TaxTMI 
TaxTMI 
2006 (4) TMI 187
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....for constitution of the Special Bench in respect 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 issue....
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....cision of the Calcutta Bench of the Tribunal in 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 Representativ....
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....ncome-tax Act, 1961. 6. Relying upon the decision of the Supreme Court in the case of 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....
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....a different view than the view expressed earlier by the Chandigarh Bench of the Tribunal in assessee's own case wherein the decision of the Supreme Court in the case of United General Trust 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 shar....
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....y previous year, no deduction shall be allowed in respect of such amount in any other previous year. Explanation.- For the purposes of this section, the expression 'due date' means the date for furnishing 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....
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....e by way of dividends from a domestic company' describe the condition which must be fulfilled in order to attract the applicability of the provision contained in section 80M. The condition is that the gross total income of the assessee must 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 ....
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.... rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions including provisions for the levy of additional income-tax of this Act in respect of the total income of the previous year of every 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:- ....
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....after making the following deductions, namely:- (i) in the case of dividends, (other than dividends referred to in section 115-0) (or interest on securities) any reasonable sum paid by way of commission or remuneration, to a banker or any other person for the purpose of realizing such dividend (or interest) on behalf of the assessee. (ia) the case of income of the nature referred to in sub-clause (x) of 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. ....
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....allowed under any provision of this Act in computing the income by way of any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature, whatsoever: Provided that nothing contained in this sub-section shall apply in computing the income of an assessee, being the owner of horses maintained by him for running in horse races, from the activity of owning and maintaining such horses. Explanation.-For the purposes of this 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 Statut....
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....st." 24. A combined reading of sections 56 to 59 and the decision of the Supreme Court referred to above reveals that deduction under section 57 out of dividend income is to be made on the following conditions:- (i) The expenditure should be incurred wholly and exclusively for the purpose of making and earning the income. (ii) It should not be in the nature of capital expenditure. (iii) It should not be in the nature of personal expenses of the assessee [Section 58(1)(a)(i)]. (iv) It should be incurred in the accounting year and not in any prior or subsequent 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 e....
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....eration to a banker or any other person for the purpose of realizing such dividend or interest on behalf of the assessee. 27. As pointed earlier the expenses which are deductible under section 57(iii) must have a close nexus with the earning of the income from other sources. Whether the expenses have been incurred or laid out for the purpose of earning the income from other sources, is a question of fact to be determined on the facts and in the circumstances of each case. There will be no difficulty to determine the issue in such cases where the assessee has a single source of income such as income from other sources. In such cases, 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 a....
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....c Light & Power Co. Ltd. [1993] 204 ITR 804 (Cal.) (iv) CIT v. Dwaraka Chit Funds (P.) Ltd. [1995] 216 ITR 115-(Mad.) (v) CIT v. Gannon Dunkerley & Co. (P.) Ltd. [2000] 243 ITR 646 (Mad.) (vi) Palani Sri Murugan Textiles Ltd. (By Official Liquidator) v. Asstt. CIT [2002] 254 ITR 333 (Mad.) (vii) CIT v. Richardson & Cruddas Ltd [1993] 202 ITR 350 (Cal.) 31. Reference to section 58 of the Income-tax Act would also be relevant to appreciate as to whether the establishment expenses are to be deducted in computing the income from other sources. Section 58(iii) restricts the deduction on account of any salary if it is paid outside India without deduction of tax. On the basis of 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" ....
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....l.) (v) Chinai & Co. (P.) Ltd. v. CIT [1994] 206 ITR 616 (Bom.) (vi) CIT v. Administrator General of Madras [1998] 234 ITR 351 (Mad.). 36. Since there are also some precedents relating to the income from profits and gains of business, it will be useful to derive benefit from the same in order to come to a fair conclusion. We, therefore, proceed to consider the procedure for determination of business income which may help us in determination of the issue at hand. 37. Section 2(24) of the Act defines income to include profits and gains of business. Section 29 of the Income-tax Act, 1961 provides that profits and gains of business shall be computed in accordance with provisions of sections 30 to 43D of the Act. 38. The word "profits" is to 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. K....
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....ips held that the income-tax is on real income. The relevant portion of the judgment is as under:- "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialize." 42. Admittedly the above principles have been laid down in relation to the income by way of profits and gains of business. But in our view, these principles are equally applicable to the income from any other source referred to in section 14 of the Act. It hardly needs to be emphasized that the intention of the Legislature 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 ....
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....purposes of other provisions of the Act. This view is further supported by the decision of the Supreme Court in the case of Brooke Bond & Co. Ltd v. CIT [1986] 162 ITR 373. In this case, Their Lordships held as under:- "Held, (i) that the mere circumstance that the appellant had p shown the dividend income under the head "Income from other sources" in its returns could not in law decide the nature of the dividend income. It had to be determined from the evidence whether, having regard to the true nature and character of the income, it could be described as income from business, even though it fell for computation under another head." 45. Their Lordships in this case also laid down the following principles of law:- "It is a cordinal principle of law relating to income-tax that income-tax is a single charge on the total 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 deduct....
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....curities were part of the trading assets of the company doing business, the income therefrom had to be assessed under section 8 of the Act. This decision does not say that the income from securities is not income from the business. Nor does the decision of this Court in East India Housing and Land Development Trust Ltd. v. CIT support the contention of the Revenue. There, a company, which was incorporated with the objects of buying and developing landed properties and promoting and developing markets, purchased 10 bighas of land in the town of Calcutta and set up a market therein. The question was whether the income realised from the tenants of the shops and stalls was liable to be taxed as "business income" under section 10 of the Income-tax Act or as income from property under section 9 thereof. This Court held that the said income fell under the specific head 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 pr....
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....s 'eligible business'. Decision of the Kerala High Court in CIT v. Appollo Tyres Ltd. [1999] 237 ITR 706 affirmed on this point." 49. In the case of Mehsana District Central Co-operative Bank Ltd v. ITO [2001] 251 ITR 522, Their Lordships of Supreme Court held that the income derived by a co-operative bank from utilization of its funds for statutory reserves under section 67(2) of the Gujarat Co-operative Societies Act, 1961 and income from hiring out of safe deposit vaults was part of the ordinary banking business of a bank. Therefore, the income derived by the cooperative bank was eligible for deduction under section 80P(2)(a)(i). 50. In the case of CIT v. Ramanathapuram Distt. Co-op. Central Bank Ltd. [2002] 255 ITR 423, Their Lordships of Supreme Court held that interest on securities, subsidies from the Government and dividend received by the assessee, co-operative society carrying 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 Centra....
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....r the provisions of the Act and included in the gross total income of the assessee. It has also been explained that provisions of the Act are not confined to provisions of sections 56 to 59 only. At the cost of repetition it may be stated that it is well-settled principle of law that deduction in respect of expenditure incurred by the assessee may be permissible in computing the taxable income notwithstanding the fact that deduction is not specified under any provision of the Act. In the case of Badridas Daga v. CIT [1958] 34 ITR 10, Their Lordships of Supreme Court held that any loss on embezzlement is allowable as a deduction in computing the income from business notwithstanding the fact that there is no specific provision for allowance of deduction for such expenses. Therefore, if any expenditure claimed by the assessee as deduction in computing the gross total income is attributable to the earning of dividend income, the same shall 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 unconn....
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.... [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 by earning such income. The point to be noted is that deductions contemplated by section 80M referred to actual expenditure whereas, deductions contemplated by section 20(1) are estimated proportionate expenses and interest. Therefore, one cannot import deductions from interest on securities in the case of a banking company under section 20(1) into the deductions contemplated by section 80M. In the case of CIT v. United Collieries Ltd. [1993] 203 ITR 857 the Calcutta High Court has held that the special deduction under section 80M is allowable on the net dividend which is arrived at after taking into account actual expenditure incurred by the assessee in earning the dividend income and that (here was no scope for any estimate of expenditure being made and there was no scope for allocation of notional expenditure unless the facts of a particular 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 wh....
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....idend income determined in accordance with provisions of sections 56 to 59 is not to be reduced by proportionate Profit & Loss expenses/overheads unrelated to the earning of dividend income in category 'A' cases. We hold accordingly. 60. The above view, however, may not hold good in category 'B' cases. As pointed out earlier, category 'B' cases are such cases where dividend is earned in the course of carrying on business or is incidental to the business activities of the assessee. We have earlier discussed that deduction under section 80M is permissible out of the net dividend income included in the gross total income and as computed in accordance with provisions of the Act in respect of which there is no dispute. 61. In order to find out what is the component of income included in the gross total income of the assessee out of the dividend income earned in the course of business or incidental to business activities, one will have to necessarily consider the deductions taken into account by the assessee in working out the net income from business determined after taking into account the gross dividend and other business receipts. Most of the expenditure....
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....9;s order since the only question which was agitated before the Tribunal was whether the deduction under section 80M of the Act was to be computed with reference to the gross dividend income without deducting therefrom the proportionate management expenses and the Tribunal, relying on the decision of this Court in Sahu Brothers (Saurashtra) (P.) Ltd. [1973] and in the case of New Great Insurance Co. Ltd. [1973] 90 ITR 348, held that the relief under section 80M was to be computed with reference to the gross dividend income. It appears clear that the aforesaid question seems to be finally concluded by the decision of the Supreme Court in the case of CIT v. Industrial Investment Trust Co. Ltd. [1968] 67 ITR 436 (Bom.)." 63. The Hon'ble Supreme Court in the case of CIT v. United General Trust Co. Ltd. [1993] 200 ITR 488 reversing the decision of the Bombay High Court held as under:- "Both counsel for the Revenue and the assessee are agreed that the only question which was sought to be raised by the Revenue, but which was not allowed by the High Court is concluded against the assessee and in favour of the Revenue by the decision of this Court in Distributors (Baroda)(P.....
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....uld not also make any difference if the order is a speaking or non-speaking one." 67. Thus the decision of the Hon'ble Supreme Court that proportionate management expenses are to be deducted from the gross dividend is of binding nature notwithstanding the fact that the detailed reasoning is not contained in the decision of the Hon'ble Supreme Court. 68. The principle of apportionment of expenses proportionately in the case of indivisible expenses was again reiterated by the Hon'ble Supreme Court, in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT [1993] 203 ITR 1027. In this case, the two questions referred to the High Court were as under:- (1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the case of the assessee is covered by section 81(i)(d) only and the provisions of section 66 read with section 110 of the Act are not attracted is erroneous in law? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to rebate under section 81(i)(d) of the Act on the whole of the amount of profit of Rs. 89,976 witho....
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....when the income of the co-operative society on which no tax was payable was included in its total income, it became entitled to a deduction from the amount of income-tax chargeable on its total income. That meant that the co-operative society became entitled to deduction or exemption of Income-tax payable by it only on the net amount of profits and gains, i.e., on the income of its business otherwise computable in accordance with the provisions of the Income-tax Act, 1961, for the purpose of charging Income-tax thereon and which was included in its total income, and not on the amount of its gross profits and gains of business on which no Income-tax was payable." 70. In the case of CIT v. Maganlal Chhaganlal (P.) Ltd. [1999] 236 ITR 456, the Bombay High Court held that "deduction under section 80M of the Income-tax Act, 1961 has to be calculated with reference to the amount of dividend computed in accordance with 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". In this case, the assessee was a Private Limited Com....
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....ssessee, a dealer in shares, claimed deduction under section 80M in respect of the gross amount of dividends received by it. The Tribunal upheld the claim of the assessee. On a reference: Held, that the relief under section 80M could not be granted on the gross amount of dividend received by the assessee but on the gross amount as reduced by the amount of interest attributable to the money borrowed for the purpose of investment and the expenditure incurred in realising the dividend income." 74. In the case of CIT v. Industrial Finance Corpn. of India [1992] 198 ITR 539, Their Lordships of the Delhi High Court held that deduction under sections 80K and 80L have to be computed with reference to the net dividend i.e., after deduction of expenses relatable thereto under section 57 of the Income-tax Act, 1961. 75. It is, therefore, evident that in such cases where the dividend is earned in the course of business or its earning is incidental to the business carried on by the assessee, the indivisible expenses have got to be apportioned for determining the net component of income included in the total income. 76. This principle may be elaborated with reference to an exam....
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.... determining the net component of dividend income which is included in the gross total income. 77. It may be pertinent to mention that the decision of the Calcutta Bench of the Tribunal in the case of Dy. CIT v. S.G. Investments & Industries Ltd. [2004] 89 ITD 44 was sought to be distinguished on the ground that the said decision has been rendered with reference to provisions of section 14A applicable in respect of income not liable to tax. It was further contended that the said decision would not be applicable in respect of the income which is included in the gross total income out of which deduction is permissible. The principle laid down in the decision of the Tribunal in the case of S.G. Investments & Industries Ltd. that the component of net income is to be determined after taking into account all the deductions claimed is in our view applicable even in such cases where the net component of income is to be determined for the purpose of grant of deduction under section 80M. As pointed out earlier deduction is permissible out of the net component of dividend income included in the gross total income. It is also pertinent to mention that the decision of the Supreme Court in th....
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....uld not fall under section 57(iii) of the Act and, therefore, not to be deducted. (ii) That where the dividend receipt is part of the business income of the assessee or is incidental to the business activities of the assessee, the indivisible expenses of business have got to be apportioned between the various receipts of business income including dividend and deduction under section 80M calculated on net income accordingly. 81. On the basis of the above principles of law it will be relevant to ascertain the nature of the dividend income derived by the assessee. 82. As per the Industrial Policy of Punjab Government, the assessee-corporation has been established to engage itself in setting up and promoting new industrial units in Punjab. The projects are jointly set up by the entrepreneur and PSIDC, i.e. the assessee. The assessee provides initial finance by buying equity. The following portion of the annual report for financial year 1996-97 will indicate the nature of the activities of the assessee:- "(3) Investments (a) The company's Investment, in pursuance of its objects to assist by way of equity participation for the advancement, promotion a....
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....ited to the head 'Receipts on Account of Projects Matured' in the years of maturity of respective projects. The above policy has been adopted because promotion of projects is a major activity of the corporation. Recovery, if any, made in the subsequent years on account of abandoned projects is credited to the Miscellaneous Income in the year of actual receipt." 83. It will also be relevant to refer to the source of income of the assessee and the nature of expenditure claimed against such income. We for the sake of convenience, refer to the statement of income for the financial year 1996-97:- "Income 1996-97 1995-96 Profit from sale of Investment 14,55,55,035 3,58,12,583 Income from Interest 40,31,49,177 30,00,92,535 Dividend on Investment 11,11,25,603 7,94,18,338 Other Income 1,22,69,860 1,76,76,038 Total Rs. Expenditure 67,20,99,675 43,29,99,494 Employees remuneration & Welfare Exps. 1,96,03,327 1,88,88,427 Administrative & other exps. 1,77,80,867 1,77,71,433 Financial Expenses 60,27,46,979 36,53,92,860 Depreciation 26,27,889 25,76,852 64,27,59,062 40,46,29,572" ....
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....th retrospective effect from 1-4-1968, over-ruled the judgment of the Bombay High Court in the case of CIT v. United General Trust (P.) Ltd. [1979] 119 ITR 664. The position which emerges after the decision of the Hon'ble Supreme Court in the case of United General Trust (P.) Ltd. referred to supra in that proportionate management expenses have to be deducted from the gross dividend for purposes of relief admissible under section 80M. In the case of the assessee, from the statement annexed along with the return, it is seen that the income from dividend shows in the profit and loss account is a figure of Rs. 2,21,77,240 which is the gross dividend without considering am expenditure incurred for earning of the said income. The assessee has claimed deduction under section 80M with respect to this gross dividend income which is not in accordance with law in view of the decision of the Supreme Court in the case of United General Trust (P.) Ltd. Besides, the income from dividend the assessee also has income from interest, income from sale of shares and other misc. income, the total income being Rs. 10,45,23,890 inclusive of gross dividend income of Rs. 2,21,77,240. Out of this gross ....
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.... 87. It is evident from the order of the Tribunal in assessee's own case that the decision of the Supreme Court in the ease of CIT v. United General Trust Ltd. [1993] 200 ITR 488 has been relied upon by the Tribunal for arriving at the decision. The another Bench of the Tribunal in the case of Mahavir Spinning Mills Ltd. have referred to the decision of the Supreme Court in the case of United General Trust Ltd. and pointed out that the said decision has got to be seen in the context in which it was rendered. The Bench has further recorded a finding of fact that no expenses had been incurred by the assessee to earn dividend income and, therefore, deduction under section 80M was permissible on the gross dividend income. The decision of the Tribunal in the case of Mahavir Spinning Mills Ltd. is inapplicable to the facts of this case insofar as in that case a finding of fact has been recorded by the Tribunal that no expenditure has been incurred by the assessee for earning the dividend income. Moreover, the Bench has not noticed the earlier decision of the Tribunal in assessee's case and, therefore, the said decision is per incuriam. In assessee's case, the Tribunal has re....
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....finding, in our humble view, does not contradict our finding that c the dividend earned by the assessee is in the course of carrying on of its business. We have expressed the view that whereas purchase of shares is a capital investment in the course of business, the dividend has been realized in the course of exploitation of the capital asset of the assessee, namely, the investment in shares. We are, therefore, of the view that there is no contradiction in the order. 90. We now proceed to consider the grounds of appeal raised by the assessee as well as by the Revenue in cross appeals. 91. Ground No. 1 in assessment year 1994-95 and ground No. 2 in assessment year 1995-96 in assessee's appeal are as under:- "Assessment year 1994-95 1.(i) That the learned Commissioner of Income-tax (Appeals) was not justified in holding that the amount which is Inadmissible as deduction under section 36(1)(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 spec....
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....come irrespective of the fact that this is income under the head other sources and further deduction under section 80M is admissible with reference to the dividend income before allowing deduction under section 36(1)(viii) of the Income-tax Act. In this regard, reference was made to the assessment records. It appears that the issue whether deduction under section 36(1)(viii) of the Income-tax Act was admissible from the dividend income came up for consideration in this year for" the first time. At the time of framing the assessment the Assessing Officer held that dividend income was income from other sources spl. therefore, deduction under section 36(1)(viii) was not admissible with respect of this income. Therefore, dividend income was excluded for the purpose of allowing deduction under section 36(1)(viii) and deduction under sections 80K & 80M of the Income-tax Act was thereafter allowed from such dividend income. The issue was decided in favour of the appellant in first appeal. The Commissioner of Income-tax (Appeals) following the order of the Income-tax Appellate Tribunal, Chandigarh Bench, in the case of Punjab Financial Corporation, held 'in consonance with the decision....
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....the matter, the first ground of appeal is rejected and it is held that the deduction under section 80M of the Income-tax Act is admissible only with reference to the net dividend income after deducting allowance under section 36(1)(viii) of the Income-tax Act claimed at the rate of 40 per cent." 94. Respectfully following the order of the Tribunal in assessee's own cases for assessment years 1990-91 to 1992-93, we uphold the orders of the Revenue Authorities in this regard and dismiss the grounds of appeal raised by the assessee. 95. 2nd ground of appeal in assessment year 1994-95 and ground No. 1 in assessment year 1997-98 in assessee's appeal are common and are as under:- "Assessment year 1994-95 2. That the learned Commissioner of Income-tax (Appeals) was further justified in upholding the disallowance of rent of Rs. 3 lakhs of Guest house expenditure as business expenditure. It is against the order of the Hon. Tribunal in earlier years wherein it was held that rent of guest house is an admissible business expenditure." Assessment year 1997-98 "1. The learned Commissioner of Income-tax (Appeals) was not justified in upholding the....
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.... Income-tax (Appeals) has also erred in allowing relief out of the addition made by the Assessing Officer by restricting the claim under section 80M to Rs. 1,12,10,100 against Rs. 2,66,90,728 claimed by the assessee." Assessment year 1995-96 "3. The learned Commissioner of Income-tax (Appeals) has further erred in directing the Assessing Officer to allow the deduction under section 80M." Assessment year 1996-97 "5. Learned Commissioner of Income-tax (Appeals) has erred in directing Assessing Officer to allow the deduction under section 80M of the Act after deducting expenditure, if any, incurred by the assessee under section 57 of the Act and the administrative expenses estimated at Rs. 3 lakhs." Assessment year 1997-98 "5. Learned Commissioner of Income-tax (Appeals) has also erred in directing Assessing Officer to allow the deduction under section 80M of the Act after deducting expenditure, if any, incurred by the assessee and the administrative expenses estimated of Rs. 3 lakhs as against expenses @95.24 per cent of the earnings worked out by the Assessing Officer." 99. We have elaborately discussed that deduction under se....
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....enue expenditure." Assessment year 1997-98 "2. Learned Commissioner of Income-tax (Appeals) has erred in deleting the addition of Rs. 1,73,273 made oh account of Project Survey expenses being capital expenditure. Learned Commissioner of Income-tax (Appeals) has erred in holding the same in the nature of revenue expenditure." 101. The Assessing Officer had treated these expenses as of capital nature. The Commissioner of Income-tax (Appeals) decided the issue in favour of the assessee. Parties have agreed before us that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case for assessment years 1990-91 to 1992-93. The issue has been dealt in para Nos. 5 and 6 of the order. Since the facts are identical, we adopt the reasoning given by the Tribunal in the aforementioned decisions to uphold the order of the Commissioner of Income-tax (Appeals) in this regard- "5. We have considered the rival submissions and have also gone through the orders passed by the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals). The assessee corporation is a wholly owned Government company of the Punjab....
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....stock-in-trade, would not change the exact nature of the expenditure debited in relation thereto. The issue is squarely covered by the decision of the Karnataka High Court in the case of Karnataka State Industrial & Investment Development Corporation and as such the departmental authorities ought to have allowed the entire expenditure debited under this head as a revenue expenditure. 6. Before parting with the matter, we may mention that even if the contention of the first appellate authority that the expenditure on the preparation of project/feasibility reports resulted into stock-in-trade, then the adjustment has to be given for the cost of the reports which were available with the assessee corporation as on l-4-1989 about which no date is available and whatever is the valuation of the Closing Stock debited will have to be taken as the opening stock of the subsequent assessment year. Since the assessment is a wholly owned company of the Punjab Government and the rate of tax is almost the same is the case of a company, there is hardly any purpose in disturbing the treatment being claimed and allowed by the Assessing Officer in relation to expenditure on preparation of pro....
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....mmissioner of Income-tax (Appeals). As per the Industrial policy of the Punjab Government, the assessee corporation was to act as a catalyst for establishment of new industrial projects in the State of Punjab, the assessee corporation was to act as a catalyst for establishment of new Industrial Project in the State of Punjab by acting as promoters/collaborators alongwith other industrial entrepreneurs. At the time of the start of the project, the assessee corporation makes investment and when the production in the projects reaches upto a certain level where after the projects become self-sufficient, it disinvests those holdings in that project by selling it to the other promoter with a view to realize funds for investments in other projects. Thus basically the investment in shares of companies which were jointly promoted by the assessee alongwith other industrial undertakings is in the nature of an investment and any profit/gain earned by the assessee on the realization of such an investment is liable to tax under the head 'Capital gains' and this position has all along been accepted even by the departmental authorities upto the assessment year 1989-90. Accordingly we hold ....
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....00 (vii) PSIDC share towards Hall reserved for DI for Display of products in Exhibition & Literature in a trade show by CII on Good Health held at Udyog Sahayak, Chandigarh 35,313.00 (viii) Paid to M/s. Hindustan Thompson Associates Pvt. Ltd. for designing, Preparing network, Photography charges, TP wiring and printing of corporate brochures of PSIDC in 3000 no.'s for infrastructure development of the corporation 3,63,000.00 (ix) Lunch to dignitaries in Hotel Mountview. 8,318.00 (x) Air tickets of Chief Minister H.S. Brar & others for visit to Bombay. 32,658.00 (xi) Presentation with slide projector at Punjab Bhawan, Chandigarh on activities of PSIDC. 1,116.00 (xii) Captioned Exhibition organized by CII at Hotel Taj Palace, New Delhi for rendering all assistance to PSIDC's stall. 3,098.00 (xiii) Chief Secretary meeting with Officers of Industries Deptt. and Foreign delegates. 9,020.00 7,77,594.00 On going through these expenses, it is seen that these expenses have been basically incurred for promotion of business and for attracting or inviting industrial participation from outside....
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....ing Officer had wrongly treated this expenditure of capital nature. We accordingly decline to interfere. 112. Ground No. 4 in the appeal of the Revenue for assessment year 1997-98 reads as under:- "4. Learned Commissioner of Income-tax (Appeals) has erred in deleting the disallowance of Rs. 1,59,312 made on account of staff welfare expenses." 113. The relevant facts relating to this issue are that the assessee had debited a sum of Rs. 1,37,330 on account of gifts to employees and a sum of Rs. 21,982 on account of providing dinner for a farewell party. The Assessing Officer disallowed the claim. The Commissioner of Income-tax (Appeals) considered that the gifts made to the employees of the value of less than Rs. 1,000 had been incurred due to commercial expediency to keep the employees happy and satisfied. The expenditure of Rs. 21,982 on account of dinner for farewell party has also been considered to have been incurred for the purpose of business. The Commissioner of Income-tax (Appeals) has also relied upon the decision of the Supreme Court in the case of Shahzada Nand & Sons v. CIT [1977] 108 ITR 358, the relevant portion of the order is reproduced as under:- ....
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....cordingly a fresh hearing was granted to the parties on 6-3-2006 and certain doubts were got clarified from learned representatives of the parties. The matter was again discussed. However no consensus could be reached and accordingly my brother Shri Bakshi, the Hon'ble V.P. has sent a signed proposed order for consideration of other Members. 3. I have very carefully gone through the order proposed and sent on 24-3-2006 by my learned Brother Shri Bakshi, the Hon'ble V.P but regret my inability to agree with the conclusion reached by the learned Brother. 4. The short question involved before us relates to computation of deduction under section 80M of the Income-tax Act. It is the contention of the assessee that only actual expenditure incurred in realizing or in earning dividend income deductible under sections 57-58 of Income-tax Act are to be deducted and not proportionate administrative or interest expenditure. The assessee did not incur any expenditure and therefore deduction under section 80M be allowed on the gross amount of dividend. There is no dispute that last year this issue was decided against the assessee and said matter is pending before the Hon'ble Hi....
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....d with the object or for purpose of earning the income and were not deductible. 8. The learned Vice President thereafter quotes the following from decision of Hon'ble Supreme Court in the case of Seth R. Dalmia v. CIT [1977] 110 ITR 644 as under: "... 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. ... It is obvious that if the assessee would not have paid the interest on the loan raised by him he would not have been able to get the dividend income". Thereafter reference is also made to decision of Supreme Court in the case of CIT v. Rajender Prasad Modi [1978] 115 ITR 519 where deduction of interest was allowed although investment in shares did not yield any income under the head "Income from other sources". 9. In my humble opinion, the....
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....s a nexus between the expenditure and the interest income earned and lethal finding regarding the nexus was a finding of fact. The Tribunal was correct in holding that the entire expenditure incurred by the assessee was deductible under the provisions of section 57(iii)." In the above case, Their Lordships of Hon'ble Madras High Court distinguished decision of Hon'ble Supreme Court in Vijaya Laxmi Sugar Mills Ltd.'s case by observing that in the case before them, expenses were found to be incurred to preserve the assets and to maintain source which yielded the income. Expenses were incurred for purposes of earning income and there was nexus between expenditure incurred and interest earned by Official Liquidator. Their Lordships referred to the decision of Supreme Court in the above case and gave the following basis for permitting deduction of expenses: "According to the Supreme Court, the expenditure claimed under section 57(iii) of the Act was not allowed because there is not even some sort of evidence to show that the expenses incurred by the liquidator were to facilitate the earning of or at least for preserving the estate. In the abovesaid decision....
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.... appellant to income-tax in respect of the income derived from the zamindari his income, profits and gains from that source should be computed after making proper allowance in respect of the jama assessed and paid.' The assessee is sought to be assessed in respect of the non-agricultural income derived from the coal fields which are situated within his zamindari. The assessee is, therefore, entitled to claim a deduction for the jama which should be ascertained as paid by him for the lands in his zamindari which produced him the royalties, otherwise the tax would not be upon 'income, profits and gains' but on his gross receipts." 16. The aforesaid principles were applied in the case of Raja Sri Sri Kalyani Prasad Deo after rejecting the contention of the revenue that there was no provision to allow deduction of expenses claimed, with reference to provision of section 12(2) providing for deduction of expenses incurred for purposes of making or earning such income. 17. It is evident from above that their Lordships while deciding above cases had principle in mind that tax has to be upon "income, profits and gains and not on gross receipt". In my considered op....
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....y learned Brother to the above extent only. I am unable to share my learned Brother's views that for purposes of computation of deduction under section 80M, it is necessary to trace out the source of income of dividend. I am not sure with reference to which decision or statutory provisions, above observations have been made. I am also further unable to agree that in some cases, the earning of dividend may be in the course of carrying on the business or may be incidental to business. 21. In my humble opinion, shares may be held by an assessee as a capital investment or as stock in trade. Nature of holding of shares in the hands of an assessee is material. It may be business or capital investment depending upon large number of factors p chiefly the intention of the assessee. However, once nature of shareholding is accepted or known, no further test is required to be applied for determining nature of dividend income. If holding of shares is business (stock in trade), then dividend earned is business income, although required to be taken under the head "Other sources" for computation of income. If shares are held as a capital investment, the dividend cannot be treated as busines....
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....e. In some cases, the dividend earned by the assessee may be on investments made in the domestic company(s) de hors any business considerations (we will hereafter refer to this category as category 'A'). In some cases, the earning of dividend may be in the course of business activities of the assessee or may be incidental to the business of the assessee (we will hereafter refer to this category as category 'B'). The computation of net income in the case of category 'A' cases and category 'B' cases will vary." "20. After careful consideration, I accept principle (i) above but am unable to subscribe to the principles (ii) to (iv) laid down by my learned Brother, the Hon'ble Vice President. None of the cited authorities mentioned or discussed above have laid down these principles. It is one thing to say that dividend income, although taken for computation under the head "Other sources" is business income for certain specific purposes but a totally different proposition to say that for determining net income included in the gross total income on account of dividend, it is necessary to trace the source of the dividend for purposes of section 80M of....
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....cision of Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10, expenditure on embezzlement were allowed in computing income from business notwithstanding the fact that there is no specific provision for allowance of deduction of such expenses. On the basis of above and other authorities, my learned Brother has concluded that expenditure even while computing income from other sources can be allowed although not specified in sections 57 to 59 of the Income-tax Act and above expenses can also be taken into account while computing deduction under section 80M of the Income-tax Act. I am unable to subscribe to the above view. 24. In the case of Badridas Daga, the question of law referred to the Court was as under: "Whether the said sum of Rs 2,02,442-13-9 being part of the amount embezzled by the assessee's munim is allowable as a deduction under the Indian Income-tax Act either under section 10(1) or under the general principles of determining the profit and loss of the assessee or section 10(2)(xv)?" Their Lordships after great discussion answered the question as under: "In the result, we are of opinion that the loss sustained by the appellant....
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....he decision of Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. [1993] 200 ITR 488. My learned Brother has also reproduced decision of Bombay High Court in the above case holding that question as framed was not arising out of the order of the Tribunal. Since only question which was considered by the Tribunal was whether deduction under section 80M of the Income-tax Act was to be computed with reference to gross dividend income without deducting therefrom the proportionate management expenses. The Tribunal relying upon decision of Bombay High Court held that relief was to be allowed with reference to gross dividend income. My Brother has held that question was answered in favour of the revenue and said decision relating to deduction of proportionate management expenses is binding upon any authority working under its jurisdiction. He has also observed that question of deduction of proportionate expenses was not considered by the Supreme Court in detail. However, he has quoted decision of Hon'ble Supreme Court in the case of Kunhayammed v. State of Kerala [2000] 245 ITR 360 to emphasize that even if decision of Supreme Court is short or non-speaking, it wo....
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....id question of deduction of proportionate expenses was required to be decided by the Tribunal on taking up the matter after receiving answer to the question referred to the Court. As the question was not considered and decided by the Tribunal, the question of answering said question or laying down any legal proposition relating to same did not arise. At any rate, the Bench of Apex Court has not laid down any proposition beyond what was laid by Constitutional Bench in the case of Distributors (Baroda) (P.) Ltd. A reference to aforesaid decision would be made a little later. 29. My learned Brother has also drawn support from the decision of Hon'ble Supreme Court in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT [1993] 203 ITR 1027 for the proposition that expenses can be apportioned in case of claim of indivisible expenses. In the aforesaid case the Supreme Court has followed the case of Distributors (Baroda)(P.) Ltd. Further the decision has been given on peculiar facts of the case and on interpretation of section 80-I, sections 66 and 110 of Income-tax Act. Further the decision pertains to business income. There can be no dispute that where there is no prohibi....
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....he assessee but on the gross amount as reduced by the amount of interest attributable to the money borrowed for the purpose of investment and the expenditure incurred in realizing the dividend income." There can be no dispute on the proposition that expenditure incurred in realizing dividend income are deducted. If shares on which dividend is received are purchased with borrowed funds, then interest paid can be deducted while computing dividend income under section 57 of the Income-tax Act and deduction under section 80M is to be allowed accordingly. But the pertinent question is to find nexus between expenditure and income. In the above referred case. Their Lordships ultimately observed as under: "Counsel for the assessee points out that from the order of the Assessing Officer and of the Commissioner, it is not clear as to whether the amount of interest deducted was the whole of the amount paid as interest by the assessee or only the portion relatable to the amount used by the assessee for investing in shares to earn the dividend. We, therefore, remand the matter to the Commissioner to recompute that amount with reference to the figures found in the allowed for statist....
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....ead "Interest on securities". In United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688, this Court pointed out that business income was broken up under different heads only for the purpose of computation of the total income, and that by such break-up the income did not cease to be the income of the business. This principle was followed by this Court in CIT v. Chugandas and Co. [1965] 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 from them would, in the commercial sense, be regarded as business income." From the above it is clear, (a) that dividend income can be business income although computed under the head "Other sources". (b) For determining nature of dividend income, the nature of holding of shares is to be seen. If income is from securities, it has to be seen whether securities are held in the course of the business and are its trading assets. Income from securities in a commercial sense can be regarded as "business income". A banking concern may hold securities in the course of its business. ....
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.... where deduction of certain expenses out of interest was not allowed as expenses were not incurred with object or purpose of earning the income. The head of the income may not be conclusive and dividend income, although computed under the head "Other sources" can be treated as "Business income" for certain specified sections where there is no restriction or condition and word "Business" is to be taken as taken under common parlance. But where as in the provision under consideration there is restriction or conditions are attached for allowing deduction the deduction can be allowed only if conditions are satisfied. For purpose of section 80M the deduction has to be out of "Dividend income computed in accordance with provisions of this Act". There is no question of considering anything else but dividend income under the head "Other sources", not under the head "Business". No provision authorizes re-computation of dividend income for purposes of section 80M of the Act. 36. The effect and implication of restriction placed by statutory provisions was also considered by Their Lordships in the case of CIT v. Chugandas & Co. [1965] 55 ITR 17 (SC). In the case of Chugandas & Co., the a....
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....t any time on any business, it is intended that the tax was at any time charged on the owner of any business. If that condition be fulfilled in respect of the income of the business under the Act of 1918, the owner or his successor-in-interest qua the business, will been titled to get the benefit of the exemption under it if the business is discontinued. The section in terms refers to tax charged on any business, i.e., tax charged on any person in respect of income earned by carrying on the business. Undoubtedly, it is not all income earned by a person who conducted any business, which is exempt under sub-section (3) of section 25: non-business income will certainly not qualify for the privilege. But there is no reason to restrict the condition of the applicability of the exemption only to income on which the tax was payable under the head 'Profits and gains of business, profession or vocation'. The Legislature has made no such express reservation and there is no warrant for reading into sub-section (3) such a restricted meaning. Sub-section (3) it may be noticed does not refer to chargeability of income to tax under a particular head as a condition of obtaining the benefit....
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....owed. The question was raised in a Writ challenging amendment introduced in the shape of section 80AA through Finance (No. 2) Act, 1980 with retrospective effect. It was the claim of the assessee that above amendment could not be introduced with retrospective effect in the light of decision of Hon'ble Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. Their Lordships rejected above contention and held that provisions of section 80AA were merely declaratory of the law as it always was and it was further held that an erroneous view was taken by the Supreme Court in the case of Cloth Traders (P.) Ltd. 40. In reaching above conclusion, Their Lordships set out the history of legislation preceding enactment of section 80M. Their Lordships considered various decisions on section 99 of the Income-tax Act as also on section 85A of Income-tax Act. Thereafter, the Hon'ble Court proceeded to consider section 80M of Income-tax Act which is reproduced at page 132 of the report. The decision of Hon'ble Gujarat High Court in Addl. CIT v. Cloth Traders (P.) Ltd. [1974] 97 ITR 140 and of Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 11....
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....ordance with sections 30 to 43A which would include section 32(2) (which provides for carry forward of depreciation) and section 33(2) (which provides for carry forward of development rebate for eight years). In other words, in computing the total income of the concerned assessee, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figure that will become exigible to the deduction of 8 per cent contemplated by section 80E(1). It will thus be seen that according to this decision, the words 'such profits and gains' in the latter part of sub-section (1) of section 80E were referable to the quantum of the profits and gains attributable to the specified business included in the total income as referred to in the earlier part of the provision. If this decision lays down the correct interpretation of subsection (1) of section 80E, the same interpretation must also govern the language of sub-section (1) of section 80M. Structurally, there is hardly any difference between section 80E, subsection (1), and section 80M, sub-section (1), and the reasoning which appealed to the court in the interpretation of sub-sect....
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....ricity 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 assessee were not expenditure incurred solely for the purpose of earning interest income and that those expenses are so remote that they have no connection with the earning of the interest. Incidentally, the question of the estimate of the expenditure made by the Income-tax Officer for the purpose of earning income had also come up for consideration before the Madras High Court. It was contended that the allocation should have been with reference to the total expenditure and not with reference to the actual income earned in that year. The Income-tax Officer had estimated the expenses at 10 per cent of the receipts and disallowed the balance of the claim. It was obser....
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....erefore, one cannot import deductions from interest on securities in the case of a banking company under section 20(1) into the deductions contemplated by section 80M. In the case of CIT v. United Collieries Ltd. [1993] 203 ITR 857 the Calcutta High Court has held that the special deduction under section 80M is allowable on the net dividend which is arrived at after taking into account actual expenditure incurred by the assessee in earning the dividend income and that there was no scope for any estimate of expenditure being made and there was no scope for allocation of notional expenditure unless the facts of a particular 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." 46. In the case of State Bank of Indore v. CIT [2005] 275 ITR 23, Their Lordships of MP High C....
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.... There is no scope for any estimate of expenditure being made and no notional expenditure can be allocated also for the purpose of earning income unless the facts of a particular case warrant such allocation. In that new 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.' In our opinion, the view that we have taken is not in conflict with the decision of the Supreme Court in Distributors (Baroda)(P.) Ltd.'s case [1985] 155 ITR 120. Indeed, we may make it clear that in case, the taxing authorities or the assessee, as the case may be, is able to prove or show that a particular amount was actually incurred by the assessee in earning dividend income, then certainly to the extent the amount actually incurred has got to be deducted from the gross dividend income and then the same is to be taken into consideration under section 80M. Since, in this case, the taxing authorities have not taken into p consideration the actual expenditure incurred by the assessee while earning the dividend, but have only proceeded to....
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.... is no justification to deduct expenses on estimate basis or in proportion of the receipts shown by the assessee from various sources. The Assessing Officer has to make deduction of "Actual expenses" or of such expenses which could be held to have been incurred by the assessee and deductible from the dividend income under the head 'Other sources'. In the light of above discussion, I am inclined to hold that there is no justification on the part of the Assessing Officer in making a proportionate deduction of expenses. The Assessing Officer has not placed any material on record to controvert or reject the contention of the assessee that no expenditure was incurred for earning dividend income. No material is available on record to show that assessee actually incurred expenses for earning dividend income and that claim of the assessee to the above effect was erroneous. Without material I see no justification on the part of the Assessing Officer to deduct proportionate expenses. 48. The Hon'ble Vice President has laid down the proposition that where dividend income is earned in the course of business or where earning is incidental to the business carried on by the assesse....
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....ed. Having regard to the Scheme of the Act, one has to determine first the business income of a dealer in shares in accordance with provisions of the Act. If interest has been paid for acquiring shares which are stock in trade and on which dividend is also received, the interest is liable to be deducted under section 36(1)(iii) of the Income-tax Act and not under section 57 of the Income-tax Act. The reason being that income of a source is required to be computed under the residuary head i.e. "Other sources" if it is not classified-for computation under any other heads mentioned in section 14 of the Income-tax Act. Therefore, one has first to proceed to compute the income under the head "Business" and see what are the deductions permissible under the said head. If interest paid on borrowed funds for acquiring shares, satisfy the conditions of section 36(1)(iii), it is to be taken and allowed deduction while computing business income. Secondly, as noted earlier, expression, "For purposes of business" is wider than the scope of expression, "For purposes of earning profit". It is, therefore, imperative that all permissible deduction under the head "Business" are first to be considered....