1998 (11) TMI 117 - HC - Income Tax

Intercorporate dividend deduction u/s80M(1): interest on borrowed share purchases must reduce dividend before claiming relief

Deduction under s. 80M(1) of the Income-tax Act, 1961, for intercorporate dividends was held to be computable only on the dividend income as 'included in ... Deduction under section 80M - Intercorporate Dividends - deduction of interest on money borrowed for purchasing shares from the dividend income - private limited company carrying on the business of manufacturing of drums and barrels, dealing in shares and investing in shares - Whether, the assessee was entitled to deduction u/s 80M for the assessment year 1968-69 on the ground that the assessee is a dealer in shares ? - HELD THAT:- We have perused the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. v. Union of India [1979 (5) TMI 2 - SUPREME COURT],, and on a careful consideration of the same, we are of the clear opinion that the controversy in this case is squarely covered by the ratio of the said decision wherein it has been held that deduction under section 80M(1) of the Income-tax Act, 1961, has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income, i.e., after deducting the interest paid on monies borrowed for earning such income, and not with reference to the full amount of dividend received by the assessee. The Supreme Court has categorically held that income by way of dividend from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. Following the same, we hold that deduction under section 80M(1) of the Act has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income, i.e., after deducting interest on monies borrowed for earning such income, and not with reference to the full amount of dividend received by the assessee. Thus, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee. Issues involved: Interpretation of deduction under section 80M of the Income-tax Act, 1961 for a private limited company dealing in shares.Summary:The High Court of Bombay was presented with a reference under section 256(1) of the Income-tax Act, 1961, regarding the entitlement of an assessee to deduction under section 80M on a specific amount for the assessment year 1968-69. The controversy revolved around the deduction of interest on money borrowed for purchasing shares from the dividend income for the purpose of calculating deduction under section 80M(1) of the Act. The Income-tax Officer and the Commissioner of Income-tax (Appeals) had differing views on the treatment of interest on borrowed funds for purchasing shares in relation to the deduction under section 80M. The Commissioner of Income-tax (Appeals) followed a decision of the Gujarat High Court in a similar matter. The Income-tax Appellate Tribunal upheld the Commissioner's decision, leading to the reference to the High Court.Upon hearing arguments from both sides, the High Court referred to the Supreme Court's decision in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120, which clarified that deduction under section 80M(1) should be calculated based on the amount of dividend computed after deducting interest on borrowed funds, not on the full amount of dividend received. The Court noted that the Supreme Court had overruled its earlier decision in Cloth Traders P. Ltd. v. Addl. CIT [1979] 118 ITR 243, which had a different interpretation. Additionally, the Court considered a decision of the Calcutta High Court in CIT v. National and Grindlays Bank Ltd. [1993] 202 ITR 559, which was found to be inconsistent with the Supreme Court's ruling in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120.In conclusion, the High Court held that deduction under section 80M(1) should be calculated based on the dividend income computed in accordance with the Act, after deducting interest on borrowed funds, aligning with the Supreme Court's interpretation. Therefore, the question was answered in favor of the Revenue and against the assessee, and the reference was disposed of with no order as to costs.