TMI Blog1985 (7) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of this court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 (SC). but the correctness of the view taken in that case has been challenged in the present writ petition. Since the decision in Cloth Traders' case was given by a Bench of three judges, it is obvious that its validity can be canvassed before this Bench which consists of five judges. If this Bench too takes the same view in regard to the construction of s. 80M as that taken in Cloth Traders' case, it would become necessary to consider the question of the constitutional validity of s. 80AA which was introduced in the I.T. Act, 1961, by s. 12 of the Finance (No. 2) Act, 1980, with a view to overriding, with retrospective effect, the construction placed on s. 80M by this court in Cloth Traders' case. If, on the other hand, this Bench disagrees with the view taken in Cloth Traders' case and hold that even before the introduction of s. 80AA, s. 80M, on a true interpretation of its language, meant exactly what s. 80AA now retrospectively declares it to mean, no question of constitutional validity of s. 80AA would arise since s. 80AA would then be merely declaratory of the law as it always was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner No. from domestic companies and not with reference to the dividend income as computed in accordance with the provisions of the I.T. Act, 1961. This claim was liable to succeed if the view taken in Cloth Traders' case, in regard to the construction of s. 80M, was correct and some of the assessments of petitioner No. 1 were actually completed on the basis that this claim was justified. The Revenue preferred appeals against such assessments and these appeals were pending at different stages at the time of filing of the present writ petition. The assessments for some of the assessment years were also pending before the ITO. So long as the decision in Cloth Traders' case stood unaffected by any constitutionally valid legislative amendment, petitioner No. 1 was entitled to succeed in the appeals as well as in the original assessments which were pending consideration before different authorities. But with a view to overriding the decision in Cloth Traders' case, with retrospective effect, Parliament enacted s. 80AA and since this section was deemed to have been introduced in the I.T. Act, 1961, with effect from April 1, 1968, and it provided that the deduction requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication would be the dividend income received by the assessee and not the said income less any further amounts because the notification must be regarded as a self-contained one not controlled by any other provisions of the Act and there was no warrant to construe the word 'income' in the notification as total income nor to qualify the dividend income specified in the said notification as the dividend income computed under section 12 of the Act It was thus held that the entire amount of dividend received by an investment trust company would be exempt from super-tax and not the amount of dividend minus the expenses incurred in earning it. It may be noticed, and this aspect was emphasised by the Bombay High Court, that what was exempted from super-tax under the notification was so much of the income of any investment trust company as is derived from dividends paid by any other company and there was no reference to total income in the notification nor was any indication given in the notification that the income derived from dividends which was sought to be exempted from super-tax was dividend income forming part of total income and that is why the Bombay Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egatived by the court and it was pointed out by Subba Rao J. that (p. 766): ..... this notification does not refer to the provisions of section 8 of the Income-tax Act at all. It gives a total exemption from income-tax to an assessee in respect of the interest receivable on income-tax free loans mentioned therein. It gives that exemption subject to two conditions, namely, (i) that the interest is received within the territories of the State of Travancore-Cochin, and (ii) that it is not brought into any other part of the taxable territories. It includes the said exempted interest in the total income of the assessee for the purpose of section 16 of the Income-tax Act. Shortly stated, the notification is a self-contained one; it provides an exemption from income-tax payable by an assessee on a particular class of income subject to specified conditions. Therefore, there is no scope for controlling the provisions of the notification with reference to section 8 of the Income-tax Act. The expression 'interest receivable on income-tax free loans' is clear and, unambiguous.. Though the point of time from which the exemption works is when it is received within the territories of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terpretation before this court prior to the decision in Cloth Traders' case, but it did come to be considered by some of the High Courts. The question in regard to the interpretation of this provision which arose before the High Court of Bombay in CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348 was whether the exemption granted under this provision was in regard to the entire amount of dividend received by the assessee from an Indian company or it was limited to the dividend income computed in accordance with the provisions of the Act and forming part of total income . The High Court of Bombay accepting the contention of the assessee held that on a plain reading of clause (iv), sub-s. (1) of s. 99, it was clear that the exemption from super-tax was granted in respect of any dividend received by it from an Indian company and these last words, according to their plain grammatical construction, could mean only one thing, namely, the entire amount of dividend received by the assessee from an Indian company and nothing less. The Bombay High Court emphasised the word received following immediately upon the word dividend and observed that the use of this word also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act and forming part of the total income . This view taken by the three High Courts was strongly relied upon by the petitioners in support of the construction of s. 80M canvassed on their behalf and in fact the decision in Cloth Traders' case sought to derive some strength from this view. But, on further reflection, we do not see how this view taken by the three High Courts in regard to the construction of clause (iv) of sub-s. (1) of s. 99 can assist in the interpretation of an entirely new section, namely, s. 80M, which, as we shall presently point out, is different in its structure, language and content from clause (iv), sub-s. (1) of s. 99. We may point out that some doubt was raised on behalf of the Revenue in regard to the correctness of this view taken by the three High Courts, but we do not think it necessary to consider whether this doubt is well founded or not because we are of the view that even if the construction placed on clause (iv) of sub-s. (1) of s. 99 by the three High Courts were correct, it cannot necessarily lead to the conclusion that A similar construction must also be placed on s. 80M which is different in material respects from clause (iv) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to income-tax. The same interpretation was, therefore, placed on s. 85A as in the case of s. 99, sub-s. (1), clause (iv), and it was held that under s. 85A, the assessee would be entitled to deduction of income-tax in respect of the whole of the dividend received from an Indian company. The expression where the total income ...... includes any income by way of dividends in the opening part of s. 85A was construed as referring to the category of income by way of dividends received from an Indian company, so that if this particular category of income is included in the computation of total income, the assessee would be entitled to a deduction of so much of the amount of income-tax calculated at the average rate of income-tax on the income so included as exceeds an amount of twenty-five per cent of such income. The words income so included were read to mean not the quantum of the income by way of dividends included in the total income but the income falling within the category of income by way of dividends from an Indian company included in the total income. Thus, the view taken by the Bombay High Court was that under s. 85A also, the deduction admissible was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides that in computing the total income of an assessee there shall be allowed from his gross total income, in accordance with and subject to the provisions of Chapter VI-A, the deductions specified in s. 80C to s. 80VV and sub-s. (2) of that section imposes a ceiling on such deductions by enacting that the aggregate amount of such deductions shall not, in any case, exceed the gross total income of the assessee. The expression gross total income is defined in clause (v) of s. 80B to mean the total income computed in accordance with the provisions of the Act before making any deductions under Chapter VI-A or under s. 280-0. Section 80M is the new section which corresponds to the repealed s. 85A and it provides for deduction in respect of certain categories of intercorporate dividends. It is the interpretation of this section which constitutes the subject-matter of controversy between the parties and hence it would be desirable to set it out in extenso. This section has undergone changes from time to time since the date of its enactment and we will, therefore, reproduce it in the form in which it stood when originally enacted: 80M. Deduction in respect of certain intercorpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the provisions of the Act, that is, after deducting the interest paid on monies borrowed for earning such income. The Gujarat High Court in a judgment delivered on November 28, 1973, held that the deduction permissible under s. 80M is liable to be calculated with reference to the dividend income computed in accordance with the provisions of the Act and not with reference to the full amount of dividends received by the assessee. The assessee being aggrieved by this judgment preferred an appeal to this court and this appeal was allowed by the judgment delivered in Cloth Traders' case [1979] 118 ITR 243. This court overruled the view taken by the Gujarat High Court and held that the deduction required to be allowed under s. SOM must be calculated with reference to the full amount of dividends received from domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act . This decision was given by the court on May 4, 1979. Now, according to Parliament, this interpretation placed on s. 80M by the summit court was not in conformity with the legislative intent and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iving at its true interpretation. But before we do so, let us consider what is the object behind grant of relief under s. 80M. It was common ground between the parties that the main object of the relief under s. 80M is to avoid taxation once again in the hands of the receiving company of the amount which has already borne full tax in the hands of the paying company. Vide the written submission under the heading Object of relief on intercorporate dividends filed by the learned counsel on behalf of the assessee in the course of the arguments. Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious, that, in order to encourage inter-company investments, the Legislature intended that this amount should not bear tax once again in the hands of the assessee either in its entirety or to a specified extent. But the amount by way of dividend which would otherwise suffer tax in the hands of the assessee would be the amount computed in accordance with the provisions of the Act and not the full amount received from the paying company. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross total income, the condition specified in the opening part of sub-s. (1) of s. 80M would be fulfilled and the provision enacted in that sub-section would be attracted. Now, it was urged on behalf of the assessee that the words where the gross total income of an assessee ... includes any income by way of dividends from a domestic company in the opening part of sub-s. (1) of s. 80M refer only to the inclusion of the category of income and not to the quantum of such income and, therefore, the words such income by way of dividends following upon the specification of this condition, cannot have reference to the quantum of the income included but must be held referable only to the category of income included, that is income by way of dividends from a domestic company. This was the same argument which found favour with the court in Cloth Traders' case [1979] 118 ITR 243, but on fuller consideration, we do not think it is well founded. We may assume with the court in Cloth Traders' case [1979] 118 ITR 243, that the words where the gross total income of an assessee ... includes any income by way of dividends from a domestic company are intended only to provide tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m a domestic company which is included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act. There is also one other strong indication in the language of sub-s. (1) of s. 80M which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the court in Cloth Traders' case [1979] 118 ITR 243, presumably because it was not brought to the attention of the court. The court observed in Cloth Traders' case [1979] 118 ITR 243, that the whole of the income by way of dividends from a domestic company or 60% of such income, as the case may be, would be deductible from the gross total income for arriving at the total income of the assessee. We are afraid this observation appears to have been made under some misapprehension, because what sub-s. (1) of s. 80M requires is that the deduction of the whole or a specified perc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase [1979] 118 ITR 243, but, unfortunately, it appears, it was not brought to the attention of the court when the Cloth Traders' case [1979] 118 ITR 243 was argued, because we have no doubt that if it had been cited, the court would have certainly made reference to it in the judgment in Cloth Traders' case [1979] 118 ITR 243. The section which came up for consideration before the court in Cambay Electric Supply Co.'s case [1978] 113 ITR 84 was undoubtedly a different one, namely, s. 80E, but the reasoning which prevailed with the court in placing a particular interpretation on sub-s. (1) of s. 80E would equally be applicable to the interpretation of sub-s. (1) of s. 80M. Section 80E, as it stood at the material time, provided, inter alia, as follows in sub-s. (1) I 80E. (1) Deduction in respect of Profits and gains from specified industries in the case of certain companies.-(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except section 80E ; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity); and, thirdly, if there be profits and gains so attributable, deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax. The learned judge then proceeded to apply this interpretation of subs. (1) of s. 80E to the facts of the case before him and observed (p. 94): 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis should not deter the court from overruling an earlier decision, if it is satisfied that such decision is manifestly wrong or proceeds upon a mistaken assumption in regard to the existence or continuance of a statutory provision or is contrary to another decision of the court. It was Jackson J., who said in his dissenting opinion in Massachusetts v. United States (333 US 611): I see no reason why I should be consciously wrong today because I was unconsciously wrong yesterday . Lord Denning also said to the same effect when he observed in Ostime v. Australian Mutual Provident Society [1960] AC 459, 480 -: The doctrine of precedent does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff. Here we find that there are overriding considerations which compel us to reconsider and review the decision in Cloth Traders' case. In the first place, the decision in Cloth Traders' case was rendered by this court on May 4, 1979, and immediately thereafter, within a few months, Parliament introduced s. 80AA with retrospective effect from April 1, .1968, with a view to overriding the interpretation placed on s. 80M in Cloth Traders' case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambay Electric Supply Co.'s case [1978] 113 ITR 84 (SC). The decision in Cloth Traders' case is inconsistent with that in Cambay Electric Supply Co.'s case. Both cannot stand together. If one is correct, the other must logically be wrong and vice versa. It is, therefore, necessary to resolve the conflict between these two decisions and harmonise the law and that necessitates an inquiry into the correctness of the decision in Cloth Traders' case. It is for this reason that we have reconsidered and reviewed the decision in Cloth Traders' case and on such reconsideration and review, we have come to the conclusion that the decision in Cloth Traders' case is erroneous and must be overturned. It is obvious that, on this view, it becomes unnecessary to consider the question of constitutional validity of the retrospective operation of s. 80AA. Section 80AA in its retrospective operation is merely declaratory of the law as it always was since April 1, 1968, and no complaint can validly be made against it. We, accordingly, dismiss the writ petition but, in the peculiar circumstances of the case, we direct that each party shall bear and pay its own costs. AMAR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en noted in the judgment of my learned brother, I have no hesitation in coming to the conclusion that the decision arrived at by my learned brother for the reasons stated by him in his judgment is sound and correct. My learned brother has properly analysed the provisions of s. 80M and has correctly construed the same, applying the well-settled principles of construction. I agree with my learned brother and the reasons given by him for coming to the conclusion that the decision of this court in Cloth Traders Ltd. v. Addl. CIT [1979] 118 ITR 243, is erroneous. In my opinion, it cannot be said that in deciding the case of Cloth Traders, this court had taken one of I two reasonably possible views. My learned brother in his judgment has aptly pointed out on a proper interpretation of s. 80M that the view taken by this court in Cloth Traders' case is fallacious and wrong. I am in entire agreement with the interpretation of s. 80M made by my learned brother for reasons stated in his judgment. It may be noted that as soon as the decision of this court in Cloth Traders' case was given, Parliament to clearly manifest the legislative intent and to indicate that the decision did not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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