Dividend relief and expense apportionment: expenditure could not be split against dividend income, and relief was computed on gross dividend.

Where shares are held as trading stock and there is no reliable basis to separate an investment block, expenditure incurred for the assessee's income cannot be apportioned to reduce dividend income. The High Court further construed section 235 of the Income-tax Act, 1961 as requiring relief to be computed on the gross dividend actually received and brought to tax, without deducting proportionate expenses. Applying the earlier construction of the corresponding provision in the 1922 Act, the reference was answered in favour of the assessee on both issues.

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Issues: (i) Whether the assessee's total expenditure could be apportioned between different heads of income so as to treat a part of it as expenditure against dividend income; and (ii) whether relief under section 235 of the Income-tax Act, 1961 had to be computed on the gross amount of dividend without deduction of proportionate expenses.

Issue (i): Whether the assessee's total expenditure could be apportioned between different heads of income so as to treat a part of it as expenditure against dividend income.

Analysis: On the findings accepted by the Tribunal, the assessee's share dealings were part of its trading activity and there was no material basis to segregate any distinct block of investment shares so as to justify a separate allocation of expenditure against dividend alone. Where shares are held as stock-in-trade and dividend is received therefrom, the expenditure incurred for earning the assessee's income is not to be split up between business income and dividend income in the absence of a basis for such segregation.

Conclusion: The apportionment of the assessee's expenditure against dividend income was not justified and the issue was decided in favour of the assessee.

Issue (ii): Whether relief under section 235 of the Income-tax Act, 1961 had to be computed on the gross amount of dividend without deduction of proportionate expenses.

Analysis: The relief provision was construed to relate to the amount of dividend actually received and brought to tax, and not merely to the net dividend remaining after deducting proportionate expenses. The reasoning followed the earlier construction of the corresponding provision in section 49B of the Indian Income-tax Act, 1922, under which relief was held admissible on the whole dividend amount.

Conclusion: Relief under section 235 had to be calculated on the gross dividend and the issue was decided in favour of the assessee.

Final Conclusion: The reference was answered in favour of the assessee on both questions, with no apportionment of expenditure against dividend income and with dividend relief computed on the gross dividend amount.

Ratio Decidendi: Where dividend is received from shares forming part of the assessee's trading stock or where no reliable basis exists for segregating investment shares, expenditure cannot be apportioned to reduce dividend income, and relief tied to dividend receipt must be computed on the gross dividend amount unless the statute expressly provides otherwise.

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