Deduction under section 80M based on gross dividend income, interest on borrowings not deductible

The High Court held that interest paid on borrowings for purchasing shares held as stock-in-trade should not be deducted from dividend income for the purpose of granting deduction under section 80M. It emphasized that expenses related to trading in shares should not be deducted twice and that section 80M deduction should be based on gross dividend income. The Court ruled in favor of the assessee, upholding the Tribunal's decision and stating that deductions under section 80M should be calculated based on net dividend income after deducting interest on borrowed funds.

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Issues:
Interpretation of provisions under Income-tax Act, 1961 regarding deduction under section 80M for a company dealing in shares and earning income from dividends and property.

Analysis:
The case involved a company dealing in shares and earning income from dividends and property. The primary issue was whether interest paid on borrowings for purchasing shares held as stock-in-trade should be considered under section 36(1)(iii) for computing business income and not deducted from dividend income for the purpose of granting deduction under section 80M. The company contended that expenses related to the business of trading in shares should not be deducted twice, once from business income and then from dividend income for section 80M deduction.

The Income-tax Officer initially computed the net dividend income and allowed a 60% deduction under section 80M. However, the Commissioner of Income-tax (Appeals) directed the deduction under section 80M to be granted on the gross dividend, following a Gujarat High Court decision. The Tribunal upheld this decision, stating that interest on borrowings for purchasing shares and other expenses should not be deducted from dividend income for section 80M deduction.

The High Court analyzed relevant sections of the Income-tax Act, including sections 36(1)(iii), 57(iii), 56, and 80M. It emphasized that for a dealer in shares, dividend income retains the character of business income, and interest on borrowings is allowable under section 36(1)(iii) as it is incurred for business purposes. The Court referred to previous judgments and highlighted that deduction under section 80M should be calculated based on the net dividend income after deducting interest on borrowed funds.

The Court distinguished a Supreme Court decision related to investment companies and reiterated that deduction under section 80M should be based on the net dividend income. It concluded that expenses related to trading in shares should not be deducted twice and that section 80M deduction should be granted with reference to the gross dividend income. Ultimately, the Court upheld the Tribunal's decision in favor of the assessee, emphasizing that expenses related to the business should not be double-counted while computing deductions under section 80M.

In conclusion, the Court disposed of the reference, ruling in favor of the assessee and against the Revenue, with no order as to costs.

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