TaxTMI 
TaxTMI 
1981 (2) TMI 61
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....ading to this reference are as follows : We are concerned with the assessment year 1969-70. The assessee is a private limited company and carries on business as a dealer in shares. In the relevant previous year in connection with assessment year 1969-70, the ITO separately computed income from dividends chargeable under the head " Other sources " and set off against the same interest amounting to Rs. 37,961 as the amount of interest attributable to and liable to be set off against such dividend income out of the total interest paid by the assessee on loans obtained or moneys borrowed for the purpose of the assessee's business. The amount of loss determined by it under the head " Profits and gains of business " was accordingly reduced by the sum of Rs. 37,691 which was apportioned against the dividend income. Against this order of the ITO, the assessee carried the matter in appeal to the AAC and it was contended before the AAC that the ITO had erred in bifurcating the interest payment between the heads " Business " and " Other sources " and as the assessee was a dealer in shares, the entire interest paid on overdraft and other loan accounts should be deducted in computing the income....
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.... by the assessee-company concerned but the net dividend income. This decision of the Gujarat High Court was reversed on appeal to the Supreme Court. That decision of the Supreme Court is to be found reported in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. There the Supreme Court held that the deduction permissible under s. 80M was to be calculated with reference to the full amount of dividends received by a company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making the deductions provided under the Act. Thus, according to the Supreme Court, the deduction under s. 80M was to be made with reference to the gross dividend income of the assessee concerned and not with reference to the net dividend income. After this decision of the Supreme Court the Legislature by the Finance (No. 2) Act of 1980 inserted s. 80AA with retrospective effect from April 1, 1968. Section 80AA provides: " Where any deduction is required to be allowed under section 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then, notwithstanding a....
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....rned under the provisions of this Act has to be computed under the provisions of ss. 56 and 57 which deal with income from " other sources ", that is, income from dividends. Therefore, now that s. 80AA has come into effect from April 1, 1968, for the purpose of assessment year 1969-70, the provisions of s. 80M have to be read in the light of s. 80AA even for assessment year 1969-70. And while computing that income for the purposes of s. 80M it will be the net dividend income which will be computed but while computing such net dividend income, what is material is that in the case of the assessee-company concerned, if it is carrying on business, its profits and gains under the head " Business income " or " Profits and gains of business " have to be first computed and having ascertained the net figure, the assessee will then proceed to claim deduction under s. 80M in respect of the quantum of income from dividend which forms a part, a component, of the total business income. That is the only way in which all these provisions can be reconciled and can be brought together. As a matter of fact, even after the decision of this High Court was rendered in Cloth Traders (P.) Ltd.'s case [....
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....sessee and it is assessable as such as profits and gains of business carried on by the assessee. Under s. 36 of the I.T. Act, interest paid by an assessee for the purpose of carrying on its business is deducted in its entirety while computing profits and gains of the business and, therefore, it is not possible to allocate a portion of that interest as against income from dividends by stating that that interest had to be paid for the purpose of investing in shares held by the assessee. It is clear, therefore, that reading the scheme of s. 80AA and the specific emphasis now on the words " in connection with that income which goes to form a component of the total income of the assessee computed in accordance with the provisions of the Act ", the real answer to the problem posed by the revenue is that, when the income from other sources is computed in accordance with the provisions of ss. 56 and 57, there is no deduction to be made by way of interest paid in respect of the income from dividends because the interest is paid by the assessee-company for the purpose of carrying on its business and the entire interest is deductible under s. 36(1)(iii) of the Act. Therefore, the entire am....