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Issues: (i) Whether deduction under section 80M of the Income-tax Act, 1961 was to be computed on gross dividend or net dividend. (ii) Whether the rule of proportionate expenditure and interest under section 20 of the Income-tax Act, 1961 could be imported into computation under section 80M of the Income-tax Act, 1961.
Issue (i): Whether deduction under section 80M of the Income-tax Act, 1961 was to be computed on gross dividend or net dividend.
Analysis: The deduction under section 80M is governed by computation of dividend after deducting interest on monies borrowed for earning such income. The amount eligible for special deduction is therefore the net dividend and not the gross dividend received.
Conclusion: The issue was answered in favour of the Department and against the assessee.
Issue (ii): Whether the rule of proportionate expenditure and interest under section 20 of the Income-tax Act, 1961 could be imported into computation under section 80M of the Income-tax Act, 1961.
Analysis: Section 20, dealing with interest on securities in the case of a banking company, applies a rule of estimated proportionate expenses and interest. Section 80M, falling in Chapter VI-A, is a special deduction provision and operates as a separate code. It allows deduction on net dividend after taking into account actual expenditure incurred for earning such dividend, and does not permit importing the estimation method used under section 20.
Conclusion: The issue was answered in favour of the assessee-bank and against the Department.
Final Conclusion: The reference was answered partly for the Department and partly for the assessee-bank, with the statutory computation under section 80M confined to net dividend and without transplantation of the section 20 proportionality rule.
Ratio Decidendi: Deduction under section 80M must be computed on net dividend after actual expenditure incurred to earn that income, and the estimated proportionality rule applicable to interest on securities cannot be imported into that computation.
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