TaxTMI 
TaxTMI 
2005 (9) TMI 50
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....f under section 80M should be granted without deducting from the gross dividend, the interest paid on overdraft and other expenditure incurred for the purpose of earning the dividend in view of the provisions of section 80AA read with section 80M?" The assessee is a company dealing in shares and earns income from dividends and also property. The assessee-company filed its return for the assessment year 1981-82 on July 31, 1981 declaring a loss of Rs. 935. In response to a notice under section 143(2) of the Income-tax Act, the company's accountant attended before the Income-tax Officer. The assessee had earned income from the business of trading in shares of Rs. 16,549 and dividend of Rs. 1,34,984 and from property of Rs. 84,000. The comp....
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....tion 80M. The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals). The learned advocate for the assessee-company has pointed out that the Assessing Officer has determined the income under the head "Business" at a loss of Rs. 57,735 after allowing the entire interest and other expenses. It is pointed out that the Assessing Officer has assessed the dividend income under the head "Other sources" at Rs. 1,34,984 and other expenses. This is evident from the fact that the dividend assessed under the head "Other sources" is the entire amount of dividend received viz., Rs. 1,34,984 without deduction of interest and other expenses. It is, therefore, contended that for the purpose of computing deduction under section 80M, the ....
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....ot for sale. In the present case, it is pointed out that the interest debited to the profit and loss account has been taken into account for arriving at trading profit which is the starting point for working out the business income. The same cannot be once again reduced from the dividend income while working out income under "Other sources". The issue for consideration is whether interest paid on borrowings used for purchase of shares held as stock-in-trade is to be taken into account under section 36(1)(iii) in computing the income from trading in shares under the head "Business" and consequently, is not to be reduced from the dividend income which would result in deduction under section 80M being allowed on the full amount of the divid....
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....ion 57(iii). Section 57(iii) reads as follows: "57. The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely:- ... (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income." In the case of an investor, the interest paid on borrowed funds used for purchase of shares would be deducted out of the dividend income. Since the dividend income included in the gross total income would be the net dividend (gross dividend minus interest), deduction under section 80M would be allowed thereof. Section 80M reads as follows: "(1) Where the gross total income ....
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....without prejudice to the generality of the provisions of sub-section (1), the following incomes shall be chargeable to income-tax under the head 'Income from other sources', namely:- (i) dividends;" Business income is broken up under the different heads only for the purpose of computing the total income, but the income does not cease to be income of the business. Therefore, in the case of a dealer in shares, as in the present case, the dividend retains the character of business income though assessed under section 56. The interest on the borrowings is paid for the purpose of business and therefore, allowable under section 36(1)(iii). The interest paid is not expenditure laid out or expended wholly or exclusively for the purpose of ....
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....section 80M(1) of the Act has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income i.e., after deducting interest on monies borrowed for earning such income and not with reference to the full amount of dividend received by the assessee. The Calcutta High Court in CIT v. National and Grindlays Bank Ltd. [1993] 202 ITR 559 had held that the relevant section 80M is admissible on the gross amount of dividend income without deducting therefrom the interest paid for earning the dividend. It appears that the decision of the apex court in the case of Distributors (Baroda) P. Ltd. [1985] 155 ITR 120 was not brought to the notice of the Calcutta High....