Under Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, the gross dividend income is to be excluded from the total income computed for purposes of income-tax assessment, not the net dividend income.

B.S.Dhillon, J.

1. The facts giving rise to this reference are that the assessee-company derives income from the grinding of wheat. For the previous year relevant to the assessment year 1970-71, it had "chargeable profits" liable to surtax under the Companies (Profits) Surtax Act, 1964 (hereinafter called " the Act "). The total income of the company under the I.T. Act was determined at Rs. 17,66,820. By an order under Section 154 of the I.T. Act, the total income was determined as Rs. 17,64,730. The said total income so determined included income by way of dividends to the extent of Rs. 89,894 which was calculated as under : Rs. Dividend income gross 2,25,734 1,000 ___________ 2,24,734 Deduction u/s. 80M 1,34,840 ___________

2. Rule 1(viii) of the First Schedule of the Act provides that in computing the chargeable profits of a previous year, the total income computed for that year under the I.T. Act shall be adjusted by excluding from such total the income by way of dividends from an Indian company or a company which had made the prescribed arrangements for the declaration and payment of dividends within India. The assessee claimed before the ITO that under Rule 1(viii) of the First Schedule, the entire income by way of dividends, namely, Rs. 2,25,734 should be excluded from the total income computed under the I.T. Act. This contention was not accepted by the ITO and he excluded only Rs. 89,894 because that was the only income by way of dividends which was included in the total income assessed.

3. Being aggrieved, the assessee filed an appeal to the AAC claiming that the entire income by way of dividends should be excluded from the total income computed under the I.T. Act. The AAC accepted the contention of the assessee and excluded a sum of Rs. 2,25,734. Being aggrieved, the revenue filed an appeal before the Tribunal, who dismissed the appeal of the revenue,

4. In a reference application made by the revenue, the following question of law has been referred to this court for its opinion;

" Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that under rule l(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964 , the gross dividend of Rs. 2,25,734 and not the net dividend of Rs. 89,894 which actually formed part of the total income was to be excluded from the total income computed for purposes of income-tax assessment? "

5. After hearing the learned counsel for the parties, we are of the opinion that no exception can be taken to the view taken by the Tribunal. We have gone through the provisions of Sections 2(24), 2(45), 80C(5) and 80M of the IT. Act read with Sections 2(5), 2(8), 2(9), 4 and Sch. I, rule l(viii) of the Act with the assistance of the learned counsel for the parties. It is not disputed that the provisions of Section 80M of the IT. Act were the subject-matter of interpretation by their Lordships of the Supreme Court in Cloth Traders P. Ltd. v. Addl. CIT [1919] 118 ITR 243. The words "such income" appearing in Section 80M of the IT. Act were the subject-matter of interpretation of their Lordships. Their Lordships held that the words " such income " cannot have reference to the quantum of the income included but refer only to the category of the income included, viz., income by way of dividends from a domestic company. The contention that relief to the extent of quantum of income be given was repelled. In a similar case as has arisen in this reference application, a Bench of the Himachal Pradesh High Court in Mohan Meakin Breweries Ltd. v. CIT [1979] 118 ITR 300, construed the very provisions of Rule 1(viii) of the First Schedule of the Act and it was found as follows :

" The definition of chargeable profits provided in Section 2(5) of the Companies (Profits) Surtax Act, 1964 , deals with the total income of an assessee computed under the IT. Act and the total income is further required to be adjusted in accordance with the provisions of