Court allows section 80M relief on dividend income before setting off losses

Commissioner Of Income-Tax Versus Bhoruka Investments Pvt. Limited

Commissioner Of Income-Tax Versus Bhoruka Investments Pvt. Limited - [1992] 198 ITR 734, 108 CTR 344, 70 TAXMANN 169 Issues:
Interpretation of section 80M of the Income-tax Act, 1961 in relation to deduction on dividend income and setting off of losses under different heads.

Analysis:
The case involved a reference under section 256(2) of the Income-tax Act, 1961 for the assessment year 1982-83. The main issue was whether the order passed by the Commissioner of Income-tax under section 263 of the Act was valid and legal, specifically regarding the deduction under section 80M of the Act. The Income-tax Officer initially allowed a deduction of Rs. 4,93,198 to the assessee on the intercorporate dividend of Rs. 8,21,996. However, the Commissioner of Income-tax found this deduction to be excessive and initiated proceedings under section 263, directing the officer to allow deduction under section 80M on the net dividend income after setting off losses under different heads. The Tribunal, after considering the arguments, concluded that the assessment order was not erroneous and prejudicial to the Revenue's interests, citing Circular No. 58, which binds Income-tax Department officers. The Tribunal found that the Income-tax Officer correctly computed the relief under section 80M, and no error was committed in granting the deduction of Rs. 4,93,198.

During the hearing, the Commissioner of Income-tax argued that the deduction under section 80M should be computed based on the dividend income after setting off losses from business and property heads. The Revenue contended that relief under section 80M should be allowed on the resultant income after setting off losses. However, the Court disagreed with this interpretation. It held that relief under section 80M should be allowed on the dividend income before such set-off, subject to the overall limit imposed by the Act. The relief must be linked to the total income computed after considering losses and unabsorbed depreciation. The Court provided an example to illustrate this principle. In the present case, the total income after setting off losses was Rs. 5,88,416, and the assessee was entitled to a relief of Rs. 4,93,198, which did not exceed the total income. Therefore, the relief under section 80M was correctly allowed by the Income-tax Officer, and the assessment order was not erroneous or prejudicial to the Revenue's interests.

In conclusion, the Court answered the reference question in favor of the assessee, stating that the relief under section 80M was correctly granted. The judgment was a significant interpretation of the provisions of section 80M of the Income-tax Act, 1961, regarding the computation of deductions on dividend income and the treatment of losses under different heads for tax purposes.