1998 (9) TMI 5 - HC - Income Tax

High Court instructs Tribunal to refer legal questions on interest apportionment & deduction calculation to court for opinion.

The High Court directed the Income-tax Appellate Tribunal to refer legal questions regarding the apportionment of interest paid on loans between business ... Reference, Business, Other Sources, Question Of Law Issues involved:1. Interpretation of the Income-tax Act, 1961 regarding the apportionment of interest paid on loans borrowed by the assessee between business income and income from dividends.2. Determination of the correct method for calculating deduction under section 80M, specifically whether gross dividend income or net dividend income should be considered.3. Review of the order of the Commissioner of Income-tax (Appeals) by the Income-tax Appellate Tribunal for the assessment year 1987-88.Issue 1: Interpretation of Interest ApportionmentThe case involved a limited company engaged in share business and receiving dividend income. The Assessing Officer found that interest paid on loans was partly attributable to dividend income and apportioned a portion of the interest to dividend earnings. The Commissioner of Income-tax (Appeals) accepted this method, which the assessee did not object to. However, the Income-tax Appellate Tribunal, based on a previous order, allowed the deduction under section 80M to be calculated on gross dividend income without reducing interest expenses. The Revenue argued that this approach conflicted with established law requiring deduction of interest on borrowed money for earning dividend income. The High Court held that the question of whether the deduction should be based on gross or net dividend income was indeed a legal issue, and directed the Tribunal to refer this question to the High Court for opinion.Issue 2: Calculation of Deduction under Section 80MThe disagreement centered on whether the deduction under section 80M should be computed on gross dividend income or net dividend income after deducting interest paid on borrowings. The Tribunal's decision to allow the deduction on gross dividend income was challenged by the Revenue, citing the Supreme Court's ruling that income from dividends should be computed after deducting interest on borrowed funds. The High Court determined that this question was a legal matter and ordered the Tribunal to refer it for the High Court's opinion, along with the first issue.Issue 3: Review of Appellate Tribunal's DecisionThe Revenue contested the Tribunal's decision not to refer the case, arguing that the Tribunal's stance contradicted established legal principles. The High Court agreed with the Revenue that the questions raised were legal in nature, and the refusal to refer them did not preclude their consideration for the assessment year in question. Consequently, the High Court allowed the Revenue's petition, directing the Tribunal to draw up a statement of the case and refer the legal questions regarding interest apportionment and deduction calculation for the High Court's opinion.