Retrospective tax amendment allowed rectification, while dividend deduction was restricted to expenditure wholly incurred for earning income.
A retrospective amendment can justify rectification where the original assessment was made without applying the law as retrospectively declared, so a mistake apparent from the record may be corrected under section 154. Dividend income for deduction purposes must be computed under the head "Income from other sources", with only expenditure wholly and exclusively incurred to earn that dividend allowed as a deduction. On the facts, the allowable expenditure was limited to Rs. 3,000 per year, and further apportionment of business expenditure against the dividend income was not warranted because that expenditure had already been absorbed in computing business income.
Issues: (i) Whether rectification under section 154 of the Income-tax Act, 1961 was permissible after the retrospective insertion of section 80AA for allowing deduction under section 80M on the basis of gross dividends; (ii) What amount of expenditure could be deducted in computing dividend income for the purpose of section 80AA and section 80M, and whether any further apportionment of business expenditure was required.
Issue (i): Whether rectification under section 154 of the Income-tax Act, 1961 was permissible after the retrospective insertion of section 80AA for allowing deduction under section 80M on the basis of gross dividends.
Analysis: The retrospective amendment introduced by Finance (No. 2) Act, 1980 operated from 1-4-1968. Once that amendment came into force, the original assessment, made without applying the amended provision, contained an error apparent from the record. The amendment was binding for the relevant assessment years, and the rectificatory jurisdiction could therefore be invoked to align the assessment with the law as retrospectively declared.
Conclusion: Rectification under section 154 was valid and the assessee's objection to its invocation failed.
Issue (ii): What amount of expenditure could be deducted in computing dividend income for the purpose of section 80AA and section 80M, and whether any further apportionment of business expenditure was required.
Analysis: Dividend income had to be computed under the head 'Income from other sources' in accordance with sections 56 and 57 of the Income-tax Act, 1961, even if the shares were held as business assets. Only expenditure wholly and exclusively incurred for earning the dividend income could be deducted. On the facts, the holding and collection activity involved only a limited number of companies and the staff effort attributable thereto was modest. The Tribunal accepted the assessee's estimate that Rs. 3,000 per year represented the expenditure incurred for earning dividend income. Other expenditure belonged to the business stream and had already been accounted for in computing business income, so no further apportionment against dividend income was warranted.
Conclusion: Only Rs. 3,000 per year was to be excluded from gross dividends, and the remaining business expenditure could not be apportioned again against dividend income.
Final Conclusion: The Revenue succeeded only to the extent of securing application of section 80AA through rectification, but the deduction for dividend income was to be recomputed after allowing only Rs. 3,000 as expenditure for each year.
Ratio Decidendi: A retrospective amendment that governs the assessment year creates a rectifiable mistake when the original assessment was made without applying it, and dividend income for deduction purposes must be computed under the specific head with allowance only for expenditure wholly and exclusively incurred for earning that income.
TaxTMI 
AI Drafter ✕
TaxTMI 
