1973 (11) TMI 15 - HC - Income Tax

Court Rules Deduction Under Income-tax Act Must Be on Net Dividend Income, Not Gross; Assessee Bears Commissioner's Costs.

The court determined that the deduction under section 85A of the Income-tax Act, 1961, should be computed on the net dividend income, not the gross ... Whether, while computing the deduction of tax on inter-corporate dividend under section 85A of the Income-tax Act, 1961, the income from dividend should be taken, at its gross figure or at net figure after deducting the expenditure incurred by the concerned assessee to earn that dividend - we answer the question referred to us in the negative and in favour of the revenue Issues Involved:1. Whether the deduction of tax on inter-corporate dividends under section 85A of the Income-tax Act, 1961, should be computed on the gross dividend income or the net dividend income after deducting the expenditure incurred to earn the dividends.Detailed Analysis:Issue 1: Computation of Deduction under Section 85AFacts of the Case:The respondent-assessee, a private limited company, derived income from dividends on shares of other companies during the assessment years 1965-66 and 1966-67. For the assessment year 1965-66, the gross dividend receipts amounted to Rs. 6,09,101, with an expenditure of Rs. 23,594 incurred as interest on borrowings to earn these dividends. The question arose whether the deduction under section 85A should be calculated on the gross amount of Rs. 6,09,101 or the net amount after deducting Rs. 23,594.Lower Authorities' Decision:The Income-tax Officer and the Appellate Assistant Commissioner held that only the net amount of dividends should be taken into account for the purpose of deduction under section 85A. The Appellate Tribunal, however, relying on decisions from the Bombay and Calcutta High Courts, concluded that the gross dividend income should be considered, deciding in favor of the assessee.Legal Question:'Whether, on the facts and in the circumstances of the case, the assessee is entitled to relief under section 85A of the Income-tax Act, 1961, in respect of the entire amount of the dividend income without deduction of interest paid on borrowings for acquiring the sharesRs.'Interpretation of Section 85A:Section 85A provides for a deduction from the income-tax chargeable on the total income of a company, which includes any income by way of dividends received from an Indian company. The deduction is calculated on the income so included, exceeding 25% of the income included. The key issue is whether 'income so included' refers to the gross or net dividend income.Definition of Total Income:According to section 2(45) of the Act, 'total income' means the total amount of income referred to in section 5, computed in the manner laid down in the Act. Section 57(iii) allows for the deduction of any expenditure incurred wholly and exclusively for earning income under the head 'Income from other sources,' which includes dividend income. Therefore, the net dividend income, after deducting such expenditure, is considered part of the total income.Arguments and Counterarguments:- Revenue's Argument: The deduction under section 85A should be on the net dividend income, as only the net income forms part of the total income.- Assessee's Argument: The term 'total income' in section 85A should be interpreted to mean gross income, as per the definition of 'income' in section 2(24).Court's Analysis:The court found that the expression 'total income' in section 85A does not carry a different meaning from the definition provided in section 2. The deduction should be calculated on the net dividend income, as only the net income can be included in the computation of total income. The court held that the decisions relied upon by the assessee, including the Bombay High Court's decision in Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd. and the Calcutta High Court's decision in Commissioner of Income-tax v. Darbhanga Marketing Co. Ltd., were not applicable because they were based on different legislative provisions.Conclusion:The court concluded that the deduction under section 85A should be calculated on the net dividend income, not the gross income. The reference was answered in the negative and in favor of the revenue, with the respondent-assessee bearing the costs of the Commissioner in this reference.Disposition:The reference is disposed of, and the respondent-assessee shall bear the costs of the Commissioner.