SUPREME COURT OF INDIA

Before:- S.P. Bharucha, D.P. Mohapatra, and Y.K. Sarbharwal, JJ.

C. A. Nos. 5547-5549/1994. D/d. 1.11.2000.

Commissioner of Income-Tax - Petitioner

Versus

Sundram Industries (P) Ltd. - Respondent

A. Income Tax Act, 1961, Sections 80L and 80M - Companies (Profits) Surtax Act, 1964, Section 4 and 2(5) and Schedule I Rule 1(viii) - Computation of chargeable profits- Deduction under Rule 1 (viii) of the First Schedule - Only the net dividend is included in the total income and, therefore, it is this amount which is deductible in arriving at the figure of the chargeable profits.

[Para 2]

B. Income Tax Act, 1961, Chapter VI-A - Computation of capital base - Deductions under Chapter VI-A- Question regarding proportionate reduction of capital whether to be allowed already stood decided against Revenue in Stump Schedule case (1991)187 ITR 108 (SC).

[Paras 1 and 2]

Cases Referred :-

Second Income Tax Officer v. Stumpp Schuele and Somappa P. Ltd., 187 I.T.R. 108.

Distributors (Baroda) P. Ltd. v. Union of India, (1985) 155 I.T.R. 120.

Commissioner of Surtax v. Modi Industries Ltd., 200 I.T.R. 325.

ORDER

S.P. Bharucha, D.P. Mohapatra, & Y.K. Sarbharwal, JJ. - 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 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?

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

2. It is not in dispute that the first two questions are covered against the Revenue by the judgment of this Court in Second Income Tax Officer and Anr. v. Stumpp Schuele and Somappa P. Ltd. 187 I.T.R. 108. The question to consider, therefore, is the third question. The judgment of this Court in Distributors (Baroda) P. Ltd. v. Union of India and Ors. 155 I.T.R. 120 delivered in respect of a similar provision was considered by the Delhi High Court, in the case of Commissioner of Surtax v. Modi Industries Ltd. 200 I.T.R. 325. 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) Pvt. Ltd. (S.C.) and noted that following that judgment, several High Courts had taken the view that on a correct interpretation of Rule 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 of 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. The third question is, therefore, answered in the negative and in favour of the Revenue.

3. The civil appeals are allowed to that extent.

4. No order as to costs.

Appeal Allowed in part.