Out of these nine appeals, five have been filed by department, while remaining four have been filed by assessee. departmental appeals relate to assessment years 1975-76 to 1979-80, while appeals filed by assessee relate to assessment years 1975-76 to 1977-78 and 1979-80. 2. We shall first deal with appeals filed by department. first ground raised is that learned Commissioner (Appeals) had erred in holding that amount of dividend and royalty which are required to be excluded in terms of rules 1(viii) and 1(ix) of First Schedule to Companies (Profits) Surtax Act, 1964 ('the Act') are gross amounts and not net amounts of dividend and royalty. This ground is common to all five assessment years. amounts involved are mentioned in orders of authorities below and need not be mentioned in this order. learned representative for assessee has relied on decisions in CIT v. Jupiter General Insurance Co. [1975] 101 ITR 370 (Bom.), A. V. Thomas & Co. v. CIT [1977] 110 ITR 515 (Ker.), CIT v. Sunderam Industries (P.) Ltd. [1985] 151 ITR 769 (Mad.) and CIT v. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. [1984] 146 ITR 178 (MP). He has also relied on decision of Tribunal for assessment years 1973-74 and 1974-75. All these decisions are based on principle laid down by Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. In that decision Supreme Court held that words 'income by way of dividends' occurring in section 80M of Income-tax Act, 1961 ('the 1961 Act'), referred to gross dividends and not net dividends. However, said decision has been overruled recently by five Judge Bench of Supreme Court in Distributors Baroda (P.) Ltd. v. Union of India [1985] 155 ITR 120. Supreme Court has held that words 'such income by way of dividends' referred to net dividend income and not gross dividend income. Supreme Court has further held that decision in Cloth Traders (P.) Ltd.'s case (supra) was wrong. Consequently, identical words in rule 1(viii) and (ix) would have to be construed in light of subsequent decision of Supreme Court, referred to above. 3. relevant provisions [rule 1(viii) and (ix) are as follows: "In computing chargeable profits of previous year, total income computed for that year under Income-tax Act shall be adjusted as follows:- 1. Income, profits and gains and other sums falling within following clauses shall be excluded from such total income, namely:- (i) to (vii) ** ** ** (viii) income by way of dividends from Indian Company. (ix) income by way of royalties received from Government or local authority or any Indian concern;" 4. In definition of 'chargeable profits' in section 2(5) of Act, total income as assessed for relevant previous year under 1961 Act is taken as first step in computation of chargeable profits and adjustment are made to this total income in order to arrive at 'chargeable profits'. First Schedule in which rule 1 quoted above appears deals with adjustments rules 1 and 2 specified downwards adjustments there are two kinds, one is styled 'exclusions' (rule 1) and other is styled 'reductions' (rule 2). broad differentiating principle between two kinds of adjustments is that reduction are of tax liabilities which exclusion in general are of certain types of income included in calculation of total income under income tax under 1961 Act. It is clear that as far as exclusion under rule 1 are concerned, they are by and large of amounts which are included in total income assessed under 1961 Act. use of word 'exclusion' as distinguished from reduction in rule 1 is significant. Consequently, when in rule 1(viii) there is provision for exclusion of income by way of dividends as included in total income. Similarly, when in rule 1(ix) income by way of royalties is mentioned what is sought to be excluded is income by way of royalties as included in total income computed under 1961 Act. These expressions do not refer to gross income by way of dividends or gross income by way of royalties. They represent net income by way of dividends and net income by way of royalties as computed under 1961 Act and included in total income. interpretations which we have placed on these expressions is derived directly from interpretations put by Supreme Court on words 'such income by way of dividends' in section 80M which occurred in same setting as words in rule 1(viii) and rule 1(ix) occurred. 5. learned representative of assessee drew our attention to fact that from 1-4-1981 Explanation has been inserted by Finance Act, 1981 in rule 1 in which specific provision has been made to effect that amount of any income, profits and gains which was required to be excluded from total income under rule 1 would be amount of such income, profits and gains as computed in accordance with provisions of 1961 Act as reduced in accordance with provisions in Chapter VIA of 1961 Act. It was submitted that since this amendment was brought into force with effect from 1-4-1981 it should be presumed that intention of Legislature was that prior to 1-4- 1981 gross amounts of income, profits and gains should be excluded under various clauses of rule 1. It was further submitted that whereas section 80AA of 1961 Act was inserted by Finance (No. 2) Act, 1980 with effect from 1-4- 1968 in order to make provision to effect that net income by way dividends should be taken into accounts for calculating deductions under section 80M of 1961 Act, similar provision in rule 1 of First Schedule of Act was made effective from 1-4-1981. This, according to learned representative, also indicated that prior to 1-4-1981 gross amounts of income, profits and gains were intended to be excluded under various clauses in rule 1. It was further submitted that words 'for removal of doubts' were not mentioned in Explanation inserted in rule 1, which also indicated that prior to 1-4-1981 gross income, profits and gains were not to be excluded. 6. We have carefully considered submissions. However, we find ourselves to accept them. Mere fact that Explanation was not stated to be inserted for removal of doubts did not indicate that legislature accepted that prior to insertion on Explanation gross amounts of income, profits and gains should be excluded from various clauses of rule 1. It is to be noted that interpretation of words in rule 1 was based on interpretation of similar words in section 80M made by High Court and initially accepted by Supreme Court in Cloth Traders (P.) Ltd.'s case (supra). correctness of that view was under challenge before Supreme Court. department had always contended in past that words 'income by way of dividends' in section 80M and similar words in rule 1 referred to net income by way of dividends and not gross income. That interpretation of department has been accepted by Supreme Court in case of Distributors Baroda (P.) Ltd. (supra). Consequently, it must be held that even prior to amendments made by insertion of Explanation by Finance (No. 2) Act, 1961, relevant words in rule 1 referred to net income and not gross income. Our attention was drawn to circular of Board in which provisions of Explanation inserted in rule 1 have been explained. We do not find anything in that circular which prevents us from interpreting relevant words in clauses (viii) and (ix) of rule 1 on basis of decision in Distributors Baroda (P.) Ltd.'s case (supra). Considering all circumstances, we hold that under clause (viii) and (ix) of rule 1 net income by way of dividends and net income by way of royalties have to be excluded from total income computed in accordance with provisions of 1961 Act. 7. It was further submitted on behalf of assessee that on basis of decision of Supreme Court in Distributors Baroda (P.) Ltd.'s case (supra), we should hold that what is to be excluded under clauses (viii) and (ix) of rule 1 is income by way of dividends as reduced by expenses incurred for earning same and income by way of royalties as reduced by expenses incurred for earning royalties and that reduction under Chapter VIA from income by way of dividends and income by way of royalties should not be taken into accounts. We are unable to accept this submission. In section 80A of 1961 Act it is mentioned that in computing total income, reduction are to be made in accordance with provisions of Chapter VIA. It is obvious that total income is computed by deducting amounts mentioned in various sections in Chapter VIA from gross total income. Some of these reductions have direct reference to particular head of income. For example, in section 80M reduction is to be made from income by way of dividends as computed under other provisions of 1961 Act. Similarly, under section 80-O of 1961 Act reduction is provided from income by way of royalties. In computation of total income, income by way of dividends and income by way of royalties after deduction under chapter VIA for such income are included. Those amounts which are included in total income are sought to be excluded by clauses (viii) and (ix) of rule 1. This is also mentioned in Explanation inserted with effect from 1-4-1981. In circumstances, and in context of interpretations derived from decision of Supreme Court, referred to above, we are of opinion that Explanation inserted in rule 1 with effect from 1-4-1981 was clarificatory in nature and that income by way of dividend and income by way of royalties has computed in accordance with provisions of said Act including Chapter VIA, shall have to be excluded under clauses (viii) and (ix) of rule 1. We, therefore, set aside orders of Commissioner (Appeals) on this point and direct ITO to exclude net income by way of dividends and royalties as explained above. 8. next ground raised in departmental appeals is that learned Commissioner (Appeals) has erred in holding that rule 4 of Second Schedule to Act was not applicable to deductions admissible under Chapter VIA of 1961 Act and, consequently, erred in directing ITO not to reduce capital base proportionately with reference to such deductions allowed in income-tax assessment of assessee. 9. We find that point in controversy has been decided against department and in favour of assessee by Tribunal in appeals for assessment years 1973-74 and 1974-75 in ST Appeal No. 45 (Bom.) of 1978-79 dated 28-2-1980 and ST Appeal No. 45 (Bom.) of 1980 dated 23-3-1981. This point has been decided in favour of assessee by Bombay High Court in CIT v. Century Spg. & Mfg. Co. Ltd. [1978] 111 ITR 6 and CST v. Ballarpur Industries Ltd. [1979] 116 ITR 528. department wants to keep issue alive. We respectfully follow these decisions and reject this ground. 10. third ground which is common to all departmental appeals is that t h e learned Commissioner (Appeals) had erred in holding that General Reserve No. 2 which was created out of profits exempt under section 80J of 1961 Act, should be included in computation of capital base for surtax purpose. This point has been decided on identical facts against department and in favour of assessee by Tribunal in appeal for assessment year 1973-74 referred to above. departments wants to keep issue alive. We respectfully follow said decision and confirm order of Commissioner (Appeals) on this point. 11. next ground which only arises in departmental appeal for assessment year 1977-78 is that learned Commissioner (Appeals) had erred in holding that amount deposited by assessee-company with IDBI in lieu of surcharge that would have been payable by assessee-company. point in controversy was considered at length by Special Bench of Tribunal in Travancore Chemicals & Mfg. Co. Ltd. v. ITO [1985] SOT 364 (Coch.) and was against assessee and in favour of department. assessee wants to keep issue alive. We respectfully follow said decision of Special Bench of Tribunal and set aside order of Commissioner (Appeals) on this point and restore that of STO. 12. We now come to appeals filed by assessee. first ground raised is that learned Commissioner (Appeals) had erred in upholding action of ITO in reducing short provision of gratuity from general reserve while computing capital employed under Second Schedule. This ground arises in assessee's appeals for assessment years 1975-76, 1976-77, 1977-78. We find that rule 1A in Second Schedule was inserted by Finance Act, 1976 retrospectively with effect from 1-4-1975 in order to counteract evasion of tax, which resulted by assessee's failure to create provisions for (i) taxation or (ii) proposed dividends, at all or to full extent necessary. As result of insertion of said rule, ITO is empowered to reduce capital otherwise computed protanto, vis-a-vis, needed provision or shortfall therein. However, that rule does not refer to assessee's failure to create provision for gratuity liability at all or to full extent necessary. Consequently, that rule can not be resorted to, to reduce capital base vis-a- vis shortfall in provision. There is no other provision under which such reduction in capital base can be made on account of short provision for gratuity. It is to be noted that amount representing short provision has not been claimed as deductions in income-tax assessment. In circumstances, ITO was not justified in deducting short provision for gratuity from reserve. We, accordingly, direct ITO not to deduct amount representing short provision for gratuity from reserve. 13. second ground is that learned Commissioner (Appeals) has erred in upholding action of ITO in not granting proportionate increase of Rs. 30,11,222 in paid-up, share capital under rule 3 of Second increase of Rs. 30,11,222 in paid-up, share capital under rule 3 of Second Schedule, on account of issue of bonus shares during year. This ground arises in assessee's appeal for assessment year 1977-78 only. It is fairly conceded by learned representative for assessee at time of hearing of appeal that point in controversy has been decided against assessee by Bombay High Court in Century Spg. & Mfg. Co. Ltd.'s case (supra). assessee wants to keep issue alive. We respectfully follow decision of Bombay High Court and reject this ground. 14. last ground is that learned Commissioner (Appeals) had erred in upholding action of ITO in granting deduction in respect of donations under rule 1(vii) to extent of Rs. 2,50,000 instead of Rs. 2,80,051 being 50 per cent of donation eligible under section 80G of 1961 Act amounting to Rs. 5,60,101. This ground arises in assessee's appeal for assessment year 1979-80 only. assessee had made donation of Rs. 5,60,101 to charitable institutions referred to section 80G (2). Under sub-section (1) of section 80G, deduction of amount equal to 50 per cent of said amount of donation was allowable. However, sub-section (1) was subject to sub-section (4) of section 80G. Sub-section (4) laid down that deduction under sub-section (1) shall not be allowed in respect of such sum exceeded 10 per cent of gross total income or five lakhs, whichever was less. In present case amount of five lakhs was smaller amount. Consequently, deduction under section 80G was allowable with reference to amount of Rs. 5 lakhs in present case. In income-tax assessment deduction of 50 per cent of Rs. 5 lakhs amounting to Rs. 2,50,000 was granted. Clause (vii) of rule 1 of First Schedule is as follows: "In computing chargeable profits of previous year, total income computed for year under Income-tax Act shall be adjusted as follows:- 1. Income, profits and gains and other sums falling within following clauses shall be excluded from such total income, namely:- (i) to (vi) ** ** ** (vii) amount equal to fifty per cent of sum with reference to which deduction is allowable to company under provision of section 80G of Income-tax Act." short question to be decided is as to what was sum with reference to which deduction was allowable to assessee-company under provision o f section 80G. answer to this question on facts of present case appears to us to be self-evident. answer is that it is sum of Rs. 5 lakhs with reference to which deduction is allowable to company under provisions of section 80G. sum of Rs. 5,60,101 which represents actual donation made by assessee-company cannot be termed as 'the sum with reference to which deduction is allowable to company under provision of section 80G of Income-tax Act' within meaning of said expression in clause (vii) of rule 1. Consequently, submission of assessee was that 50 per cent of Rs. 5,60,101 was allowable as deductions under said clauses cannot be accepted. 15. Before parting with this topic, we may mention that learned representative for assessee had cited before us two decisions of Tribunal. first decision was in Carborandum Universal Ltd. v. STO [ST Appeal No. 9211 (Mad.) of 1978-79 dated 19-5-1971]. other decision was Bajaj Auto Ltd. v. ITO [ST Appeal Nos. 53 to 59 (Bom.) of 1983 dated 27-3- 1984]. In later decision, Bench of Tribunal has followed earlier decision. In earlier decision, it has been held that 50 per cent of amount representing donations was allowable as deduction under clause (vii) of rule 1 and that limit of Rs. 2 lakhs which was upper limit at time with reference to which deduction was allowed in income-tax assessment, in view of provisions in sub-section (4) of section 80G should be ignored. main reason given in that words in clause (vii) are 'the sum with reference to which deduction is allowable to company under provisions of section 80G of Income-tax Act' and not 'the sum with reference to which deduction is allowed to company under provisions of section 80G of Income-tax Act.' In other words, reason given by Tribunal is that if words in clause (vii) had been 'the sum with reference to which deduction is allowed to company under provision of section 80G of Income-tax Act', upper limit of Rs. 2 lakhs which was limit at time when Tribunal decided appeal would have to be taken into account. However, since word used is 'allowable' and not 'allowed' upper limit in sub-section (4) of section 80G should be ignored. What was lost sight of was that no deduction can be allowed unless deduction is allowable, and, as such, deduction allowable would always be equivalent to deduction allowed. Consequently, use of word 'allowable' would not make any difference. It is to be noted that clause (vii) refers to section 80G as whole and not to sub-section (1) of section 80G. Consequently, when we have to ascertain as to what was sum with reference to which deduction is allowable under section 80G, we have to consider all sub-section of 80G. Sub-section (4) of section 80G cannot be ignored. In fact, sub-section (1) is subject to sub-section (4) of section 80G. Consequently, sum mentioned in sub-section (4) is in substance sum with reference to which deduction is allowable to company under provision of section 80C of 1961 Act and it is with reference to that sum that deduction of 50 per cent is to be calculated under clause (vii) of rule 1. Two decisions of Tribunal are in appeals of some other assessees. If decision had been in appeal of assessee of earlier year, we would have followed said decision inspite of our reservation about correctness of view. Ordinarily, we would have referred this question to larger Bench. However, since amount involved is small and point does not arise very often, we do not consider it expedient in present appeal to refer matter to Special Bench. We accordingly, see no justification to take view different from view taken by Commissioner (Appeals) in present case. Consequently, this ground is rejected. 16. In result, appeals are partly allowed. *** INCOME TAX OFFICER v. DHARAMSI MORARJI CHEMICALS CO. LTD.