Section 80M deduction must be based on net dividend income after fair apportionment of common expenditure.

Section 80M deduction had to be computed on dividend income as assessed under the Act, not on the gross dividend received. In determining that income, only expenditure allowable under section 57(iii) could be deducted, and where common corporate expenditure related to both dividend and interest income with no reliable segregation, a fair apportionment by the assessing authority was permissible. The claim that the whole outlay should be assigned only to interest income was rejected because the expenses had nexus with both income streams. The argument that the assessee carried on an investment and financing business so that section 37(1) applied was also rejected, as no business activity was established and the receipts were taxable under income from other sources.

---

---

Issues: Whether deduction under section 80M was to be allowed on the gross dividend or only on dividend income computed after apportionment of common expenditure under the Act.

Analysis: Section 80AA makes it clear that deduction under section 80M must be computed with reference to dividend income as computed in accordance with the Act and not on the gross amount of dividends. In computing dividend income, only deductions permissible under section 57(iii) can be considered, namely expenditure laid out wholly and exclusively for earning that income. Where the assessee has composite expenditure connected with both dividend and interest income and offers no reliable bifurcation, the assessing authority may reasonably apportion the expenditure between the two streams on a fair basis. The claim that the entire expenditure should be attributed only to interest income was rejected because the expenses were of a routine corporate nature and had nexus with earning both kinds of income. The contention that the assessee was carrying on a business of investment and financing, so that the expenditure should fall under section 37(1), was also rejected since both receipts were assessable as income from other sources and no business activity was established. The allocation made by the lower authorities was held to be fair and reasonable.

Conclusion: Deduction under section 80M was not allowable on the gross dividend amount, and the apportionment of common expenditure against dividend income was upheld.

---