TaxTMI 
TaxTMI 
2006 (4) TMI 187
X X X X Extracts X X X X
X X X X Extracts X X X X
....spect of common issue relating to computation of deduction under section 80M as in the case of Mahavir Spinning Mills Ltd. [I.T. Appeal No. 26 (Chd.) of 1996] for assessment year 1991-92 vide para 2 of its order the Tribunal held that no expenditure can be deducted on proportionate basis out of the common administrative expenses for the purpose of computation of deduction under section 80M. The request of the assessee was accepted by the President of Tribunal. The Special Bench is constituted mainly for deciding the common issue relating to computation of deduction under section 80M of the Income-tax Act, 1961. Three appeals have been filed by the assessee for assessment years 1994-95, 1995-96 and 1997-98. The appeal of the assessee for assessment year 1996-97 stands decided against the assessee by the Tribunal. There are cross appeals by the Revenue for the aforementioned assessment years. The Revenue has also filed an appeal for assessment year 1996-97. 2. We have heard the parties and perused the record. Since all the appeals (seven in number) were allotted to the Special Bench for disposal, we proceed to decide the same on all issues including the hotly contested issue relatin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the case of Shaw Wallace & Co. Ltd. v. Dy. CIT [2002] 80 ITD 156 at page 174 para 19 of the order in support of the contention. Shri Garg also placed reliance on the decision of the Calcutta High Court in the case of CIT v. United Collieries Ltd. [1993] 203 ITR 857. Reliance was also placed on the following decisions in support of the contention:- (i) Usha Martin Industries Ltd. v. Dy. CIT [2003] 86 ITD 261 at page 273 (Cal.). (ii) East India Agencies (P.) Ltd. v. CIT [1991] 189 ITR 44 (Ker.). (iii) CIT v. Pfizer Corpn. [19931 202 ITR 115, 120 (Bom.). (iv) CIT v. Jai Hind Investment Industries (P.) Ltd. [1993] 202 ITR 316, 323 (Cal.). (v) CIT v. Mahendra Sobhagchand Shah [1993] 203 ITR 178 (Bom.). 4. After hearing of the appeals, the learned counsel filed a letter inviting our attention to the decision of Madhya Pradesh High Court in the case of State Bank of Indore v. CIT [2005] 275 ITR 23 to support the contention that the proportionate management expenses are not to be deducted for the purposes of computation of deduction under section 80M. 5. The learned Departmental Representative, Shri R.K. Goyal, on the other hand, contended that the issue has been decided in fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... CIT v. United General Trust Ltd. [1993] 200 ITR 488, it was contended that the issue is covered by the said decision of the Supreme Court in favour of the Revenue. It was pointed out that the Hon'ble Supreme Court has overruled the decision of the Bombay High Court in the case of CIT v. United General Trust (P.) Ltd. [1979] 119 ITR 664 to the contrary. It was claimed that in this case, reference was deemed to have been made and the question of law relating to deduction on proportionate management expenses for the purposes computation of deduction under section 80M decided in favour of the Revenue. 7. The learned Departmental Representative also relied upon the decision of the Chandigarh Bench of the Tribunal in the case of Haryana State Co-operative Supply & Marketing Federation [IT Appeal Nos. 681 to 683 (Chd.) of 2002] in support of the contention that deduction under Chapter VI-A is to be allowed after taking into account the proportionate management and other indivisible expenses. Reliance was also placed on the following decisions to support the contention that deduction of expenses on proportionate basis has been recognized by Supreme Court and various High Courts and t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t Ltd. has been relied upon to arrive at the decision. The learned Departmental Representative also stated in writing that the decision of the Madhya Pradesh High Court in the case of State Bank of Indore cited on behalf of the assessee is distinguishable on facts and in any case the decision of the Supreme Court in United General Trust Ltd.'s case has not been considered. It was further contended that proportionate management expenses have got to be deducted under section 57 of the Income-tax Act, 1961. 10. In counter reply, the learned counsel for the assessee contended that the decision of Haryana State Co-operative Supply & Marketing Federation's case is inapplicable to the facts of this case insofar as in that case the deduction was permissible out of the business income under section 80P(2) and in the case of the assessee the deduction is permissible out of the income from other sources. It was further contended that borrowed money has not been utilized for acquisition of share yielding dividend income. 11. We have given our careful consideration to the rival contentions and have also considered the earlier order of the Tribunal in the case of the assessee for asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the return of income under sub-section (1) of section 139." 14. Section 80AA reads as under:- "80AA. Computation of deduction under section 80M.- 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 anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross-amount of such dividends." 15. It may be pertinent to mention that section 80M was omitted by the Finance Act, 1997 (26 of 1997) w.e.f. 1-4-1998 in consequence of insertion of section 10(33) of the Income-tax Act, 1961 granting exemption in respect of dividend income. However, the said section was re-introduced from assessment year 2003-04 as the exemption in respect of dividend income was removed. Subsequently, it was again omitted by the Finance Act, 2003 w.e.f 1-4-2004 as the dividend income is now exempt in the hands of the shareholders. H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t include, income by way of dividends from a domestic company. 'Gross total income' is defined in section 80B, clause (v), to mean 'total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or section 280-O'. Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or in other words, forms part of the gross total income, the condition specified in the opening part of sub-section (1) of section 80M would be fulfilled and the provisions enacted in that sub-section would be attracted. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words 'such income by way of dividends' must be referable not only to the category of income included in the gross total income but also to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....very person: Provided that where by virtue of any provision of this Act Income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of the Act." 21. Section 2(45) defines 'total income' as under:- "Total income' means the total amount of income referred to in section 5, computed in the manner laid down in this Act." 22. Section 14 of the Income-tax Act, 1961 provides for classification of income chargeable to tax. It reads as under:- "14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:- A.- Salaries C.- Income from house property D.- Profits and gains of business or profession E.- Capital Gains F.- Income from other sources" Chapter VI deals with deductions out of gross total income. Some of the relevant provisions are as under:- Section 80A reads as under:- "80A....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... clause (24) of section 2 which is chargeable to Income-tax under the head 'Income from other sources', deductions, so far as may be, in accordance with the provisions of clause (va) of sub-section (1) of section 36; (ii) in the case of income of the nature referred to in clauses (x) and (24) of sub-section (2) of section 56, deductions, so far as may be, in accordance with the provisions of sub-clause (ii) of clause (a) and clause (c) of section 30, section 31 and sub-sections (1) and (2) of section 32 and subject to the provisions of section 38. (iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or (fifteen) thousand rupees, whichever is less. Explanation.- For the purposes of this clause, 'family pension' means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death; (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." Section 58 reads as under:- "(1) Notwithstanding anything t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his sub-section, 'horse race' means a horse race upon which wagering or betting may be lawfully made." Section 59 read as under:- "(1) The provisions of sub-section (1) of section 41 shall apply, so far as may in computing the income of an assessee under the head 'Profits and gains of business or profession'." 23. A plain reading of the aforementioned provisions of the Act clearly indicates that Income-tax is chargeable on the gross total income as computed in accordance with the provisions of the Act. The procedure for determination of income from business as well as income from other sources is provided under the A Statute. It may be pertinent to mention that certain deductions which may not be provided specifically under various provisions of the Act, can also be deducted in computing the net income from a particular source if deduction of such expenditure is necessary to ascertain the true income. We will deal with this aspect at a latter stage. We shall initially deal with the deductions, which are permissible out of the dividend income assessed under the head "Income from other sources" specifically provided under the Statute. The deductions under the head....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... year. 25. It may be stated, even at the cost of repetition, that the connection between the expenditure and earning of income need not to be direct as held by the Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. It may be indirect. In the case of Seth R. Dalmia v. CIT [1977] 110 ITR 644, Their Lordships of Supreme Court at pages 652-53 have also held as under:- "In CIT v. H.H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom.), a Division Bench of the Bombay High Court held that the deduction which is permissible under sub-section (2) of section 12 is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax and the dominant purpose of the expenditure incurred must be to earn income. It was further held that the connection between the expenditure and the earning of income need not be direct and even an indirect connection could prove the nexus between the expenditure incurred and the income. We fully agree with the view taken by the Bombay High Court. In view of the direct decision of this Court in Eastern Investments Ltd.'s case [1951] 20 ITR 1 (SC), it is not necessary for us to multiply authoritie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es, the tests laid down by various High Courts and Hon'ble Supreme Court will enable the determination of the issue without any difficulty. There would also not be much difficulty in such cases where the assessee derives income from various sources but the income derived from other sources is unconnected with the business activities of the assessee. The difficulty arises in such cases where the assessee has income from various sources and the expenditure is combined expenditure taken into account in the computation of net income as per the books of account maintained by the assessee. 28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources. 29. It has to be borne in mind that no deduction would be permissible in respect of such establishment expenses which are unconnected with the earning of income assessable under the head "Income from other sources". In case of Company liquidation, the expenses incurred by a liquidator' such as salary and other expenses were not allowed as deduction from income earned by way of interest from a fixed deposit in the relevant year on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the aforementioned decisions and the relevant provisions of the Act, it is not difficult to appreciate that in computing the income from other sources the expenses such as salary, interest, commission, brokerage laid out or expended wholly and exclusively for the purpose making or earning the income shall have to be deducted in computation of the income for the purpose of inclusion in the gross total income. 32. It hardly needs to be emphasized that the tax is on "income" and certain expenditure even if it does not fall within the specified deductions would be deductible in computing the net income. 33. The concept of income is well understood not to be the gross receipts but only the net income properly so called and, therefore, such deductions may be made as are necessary to ascertain the true income. In order to determine the net income derived by the assessee which forms the basis for taxation, it is necessary to take into account the gross receipts which are reduced by the outgoings. Under various heads of income, certain deductions are regulated under the Act and as such at times it is necessary to make adjustments in the net income determined in accordance with the recog....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be understood, said Lord Halsbury in Gresham Life Assce Soc. v. Styles 3 TC 185, 188 (HL) in its natural and proper sense in a sense which no commercial man would misunderstand. The said principle was approved by the Privy Council in Pondicherry Rly. Co. Ltd. v. CIT 5 ITC 363 and by the Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10, Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86. In the case of Badridas Daga, Their Lordships of the Supreme Court held that profits should be computed after deducting the losses and expenditure incurred for the purpose of the business, profession or vocation, though such losses and expenses may not be expressly allowed under sections 30 to 43 unless the losses and expenses are expressly or by necessary implication disallowed by the Act. The relevant portion of the judgment is reproduced as under:- "While section 10(1) of the Indian Income-tax Act, 1922, imposes a charge on the profits or gains of a business, it does not provide how these profits are to be computed. Section 10(2) enumerates various items which are admissible as deduction but they are not exhaustive of all allowances whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ture to grant relief to the corporate assessees is in respect of the dividend income which is included in the gross total income out of the income which has suffered tax in the hands of the company. It will be useful to refer to the view of the Supreme Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 432 at page 57, "we think all misconceptions will vanish and all the provisions will fall into place if we bear in mind a fundamental though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed". It would be unreasonable to presume that the Legislature intended to give relief to the assessee under section 80M in excess of the tax that would otherwise be chargeable on dividend income in the hands of the recipient of such income. It is, therefore, in our view, necessary to determine the net component of dividends included in the gross total income on which deduction under section 80M is permissible to the assessee. 43. Therefore, in order to determine the issue relating to the computation of deduction under section 80M, it is necessary to trace ou....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income of an assessee. For the purpose of computation, the statute recognizes different classes of income which it classifies under different heads of income. For each head of income, the statute has provided the mode of computing the quantum of such income. The mode of computation varies with the nature or the class of such income, for the deductions permissible under the law in computing the income under each head bear a particular relevance to the nature of the income. The statute operates on the principle that it is the net income under each head which should be considered as a component of the total income. The statute permits specified deduction from gross receipts in order to compute the net income. The net income under the different heads is then pooled together to constitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and of unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, i.e., the quantum of income which is assessed to tax." 46. In the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d mentioned in section 9 of the Act. This case also does not lay down that the income from the shops is not the income in the business. In CIT v. Express q Newspapers Ltd. this Court held that both section 26(2) and the proviso thereto dealt only with profits and gains of a business, profession or vocation and they did not provide for the assessment of income under any other head, e.g., capital gains." 47. The decision of the Supreme Court in CIT v. Chugandas & Co. [1965] 55 ITR 17, 24, is also relevant. In this case, it was held as under:- "The heads described in section 6 and further elaborated for the purpose of computation of income in sections 7 to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of income; the heads do not exhaustively delimit sources from which income arises. This is made clear in that business income is broken up under different heads only for the purpose of computation of the total income: by that break up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Indian Income-tax Act for computation of income." 48. In the case of Apollo Tyres Ltd. v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rying on banking business, were business income of the assessee, and as such the assessee was entitled to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. Similar view has been taken by the Hon'ble Madras High Court in the case of CIT v. Ramanathapuram District Central Co-operative Bank Ltd. [1997] 224 ITR 226. 51. On the basis of the above view, we hold that the source of dividend income in some cases may be from business notwithstanding the fact that it has got to be computed under the head "Income from other sources". 52. On the analysis of above decisions, following principles of law emerge:- (i) That deduction under section 80M is permissible on the net dividend income computed in accordance with the provisions of the Act and included in the gross total income. (ii) That for determination of net dividend income included in the gross total income, it is necessary to trace the "Source of dividend income" notwithstanding the fact that it is assessable under the head "Income from other sources". (iii) That computation of dividend income in accordance with Act does not restrict the scope of computation to sections 56 to 59 of the Act. That the real comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll have to be deducted from the gross dividend income notwithstanding the fact that the said deduction does not necessarily fall within sections 57 to 59 of the Act. In the case of any assessee carrying on business and making investment in shares unconnected with his business, the expenses incurred by him for the purposes of other business cannot be attributed to the earning of dividend income. Therefore, there is no justification for apportionment of expenses incurred by the assessee for the purposes of business between receipts of business and dividend received on investment unconnected with the business of the assessee. This view that the proportionate management expenses are not to be deducted in computation of such dividend income for the purpose of deduction under section 80M is supported by various Authorities, some of which may be mentioned hereunder to complete the record as it is not necessary to elaborately refer to such cases in support of this view. (vi) CIT v. Central Bank of India [2003] 264 ITR 522 (Bom.) (vii) Shaw Wallace & Co. Ltd. v. Dy. CIT [2002] 80 ITD 156 (Cal.) (viii) CIT v. United Collieries Ltd. [1993] 203 ITR 857 (Cal.) (ix) State Bank of Indore ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....articular case so warranted. In our view, section 20(1) contains a rule of proportionality of expenses and interest and that rule is based on estimation of expenditure whereas, section 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend unless the facts of a particular case-warrant otherwise. Therefore, we answer the latter question in favour of the assessee-bank and against the Department." 58. Their Lordships of Kerala High Court in the case of East India Agencies (Pvt.) Ltd. v. CIT [1991] 189 ITR 44 have followed decision of Madras High Court in the course of South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469 wherein it was observed as under:- "On a reference to the Madras High Court under section 256(1) of the Income-tax Act, 1961, it was held that the income assessed was the 'interest income' and the expenditure allowed was not incurred solely for the purpose of making or earning the interest income. After pointing out that the assessee was not carrying on any business during the relevant assessment years, it was held that the deductions claimed by the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee in working out the net income from business determined after taking into account the gross dividend and other business receipts. Most of the expenditure such as salary, interest and other management expenses will fall under section 57. In such type of cases, we hardly need to emphasise that the receipts including dividend income is reduced by expenses incurred in the course of business to determine the net component of business income. The expenses being mixed in character cannot be identified in respect of one or the other source of receipts. It is in this type of cases that the principle of proportionality is applicable. The principle of apportionment of proportionate expenses for computation of deduction under section 80M has been approved by the Supreme Court in the case of CIT v. United General Trust Ltd. [1993] 200 ITR 488. In this case, Hon'ble Supreme Court had reversed the decision of the Bombay High Court. It would, therefore, be useful to refer to the decision of the Bombay High Court in the case of CIT v. United General Trust (P.) Ltd. [1979] 119 ITR 664 which has been reversed by the Supreme Court in the case of United General Trust Ltd. In this case, the follow....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oncluded against the assessee and in favour of the Revenue by the decision of this Court in Distributors (Baroda)(P.) Ltd. v. Union of India [1985] 155 ITR 120. Indeed, the same result follows from section 80AA introduced by the Finance (No. 2) Act, 1980, with retrospective effect from April 1, 1968. For the above reason, the appeals are allowed. The application under section 256(2) of the Income-tax Act made by the Revenue shall be deemed to have been allowed, a reference made and answered in the manner indicated above. We may clarify that the assessment years concerned herein are 1970-71, 1971-72 and 1972-73." 64. As a result of the decision of the Supreme Court, the question of law sought by the Revenue as to whether the assessee would be entitled to deduction under section 80M on the gross dividend before deduction of the proportionate management expenses, was answered in favour of the Revenue. Their Lordships of the Supreme Court have referred to its own decision in the case of United General Trust Ltd. and the provisions of section 80AA introduced by the Finance (No. 2) Act, 1980 w.e.f. 1-4-1968 to support the answer in favour of the Revenue. The Hon'ble Supreme Cour....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(d) of the Act on the whole of the amount of profit of Rs. 89,976 without deduction of proportionate overhead expenses? 69. Their Lordships of the Supreme Court held that the rebate allowed to the assessee was in respect of the amount to be computed after deduction of proportionate overhead expenses. Since the reasoning given by the Hon'ble Supreme Court will be helpful in resolving the issue involved in this case, we reproduce the same as under:- "The appellant was a co-operative society engaged in the purchase of agricultural implements, seeds, livestock and other articles intended for agriculture for the purpose of supplying them to its members as well as to non-members. For the assessment years 1964-65, 1965-66 and 1966-67 the appellant claimed exemption from Income-tax under section 81(i)(d) of the Income-tax Act, 1961, on the gross profits and gains of the business with its members. But the Income-tax Officer granted relief only on the net amount as was includible in the computation of its total income under section 110, since the income exempted under section 81(i)(d) was to be included in its total income as required by section 66. For the first two years, the Appell....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... In this case, the assessee was a Private Limited Company carrying on the business of manufacturing of the drums and barrels, dealing in shares and investing in shares. The controversy arose in regard to deduction of interest on money borrowed for purchasing of shares from the dividend income for the purposes calculating deduction under section 80M of the Income-tax Act, 1961. The assessee claimed deduction under section 80M on the gross dividend income on the ground that deduction on account of interest was permissible under section 36(1)(iii). The claim of the assessee was rejected by the Hon'ble High Court. 71. In the case of Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CIT [1998] 232 ITR 718 Their Lordships of the Himachal Pradesh High Court held that proportionate expenses were to be deducted from computation of income qualifying for deduction under section 80P(2)(a)(iii) of the Act. 72. In the case of Shekhavati General Traders Ltd. v. CIT [1987] 167 ITR 116, Their Lordships of Rajasthan High Court held that relief in respect of dividends received from a domestic company was available only with respect to net amount of dividend after deducting....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reference to an example in assessee's own case. The receipts are profit on sale of shares, interest and dividend income. We may assume that the assessee had derived income from dividends only without there being any receipt on account of interest or profit on sale of shares. If we were to confine ourselves to determination of the income under sections 56 to 59, then the assessee would be deprived of various deductions claimed in the Profit & Loss Account. We have noted elsewhere in this order that the assessee's claim is that no expenditure of whatsoever nature has been incurred by the assessee for earning the dividend income. If this contention were to be accepted and the income computed under sections 56 to 59 then the gross dividend income received by the assessee would be liable to tax without any other deduction for the expenses incurred. However, it is not so insofar as it is well established principle of law that the tax is on real income. The assessee in fact, has incurred expenses for earning the business income. If the receipts of the business are by way of dividends, the expenditure incurred by the assessee in earning such income by way of carrying on the busines....
X X X X Extracts X X X X
X X X X Extracts X X X X
....upreme Court in the case of Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 was superseded by insertion of section 14A with retrospect effect. It is therefore evident that the intention of the Legislature has never been to grant deduction or exemption in respect of dividend income in excess of net component of income included in gross total income. 78. Moreover, the contention advanced on behalf of the assessee that the decision of the Tribunal in the case of S.G. Investments & Industries Ltd. is inapplicable as it relates to exempted income, is of no consequences, insofar as the two decisions of the Hon'ble Supreme Court, one in the case of United General Trust Ltd. and another in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. relate to deductions/rebate out of the income included in the gross total income. The decisions cited on behalf of the assessee have been considered by us. Most of the decisions relate to the dividend earned on pure investments unrelated to business of the assessee. Some of the High Court decisions may appear contrary to the decisions of the Supreme Court referred to above. In none of the decisions cited before us, the aforesaid dec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in the state is meant to be held for long-term and as such are valued at cost. (b) The profit/loss on sale of shares is being accounted for in the year in which the share scripts alongwith the duly executed transfer deeds are actually delivered to the transferees irrespective of the time at which the consideration for the same has been received. (c) The corporation makes dis-investment of its shareholdings in joint/assisted sector projects and private sector projects as per the provisions contained in the financial collaboration agreements and buy-back undertakings respectively executed by the collaborators/Promoters with the corporation. (d) As per financial collaboration agreements the collaborators have to buy-back the shares at the end of specified period at the highest market price quoted on recognized stock exchange(s) or the book value along with the simple interest at the lending rate at which the financial institutions/banks have provided long-term finance to the company, whichever is higher. However, the terms of standard Financial Collaboration Agreement have been amended w.e.f. 18-10-1996 which provide for buy-back of the Corporation's investments at the hig....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been claimed by the assessee on the gross dividend income for all the assessment years. 85. It is evident from the facts stated above that the source of dividend of the assessee is interlinked with the business activities of the assessee. It is in the light of these facts that one has to consider the decision of the Tribunal in assessee's own case for assessment years 1990-91 to 1992-93 where the issue was decided in favour of the revenue. The relevant portion of the order is reproduced hereunder:- "19. We have considered the rival submissions and have gone through the orders passed by the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals), relevant portion of which has been extracted by us extensively in para 16 to bring the whole controversy into close focus. Earlier deduction admissible in the intercorporate dividend was to be calculated with respect to the gross amount of dividend received by a domestic company from an Indian Company and not with respect to the dividend income as computed in accordance with the provisions of the Act i.e. after making deduction provided under the Act as per the decision of the Hon'ble Supreme Court in the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate authority was justified in holding that the expenses claimed in the Profit & Loss Account were deemed to have been claimed on a pro rata basis for earning the income from dividend. The contention of Shri M.L. Garg, the learned counsel that no commission or remuneration had been paid and no other expenditure had been incurred wholly and exclusively to earn the dividend income and, therefore, the gross income from dividend is also the net income, cannot be accepted because it is not supported by any documentary q evidence. Even the reliance by Shri Garg on the decision of the Calcutta High Court in the case of CIT v. United Collieries is not of much help to the assessee because in that judgment, it is specifically held that deduction under section 80M is allowable only on the net dividend after taking into account the expenditure, if any, incurred for the purpose of earning such dividend. The contention of the learned counsel for the assessee that in the case of the assessee-corporation, gross dividend income was the net dividend income, cannot be accepted on its fact value because it cannot be presumed that no expenditure whatsoever was incurred for the purpose of earning a huge....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arning of the dividend income as such is incidental to carrying on the business of the assessee. 88. Taking the totality of the facts and circumstances of this case into consideration, we hold that in computing the deduction under section 80M the proportionate expenses incurred by the assessee for earning the business income which includes receipts by way of dividend are to be proportionately deducted for arriving at the net dividend income. 89. Before parting with this issue, we would like to clarify that in this case, it may appear that there is a contradiction in the order insofar as profit derived on sale of shares has been held to be assessable under the head "Capital gains" and for the purpose of deduction under section 80M, the dividend income earned by the assessee has been held to be incidental to the carrying on the activities of business by the assessee. It is, however, not so. The assessee has made investment in the course of business by purchasing shares of the companies promoted by it. The investment in purchase of shares though for the purpose of business, is a capital investment as the assessee is not dealing in shares. Therefore, when the shares are held for more....
X X X X Extracts X X X X
X X X X Extracts X X X X
....That the learned Commissioner of Income-tax (Appeals) was not justified in holding that the amount which is admissible as deduction under section 36(i)(viii) is to be deducted from the dividend income to arrive at the net dividend income for purpose of deduction under section 80M. (ii) That income from dividend being income from other sources, the only deductions permissible to arrive at net income, are as specified in section 57. Deduction under section 36(1)(viii) which is admissible on total income as computed, is not an expenditure to reduce the net income." 92. The abovementioned grounds of appeal relate to computation of deduction under section 80M after deduction under section 36(1)(viii). The Assessing Officer had computed the deduction under section 80M first determining the net dividend income after apportionment of expenses and further reducing the same by deduction claimed and allowed to the assessee under section 36(1)(viii). The Commissioner of Income-tax (Appeals) has upheld the view of the Assessing Officer that the net dividend computed has got to be further reduced by deduction allowed under section 36(1)(viii) for the purpose of computation of the amount on ea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ities, business, capital gains and other sources after act off or loss'. Accordingly, the Assessing Officer (Asstt.) is directed to recompute the deduction on the basis of the order of the Income-tax Appellate Tribunal. However, at the time of giving effect to this order, applicability of provisions of sections 80AA which had been introduced through Direct Taxes Finance (Pb.) Act, 1980 was lost sight of. The deduction under sections 80K & 80M was allowed as originally determined, at the time of assessment, the deduction was allowed as claimed because deduction under section 36(d)(viii) claimed @ 40 per cent had D been denied. However, once deduction under section 36(1)(viii) of the Income-tax Act was held to be allowable deduction under section 80M needed reconsideration under the provisions of section 80AA of the Income-tax Act which does not appear to have been carried on. Thus there is no finding of any appellate authority at any stage that deduction under section 80M is permissible with reference to dividend in one p before allowing deduction under section 36(1)(viii) of the Income-tax Act irrespective of the fact that the deduction under section 36(1)(viii) @40 per cent is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reed before us that the issue is covered in favour of the revenue by the decision of the Special Bench in the case of Etcher Tractors Ltd. v. Dy. CIT [2003] 261 ITR (AT) 52 (Delhi). Respectfully following the aforementioned decision of the Special Bench, we uphold the disallowance and dismiss the common grounds of appeal raised by the assessee in this regard. 97. 1st ground of appeal in assessment year 1995-96 and 2nd ground of appeal in assessment year 1997-98 are common and are as under:- "Assessment year 1995-96 1. That the learned Commissioner of Income-tax (Appeals) was not justified in holding that an amount of Rs. 2 lakhs be deducted on estimate basis on account of administrative expenses to arrive at the net dividend income for purpose of deduction under section 80M. There is no scope for estimating any expenditure under section 57, and the expenditure ordered to be deducted do not fall under section 57. Assessment year 1997-98 2. That the learned Commissioner of Income-tax (Appeals) was further not justified in holding that an amount of Rs. 3 lakhs on estimate be deducted from dividend income to allow deduction under section 80M. The gross dividend received by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1992-93 the Tribunal has considered 50 per cent of the gross dividend income as expenses attributable to the earning of the dividend income. Whereas the Assessing Officer has estimated the expenditure on higher rate than 50 per cent adopted by the Tribunal, the Commissioner of Income-tax (Appeals) has resorted to ad hoc estimation. We taking into account the totality of the facts and circumstances of this case consider the estimate made by the Tribunal at 50 per cent of the gross dividend as reasonable. We accordingly direct the Assessing Officer to compute the deduction under section 80M by deducting 50 per cent of the gross dividend on account of expenses attributable to the earning of such dividend income. The orders of the Commissioner of Income-tax (Appeals) and those of the Assessing Officer for the respective assessment years are modified accordingly. There is no other ground of appeal in the appeals of the assessee. 100. Now we deal with the remaining grounds of appeal of the Revenue. Ground No. 1 in assessment year 1994-95, ground No. I in assessment year 1995-96, ground No. 2 in assessment year 1996-97 and ground No. 2 in assessment year 1997-98 relate to deduction on a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessing Officer however, for the assessment year 1990-91, the Assessing Officer held it to be 'capital expenditure'. On appeal, the Commissioner of Income-tax (Appeals) treated the expenditure of revenue nature but held that the assessee ought to have shown the value of unsold project reports/feasibility study reports as stock-in-trade to arrive at the correct profits. The learned first appellate authority before whom the decision of the Karnataka High Court referred to supra was cited, observed that the full facts of the case were not discussed in the judgment cited and there was no discussion as to part of the Closing Stock of the assessee corporation or not. The question which we have to decide is as to whether the expenditure amounting to Rs. 8,34,427 incurred by the assessee in the assessment under consideration is a revenue expenditure or a capital expenditure. The learned first appellate authority has held it to be revenue expenditure and that decision is in accordance with the ratio of the decision of the Karnataka High Court referred to supra. However, the learned first appellate authority has sustained the addition to the extent of Rs. 7,47,078 on the ground that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd of appeal in this regard in ground No. 2 in assessment year 1994-95, ground No. 2 in assessment year 1995-96 and ground No. 1 in assessment year 1996-97 and ground No. 1 in assessment year 1997-98. These grounds are reproduced hereunder for the sake of ready reference:- Assessment year 1994-95 "2. The learned Commissioner of Income-tax (Appeals) has further erred in deleting the addition of Rs. 28,88,58,740 made on account of sale of shares and directing the Assessing Officer to assess it under the head 'Capital gain'." Assessment year 1995-96 "2. The Commissioner of Income-tax (Appeals) has erred in deleting the addition of Rs. 12,10,97,295 rightly made by Assessing Officer by treating the profit on sale of shares as business income." Assessment year 1996-97 "1. On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) in appeal No. 538/P/98-99 has erred in deleting the addition of Rs. 3,52,52,583 made on account of business income from sale of shares, by holding that the income arising on the sale of shares is to be assessed under the head 'Capital gains' and not Business income'." Assessment year 1997-98 "....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther reserve for claiming deduction under section 36(1)(viii)." 105. This issue is also covered in favour of the assessee by the decision of the Tribunal in assessee's own case in Income-tax Appeal Nos.1319 & 1318/Chandi./87 and Income-tax Appeal No. 527/Chandi./99 for assessment years 1984-85, 1982-83 & 1983-84. Since the decision of the Commissioner of Income-tax (Appeals) is in conformity with the decision of the Tribunal in assessee's own case for earlier years, we find no justification to interfere. 106. Ground No. 3 in assessment year 1996-97 of the appeal of the Revenue is as under:- "3. Learned Commissioner of Income-tax (Appeals) erred in deleting the disallowance of Rs. 7,77,594 made on account of expenditure under the head 'Business Promotion Expenses'." 107. The Assessing Officer had treated the expenditure as capital expenditure. The Commissioner of Income-tax (Appeals) has given details of the expenditure in para 4.3 of his order as under:- "4.3 The submissions made by the appellant have been considered carefully and I have also gone through the details of the expenses which are as under:- (i) Conference on Chandigarh Gateway to golden opportu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d raised by the Revenue is accordingly dismissed. 109. Ground No. 3 in assessment year 1997-98 of the appeal of the Revenue is as under:- "3. Learned Commissioner of Income-tax (Appeals) has erred in deleting the disallowance of Rs. 82,168 made on account of expenditure under the head 'Udyog Sahayak Expenses'. Learned Commissioner of Income-tax (Appeals) has erred in holding this expenditure of revenue nature." 110. The relevant facts relating to this issue are that the assessee had incurred expenditure as a contributor for running a cell "Udyog Sahayak" for providing assistance/guidance to entre preneurs for setting up of industries in the State of Punjab. During the year total expenditure on running the cell amounted to Rs. 4,93,010. The assessee had to contribute 30 per cent which works out to Rs. 82,168. The Assessing Officer treated this expenditure as of capital nature. The Commissioner of Income-tax (Appeals) considering the facts that one of the objective of the corporation was to industrialise the State of Punjab and that the expenditure had been incurred by the assessee for furtherance of business and for industrialization of the State held the expenditure as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ration of the employer and the employees and other prior- charges such as interest on capital, depreciation, reserves, etc. a part of it should in all fair-ness go to the employees." 114. The findings of facts recorded by the Commissioner of Income-tax (Appeals) have not been controverted before us much less rebutted by any evidence. Since the expenditure has been incurred by the assessee purely on commercial consideration, the Commissioner of Income-tax (Appeals) was justified in deleting the addition. We accordingly, decline to interfere. 115. In the result, the appeals of the revenue as well as appeals of the assessee are partly allowed. Per Vimal Gandhi, President. 1. At the very outset, I apologise for the delay in disposal of these appeals. These were first heard by the Special Bench on 24-5-2005 and my learned brother Shri M. A. Bakshi, the Hon'ble Vice President, Chandigarh Zone had agreed to propose an order on behalf of the Bench. The said order was accordingly proposed. I had reservation on the view taken in the proposed order and felt need to have further discussion with other Hon'ble Members of this Bench. The discussion was only possible during my camps at....
X X X X Extracts X X X X
X X X X Extracts X X X X
....have to perform. 6. On consideration of proposed order of my Brother, I have no problem in agreeing with him in what is stated upto page 12 of the proposed order. On page 13 in para 23, my learned Brother has drawn legal inferences. I am unable to agree with the following general observations made at page 13 of the order. These are against the scheme of the Income-tax Act. For instance section 29 in case of business income. "It may be pertinent to mention that certain deductions which may not be provided specifically under various provisions of the Act can also be deducted in computing the net income from a particular source, if deduction of such expenditure is necessary to ascertain the true income." 7. My learned Brother has stated at page 13 that he would deal with this aspect of the matter at a later stage. He has stated that deduction under the head "Income from other sources" are specifically provided under section 57 and as per clause (iii) of said section, any expenditure laid out or expended wholly and exclusively for purposes of making or earning of income is deductible. He, thereafter quotes from the decision of the Hon'ble Supreme Court in the case of Vijaya Lax....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gain the learned Brother refers to decision of Vijaya Laxmi Sugar Mills Ltd.'s case where expenses incurred by Liquidator on salary and other expenses were not allowed out of income earned by way of interest, for the reasons that these expenses had no connection with receipt. The learned Vice President, thereafter refers to decision of Hon'ble Madras High Court in the case of CIT v. Official Liquidator, Pilot Pen Co. (P.) Ltd. [2002] 253 ITR 533, wherein the question was whether B security charges in respect of land and building could be set off against "other income" (there was no income from the said source of land and factory on which expenditure were incurred). Their Lordships treated the question as fully covered by decision of Hon'ble Madras High Court in the case of CIT v. Gannon Dunkerley & Co. (P.) Ltd. [2000] 243 ITR 646 and allowed the expenses. 11. In the case of CIT v. Gannon Dunkerley & Co. (P.) Ltd. [2000] 243 ITR 646 (Mad.), the Official Liquidator in the case of winding up of company, had claimed certain expenditure against interest income. The deduction was allowed with the following observations: "Held, that the expenditure was incurred in the perf....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en if it does not fall within the specified deductions would be deductible in computing the net income." 13. With greatest respect, I do not see any nexus between the legal inference drawn and cases quoted and referred to above. The decisions of Supreme Court and Madras High Court have reiterated a settled proposition that for purposes of deduction under the head "Other sources", expenses must have nexus to the earning of income and should have been spent with the object of making or earning such income. The discussion on above lines leaves no scope to draw a general inference that expenditure, even if it is not specified in the statute, would be deductible for computing income. In my humble opinion to accept the general proposition de hors of facts of a given case is not possible. 14. The learned Vice President has also discussed concept of income. There is no dispute that total income (after deducting expenditure) computed in accordance with provisions of the Income-tax Act is to be charged to tax. 15. The learned Vice President has referred to the cases of Raja Probhat Chandra Barua v. CIT 5 ITC 1 (PC) and CIT v. Raja Sri Sri Kalyani Prasad Deo [1945) 13 ITR 17 (Pat). In the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ses of earning or making income, assessed under the head "Other sources". Expenses were allowed in above cases under a specific provision of the Statute. 19. In para 36, there is reference to certain precedent relating to income assessable under the head "Profits and gains of business" and as to what is the procedure laid down for the determination of business income. In the following para, reference is made to large number of decisions including decisions of Supreme Court in the case of CIT v. S.C. Kothari [1971] 82 ITR 794 and to case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746, the case of Escorts Ltd. v. Union of India [1993] 199 ITR 432 and the proposition laid down in the aforesaid decisions. My learned Brother at page 19 of the order has drawn the following inference: "It would be unreasonable to presume that the Legislature intended to give relief to the assessee under section 80M in excess of the tax that would otherwise be chargeable on dividend income in the hands of the recipient of such income. It is, therefore, in our view, necessary to determine the net component of dividends included in the gross total income on which deduction under section 80M is p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me under section 14 of the Income-tax Act and decisions of Supreme Court in the case of Brooke Bond & Co. Ltd. v. CIT [1986] 162 ITR 373 in case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, CIT v. Chugandas & Co. [1965] 55 ITR 17 and Apollo Tyres Ltd v. CIT [2002] 255 ITR 273. I have already agreed that dividend income in certain circumstances can be taken as business income although for computation, it is assessed under the head "Other sources". But this will depend upon facts and circumstances of the case and statutory provisions under consideration. 23. After analysis of different cases, the following propositions are laid down by my learned Brother, the Hon'ble Vice President: "52. On analysis of above decisions, following principles of law emerge:- (i) That deduction under section 80M is permissible on the net dividend income computed in accordance with the provisions of the Act and included in the gross total income. (ii) That for determination of net dividend income included in the gross total income, it is necessary to trace the 'Source of dividend income' notwithstanding the fact that it is assessable under the head 'Income from other s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to sections 56 to 59 of the Act. The nature of dividend income vary from case to case depending upon nature of holding as discussed above and not on any other consideration. 21. My learned Brother has referred to cases in category 'A' and 'B'. My learned Brother Hon'ble Vice President has put in category 'A' cases where proportionate management expenses are not to be deducted while computing deduction under section 80M of the Income-tax Act. According to him, the view is supported by the following decisions: (i) CIT v. Central Bank of India [2003] 264 ITR 522 (Bom.), (ii) Shaw Wallace & Co. Ltd. v. Dy. CIT [2002] 80 ITD 156 (Cal.), (iii) CIT v. United Collieries Ltd. [1993] 203 ITR 857 (Cal.), (iv) State Bank of Indore v. CIT [2005] 275 ITR 232 (MP), (v) Usha Martin Industries Ltd. v. Dy. CIT [2003] 86 ITD 261 at page 273 (Kol.), (vi) East India Agencies (P.) Ltd. v. CIT [1991] 189 ITR 443 (Ker.), (vii) CIT v. Pfizer Corpn. [1993] 202 ITR 1154, 120 (Bom.), (viii) CIT v. Jai Hind Investment Industries (P.) Ltd. [1993] 202 ITR 316, 323 (Cal.), (ix) CIT v. Mahendra Sobhagchand Shah [1993] 203 ITR 178 (Bom.). 22. It has been observed that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....poses of business" is wider in scope than the expression "for purposes of earning profit". It was held that the expression "for the purpose of business" may take in not only the day-to-day running of the business, but also the rationalization of its administration and modernization of its machinery. It may include measures for the preservation of the business and for the protection of its assets. It was further held that the purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shell incur it in his capacity as a person carrying on the business. 26. My learned Brother has then put certain cases in category 'B' where according to him dividend is earned in the course of carrying on business or is incidental to business activities of the assessee. Dividend is incidental income and may be "business income" if shares are held as stock in trade but it is not possible to accept that dividend can be earned "in the course of carrying on of business". The assessee may be a dealer in shares and thus carry business in shares and in that case dividend as incidental income would be busines....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee would be entitled to the deduction under section 80M on the gross dividend before deduction of the proportionate management expenses?" As already stated the Appellate Tribunal held that deduction under section 801V1 was to be allowed on gross dividend in line with the decision of Hon'ble Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348. The aforesaid decision was challenged by the revenue on the ground that above view could not be taken in the light of amendment in the Act made with effect from 1-4-1968. The Hon'ble High Court answered the question against the revenue but that view was contrary to the decision of Supreme Court in the case of Distributors Baroda (P.) Ltd. v. Union of India [1985] 155 ITR 120 and also contrary to the amendment made by Finance (No. 2) Act, 1998 with retrospective effect from 1-4-1968. It is so held by the Supreme Court. So the decision of the Tribunal and High Court are reversed for above reasons. This is the proposition of law laid down by Hon'ble Supreme Court which is binding on all authorities. The portion of the referred question underlined by my learned Brother is consequential. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....interest paid on money borrowed for purchase of shares on which dividend was allowed, was required to be deducted. Their Lordships of Bombay High Court following the decision of Supreme Court in the case of Distributors (Baroda) (P.) Ltd. answered the reference in favour of the revenue. While doing so, Their Lordships allowed deduction of interest out of the total income as "interest was paid on money borrowed for earning such income". Thus deduction of interest was allowed in terms of section 57 of the Income-tax Act. 31. The decision of Himachal Pradesh High Court in the case of Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CIT [1998] 232 ITR 718 and of Delhi High Court in the case of CIT v. Industrial Finance Corpn. of India [1992] 198 ITR 539 referred to by my learned Brother and Hon'ble Vice President are on sections 80P, 80K and 80L of the Income-tax Act. The language and purpose of above sections is quite different and, therefore, above decisions may not be relevant, more particularly when direct decisions on section 80M are available on the points. My learned Brother Hon'ble Vice President also referred to and relied upon the decision of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... mode of computation varies with the nature of the class of such income, for the deductions permissible under the law in computing the income under each head bear a particular relevance to the nature of the income. The statute operates on the principle that it is the net income under each head, which should be considered as a component of the total income. The statute permits specified deductions from gross receipts in order to compute the net income. The net income under the different heads is then pooled together to constitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and of unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, the quantum of income, which is assessed to tax. Ordinarily, when income pertains to a certain head, the source of such income is peculiar to that head, but it is not unusual that commercial considerations may properly describe the source differently. For instance, a banking concern may hold securities in the course of its business. The securities constitute its trading assets and income fr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eduction is allowed of an amount equal to so much of an amount of dividend as computed in accordance with provisions of this Act and included in the total income. The controversy raised will loose its sheen if due importance is attached to the words "Dividend income" computed in accordance with provisions of this Act. It is computed dividend income on which deduction is allowed and, therefore, there is no question of considering dividend as business income. The dividend indisputably is assessable under the head "Other sources" and deductions are permissible out of dividend income as per provisions of sections 57 to 59 of the Income-tax Act. In most of the cases cited and considered above, question arose with reference to deduction permissible under section 57(iii) of the Income-tax Act which provides that deduction of any expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purposes of making or earning of income would be allowed. In such cases where it was established that expenditure was incurred for purposes of making or earning dividend income or for realizing such dividend income, the deduction of expenditure was allowe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lready been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference." 37. The Assessing Officer did not allow exemption to the assessee under the above provision as according to him interest on securities was liable to be assessed to tax under the head "Interest on securities" (section 8) and not under the head "Business" (section 10) of the Income-tax Act. When the matter was carried to the Hon'ble Bombay High Court, one of the learned Judges (Tendolkar, J.) was of the opinion that the income of the business was to be computed under section 10 and such income alone could be admitted to the exemption under section 25(3). However the majority of the Court held that all income earned from business qualified for the exemption. Their Lordships of Supreme Court agreed with the majority view of the Hon'ble High Court. In the decision Their Lordships made the following pertinent observation:- "Tax is charged under the Income-tax Acts on specific units, such as, individuals, Hindu undivided families, companies, local authorities, firms and associations of persons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion under section 25(3) is general: it is not restricted to income chargeable under section 10 of the Act." 38. It is evident from above as to the relevance of the head under which a particular income is computed for charging to Income-tax. Whether particular section imposes a condition of chargeability under a particular head to allow benefit of exemption depends upon the language and text of the section. Their Lordships in the case of Chugandas & Co. has given illustrations of several sections where the Legislature has specified a particular head of income as a condition for claiming exemption. If there is no restriction of the nature discussed above p then business profit and gain can be taken on a commercial basis irrespective of head under which the income has been computed. But this proposition is not of universal application as is evident from the para quoted from the case of Chugandas & Co. The language and text of the section required to be considered have a bearing on the question when "Business" is to be given commercial meaning or income is to be taken as computed under the Act. 39. In my considered opinion, the decision of Constitutional Bench in Distributors (Barod....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent, thereof, in computing the total income of the company." 41. The sub-section required "Computation of business income in accordance with provision of the Act" included in the "Total income". Thereafter three steps required to be taken, for computing deduction under section 80E(1), are stated by the Court. As noted earlier, the deduction was to be allowed on profits and gains computed in accordance with provisions of the Act and included in the total income. Their Lordships observed as under: "As indicated earlier, sub-section (1) contemplates three steps being taken for computing the special deduction permissible thereunder and arriving at the net income exigible to tax and the first two steps read together contain the legislative mandate as to how the total income - of which the profits and gains attributable to the business of the specified industry forms a part - of the concerned assessee is to be computed and according to the parenthetical clause, which contains the key words, the same is to be co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome-tax Act. No other provision is relevant having regard to authoritative pronouncement of Supreme Court in Distributors (Baroda)(P.) Ltd.'s case. Sufficiently strong language has been used by employing words like "Legislative mandate" "Key words in parenthetical clause" to rule out application of commercial principles in interpreting section 80M. It is not possible to ignore restrictions imposed on applicability of deduction and in particular ignore the words, "dividend income computed in accordance with provisions of this Act'. The section does not say "Business income". Therefore, there is no question of referring to any of the provisions relating to deduction under the head "Profits & gains of business". The decision of Hon'ble Supreme Court and High Courts referred to above requiring application of commercial principle and holding dividend income as business income has no application in view of clear language of section 80M of Income-tax Act and the strong words used by the Apex Court describing restriction imposed by the language of section 80M. Aforesaid view of mine finds full support from the following decisions. 43. In the case of East India Agencies (P.) L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lar case warrant such allocation. In that view of the matter, we are of the view that only the actual expenses should be taken into account in reducing the dividend income and not any notional expenditure as has been done in the instant case. We, therefore, decline to answer the question. The Tribunal will find out the expenditure, if any, actually incurred in earning the dividend and, to that extent, the dividend income should be reduced and relief under section 80M should be allowed on that." 45. Bombay High Court in the case of CIT v. Central Bank of India [2003] 264 ITR 522 held as under: "As held in numerous cases by the Court, Chapter VI-A constitutes a separate code dealing with deductions to be made in computing total income. Section 80M refers to special deduction in respect of intercorporate dividends. As held by the Bombay High Court in the case of Maganlal Chhaganlal (P.) Ltd. [1999] 236 ITR 456, in order to compute deduction under section 80M, one has to compute the amount of dividend in accordance with the Act after deducting interest on monies borrowed for earning such income. The point to be noted is that deductions contemplated by section 80M referred to actual ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tainly the amount actually incurred by way of expenditure has got to be deducted in accordance with the procedure prescribed under the Act. But when there is nothing on record to show that any expenditure is incurred by an assessee while earning/depositing the dividend, then it is difficult for us to hold that some hypothetical and/or notional expenditure can be made a basis for deduction. In other words, we have not been able to notice any provision which may entitle the taxing authorities to work out by way of expenditure any notional figure for the purpose of section 80M though, in fact, it has not been so incurred by an assessee while encashing the dividend. In somewhat similar circumstances, this question had come up for consideration thrice before the Calcutta High Court. These cases are CIT v. National & Grindlays Bank Ltd. [1993] 202 ITR 559, CIT v. United Collieries Ltd. [1993] 203 ITR 857 (Cal.) and lastly CIT v. Enemour Investments Ltd. [1994] 72 Taxman 370 (Cal.). In all the three cases, Their Lordships of the Calcutta High Court have taken a consistent view that we have taken. It has been held that: 'In our view, only the actual expenditure incurred by the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d received by the assessee-company can under no circumstances be held to be business income. It is incidental income received by the assessee on account of holding of a capital investment. It cannot have a character different from the character of shares in the hands of the assessee. Shares were not trading assets. Therefore, dividend receipts could only be assessed under the head "Other sources". Out of dividend receipts only expenditure referred to in section 57 could be deducted i.e. any sum expended wholly and exclusively for the purpose of making or earning such income (dividend). In this case, I see no reason to take a view different from one taken by M.P. High Court in the case of State Bank of Indore, or by Bombay High Court in the case of Central Bank of India. To the same effect are the decisions of other High Courts referred to in above paras. Different Benches of the Tribunal have also held that actual expenditure incurred by the assessee for earning dividend are to be taken into consideration. Reference can also be made to the decision of Calcutta Bench in the case of Usha Martin Industries Ltd. v. Dy. CIT [2003] 86 ITD 261, which in my humble opinion, has correctly ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w has no application to the facts and circumstances of the case. 49. The ultimate conclusion of my learned Brother and Hon'ble Vice President is reflected in para 28 which is as below: "28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources." The question is ultimately answered in the affirmative. With utmost respect, I am unable to subscribe to the view taken in the above para. I have recorded above my reasons for not agreeing with the view taken by my learned Brother, the Hon'ble Vice President. The issue is not res integra and is fully covered in favour of assessee, as per direct decisions of various High Courts and of Supreme Court including Distributors (Baroda)(P.) Ltd.'s case. 50. One controversy left is as to how deduction under section 80M is to be computed where interest on borrowed funds is paid by the assessee; a dealer in shares and when accounts for all sources are mixed. In my considered opinion, all expenses incurred I or earning, making or realizing dividend income are lobe-deducted while computing dividend income. Only on net dividend dedu....