BALASUBRAHMANYAN J.


This reference arises under the Companies (Profits) Surtax Act, 1964. The point for consideration relates to the computation of chargeable profits under the First Schedule to that Act Under the Surtax Act, chargeable profits will have to be derived from the total income of the assessee-company as computed for income-tax assessment, but subject to certain adjustments. In the present case, the assessee is a private company by name Express Newspapers Private Ltd., Madras. Its total income for the assessment year 1972-73 for purposes of income-tax assessment was Rs. 35, 60, 820. In the relevant previous year, the assessee had derived dividend income of Rs. 2, 47, 315. For computing the assessee's chargeable profits under the Surtax Act, the assessee claimed that from the total income of Rs. 35, 60, 820 the dividend income of Rs. 2, 47, 315 must be deducted. The ITO did not do so. On appeal, however, the AAC granted the assessee's claim for deduction. While doing so, however, the Asst. Commissioner directed the ITO to apply r. 2(i)(a) of the First Schedule to the Surtax Act. The net result of the AAC's order was that while on the one hand, the dividend of Rs. 2, 47, 315 had to be deducted from the total income for arriving at the chargeable profits for surtax purposes, the proportionate income-tax payable on the dividend could not be excluded from the chargeable profits, and the officer was asked to calculate the figure of the proportionate income-tax on dividends.


The assessee appealed to the Tribunal against the latter part of the directions issued by the AAC. The Tribunal accepted the plea of the assessee that on a proper application of r. 2(i)(a) and on a proper calculation of the figures, the proportionate income-tax payable on the dividend would be found to be nil, therefore, it would not affect the chargeable profits arrived at after deducting the dividend. In other words, according to the Tribunal, the practical application of r. 2(i)(a) to this case would not affect the computation of chargeable profits in so far as the deduction of dividend was concerned, and the "gross" dividend, without deduction of any kind, will have to be deducted from total income for arriving at the chargeable profitsIn this reference by the Department, the order of the Tribunal is challenged on the following question of law.


"Whether, on the facts and in the circumstances of the case, in applying the provisions of rule 2(i)(a) of the First Schedule any tax on the gross dividend of Rs. 2, 47, 315 has to be excluded ?" *


We must confess that the order of the Tribunal makes for difficult reading. The rule in the First Schedule provides that while income-tax payable by the assessee on its total income will go in "reduction" of the total income to be taken into account for the purpose of computation of chargeable profits, from the income-tax which enters into the reckoning as part of that "reduction", must be excluded the proportionate income-tax payable on the dividend income. The crucial words of r. 2(i)(a) are in the following terms.


".. ... after excluding from such amount the amount of income-tax, if any, payable by the company in respect of any income referred to in... clause (viii) of rule 1..." *


The income referred to in cl. (viii) of r. 1 is the dividend income. Rule 2(i)(a) thus speaks of the amount of income-tax, if any, payable by the company on the dividend income. The implication of this rule is very clear. If no income-tax is payable on the dividend income, then the entire income-tax liability will go to reduce the total income for arriving at the chargeable profits. It is only in a case where some income-tax is payable on the dividend income, that the amount of such income-tax will have to be excluded from the tax which will go in reduction of the total income for arriving at the chargeable profits for surtax purposes.


The question in the present case is, therefore, simple enough. In practical terms and in order to minimise our figure work, we will have to find out as to what was the tax treatment given to this dividend income of Rs. 2, 47, 315 in the income-tax assessment order. The relevant portion of the income-tax assessment order has been extracted by the Tribunal. This extract shows that while the dividend income of Rs. 2, 47, 315 figures in the income-tax assessment under the head "Other sources", that amount is offset and more than absorbed by the allowance of interest in the sum of Rs. 11, 44, 635. It is common ground that the assessee's liability for interest in this sum of Rs. 11, 44, 635 arises out of borrowings effected by the assessee for investing in the very shares from which the dividend income of Rs. 2, 47, 315 was derived in the relevant year of account. According to the computations contained in the income-tax assessment order, the net result of the assessment of dividend income is not a positive figure of Rs. 2, 47, 315 or any lesser positive figure, but loss of Rs. 8, 97, 320 after setting off the dividend income against interest. As the AAC pointed out,

"the entire gross dividend income of Rs. 2, 47, 315 must be taken to have been more than absorbed by a negative income by way of net interest computed at Rs. 11, 44, 635 under other sources" *


The position, therefore, is undeniable that in the circumstances of the assessee's case, no part of the dividend income of Rs. 2, 47, 315 has borne income-tax or could have borne income-tax in any amount. Rule 2(i)(a) of the First Schedule to the Surtax Act, as we earlier said only refers to income-tax, "if any", payable on the dividend income. It is true that in this case the dividend income has not borne tax only because of the interest charges being of such amount as to swallow the entire dividend income. Even so, the fact remains that no income-tax is payable on the dividend income. It follows, therefore, that no adjustment can be made in terms of r. 2(i)(a) for arriving

at the chargeable profits of the assessee in this case. The conclusion of the Tribunal in their order was that no adjustment need be made under r. 2(i)(a) of the First Schedule having regard to the facts of the present case. Our reasoning is fundamentally different, although it leads to the same conclusion. We have shown that on the facts and in the circumstances of the present case, r. 2(i)(a) has no application at all for the simple reason that no tax is payable on the dividend income in this case. The result, however, is that the assessee succeeds in this reference. The Department will pay the assessee's costs. Counsel's fee Rs. 500.