtax Act. As stated above, the Tribunal has referred question No. 3 in the case of Messrs Voltas Ltd., and question No. 1 in the case of Messrs Standard Mills Co. Ltd., at the instance of the Revenue, in this regard.
9. At the outset, Shri Mistry, learned counsel for Messrs Voltas Ltd., was fair enough to invite our attention to the decision of this court in the case of CIT v. Banque Nationale De Paris [1992] 194 ITR 167, which apparently supports the stand taken by the Revenue. However, he hastened to state that it would be his endeavour to impress upon us that the said decision should not be followed as, in that case, the court was concerned with rule 1(x) of the First Schedule which deals with “income by way of any interest” while, in the present reference, we are concerned with rule 1(viii) of the said Schedule which deals with “income by way of dividend”. Further, in the reported case, the court has considered the first part of the Explanation inserted in rule 1 of the First Schedule to the Surtax Act, by the Finance Act, 1981, which was made applicable from April 1, 1981, that is from the assessment year 1981-82 while, in the present reference, we are concerned with the second part of the said Explanation. In this connection, he also referred to the Memorandum explaining the provision of the Finance Bill, 1981, which, inter alia, inserted the said Explanation reported in [1981] 128 ITR (St.) 82, 111, with a view to urge that the said Explanation would be applicable to the assessment year 1981-82 onwards and not to the assessment years prior to the assessment year 1981-82. Relying on the decision of this court in the case of CIT v. Tata Chemicals Ltd. [1988] 169 ITR 314, he submitted that the circulars issued by the Central Board of Direct Taxes are binding on the income-tax authorities and, therefore, the Surtax Officer ought to have accepted the assessees’ contention in this regard. Learned counsel also referred to sections 80AA and 80AB of the 1961 Act and submitted that, in the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120, the Supreme Court was called upon to decide the validity of section 80AA. In other words, according to him, the position of section 80AB has not altered vis-a-vis the issue raised in the present reference. He, however, was fair enough to invite our attention to a recent decision of the Delhi High Court in the case of Commr. of Surtax v. Modi Industries Ltd. (No. 2) [1993] 200 ITR 325, where the court has taken a view in favour of the Revenue on a similar issue which came up for its consideration. In conclusion, he once again urged that since in the case of Banque Nationale De Paris [1992] 194 ITR 167, this High Court was not directly concerned with the issue involved in the present reference, certain observations made by the court in connection with the Explanation inserted in rule 1 of the First Schedule to the Surtax Act, with effect from April 1, 1981, by the Finance Act, 1981, should not influence our mind in deciding the question referred to us.
10. Shri Dwarkadas, learned counsel for Messrs Standard Mills Co. Ltd., apart from adopting the arguments made in the case of Messrs Voltas Ltd., invited our attention to section 2(5) of the Surtax Act which defines “chargeable profits” as well as rule 1(viii) of the First Schedule to the Surtax Act to urge that the aggregate dividend received by the assessee after deduction of expenses, etc., under section 57(iii) of the 1961 Act, should be excluded from the total income in determining the chargeable profits as per the First Schedule to the Surtax Act and not the amount of dividend arrived at after considering the deduction granted under Section 80K/80M of the 1961 Act, as was done by the Surtax Officer.
11. We have considered the submissions made by learned counsel for the assessees and have carefully gone through the decision of this court in the case of Banque Nationale De Paris [1992] 194 ITR 167 and we do not in any force in the stand taken on behalf of the assessees. As regards the Explanation inserted in rule 1 of the First Schedule to the Surtax Act, this court observed as under at page 178 of the report :
“It was lastly submitted by the assessee that by the Finance Act of 1981, an Explanation has been added to rule 1 of the First Schedule to the Companies (Profits) surtax Act. It 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 Income-tax 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.’
It is submitted that rule 1(x) can be interpreted as referring to the net income only after the insertion of the Explanation and not prior to it. This submission, in our view, must be rejected. 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 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.
In this connection, it is interesting to note the background in which this Explanation was inserted. This is set out in the Memorandum explaining the provision of the Finance Bill, 1981, which, inter alia, inserted this Explanation. The relevant note states (see [1981] 128 ITR (St.) 111) :
‘In the case of Cloth Traders P. Ltd. v. Addl. CIT [1979] 118 ITR 243, the Supreme Court held that, in computing the taxable income for the purposes of the Income-tax 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…………….. Since this decision ran counter to the legislative intent to grant such deduction with reference to the net income by way of dividends only, the Finance (No. 2) Act, 1980, inserted a new section 80AA in the Income-tax Act clarifying the intention with retrospective effect from April 1, 1968. In several cases, High Courts have held that, even for the purposes of determining chargeable profits under the Companies (profits) Surtax Act, the gross amount of dividends should be excluded from the total income……………. and, accordingly, the High Court rulings have resulted in giving an unintended benefit to companies in respect of dividends received by them from domestic companies.’
Hence, the Explanation was added to rule 1 of Schedule I. The insertion of the Explanation, therefore, does not help the assessee in any way.”
12. The fact that, in the above case, the court was dealing with the first part of the Explanation would not in any way affect the observations made in respect of the purpose of the Explanation as a whole brought on the statute.
13. Under the Surtax Act, certain “excess profits” are brought to tax like its under forerunners, viz., the Excess Profits Tax Act, 1940, the Business Profits Tax Act, 1947, and the Super Profits Tax Act, 1963. Under the Surtax Act, the chargeable profits (excess profits) are defined in section 2(5) to mean the total income of an assessee computed under the 1961 Act for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule to the Surtax Act. The relevant portion of the First Schedule read as under :
“THE FIRST SCHEDULE
(See section 2(5))
In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax 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 a company which has made the prescribed arrangements for the declaration and payment of dividends within India;”
14. The question is whether the words “income by way of dividend……… received from an Indian company” refer to the gross dividend received by the assessee as reduced by expenses permissible under section 57(iii) of the 1961 Act or whether they refer to the net dividend after deduction allowed under section 80K/80M of the 1961 Act also. There are twelve clauses contained in rule 1 including clause (viii). On a plain reading of various clauses, it is clear that certain items of income which are included in the total income while computing such total income under the 1961 Act are to be excluded in working out the chargeable profits under the First Schedule to the Surtax Act. It is not doubt true that in Banque Nationale De Paris [1992] 194 ITR 167 (Bom), the court was interpreting clause (x) of rule 1 of the First Schedule to the Surtax Act. However, the ratio laid down therein would be equally applicable in the instant case. At page 180 of the report in concluding the judgment, the court observed as under :
“Rule 1(x), in our view, refers to the exclusion of only the net interest from the total income for arriving at the chargeable profits, that is to say, such interest covered by rule 1(x) as would form a part of the total income computed under the Income-tax Act.”
15. In the instant case, it cannot be disputed that Rs. 2,48,800 and Rs. 4,09,007 formed a part of the total income respectively, for the assessment years 1974-75 and 1975-76, in the case of Messrs Voltas Ltd., and Rs. 17,258 formed a part of the total income for the assessment year 1975-76, in the case of Messrs Standard Mills Ltd., which only would be excluded in determining the chargeable profits for the purpose of the Surtax Act.
16. In view of the aforesaid discussion, we answer question No. 3 in the case of Messrs Voltas Ltd. and question No. 1 in the case of Messrs Standard Mills Ltd., in the negative that is against the assessee and in favour of the Revenue.
17. No order as to costs.