2014 (11) TMI 413 - HC - Income Tax

Allowability of deduction u/s 80M and 80K Dividend income reduced or not as permissible u/s 36(1)(viii) Held that - The assessee had not challenged reduction of deduction u/s 80K and the CIT(A) had not dealt with the issue the Tribunal fell in error in treating the deduction u/s 80K and disallowance made u/s 36(1)(viii) as a ground raised by the Revenue in appeal - Section 80M in the opening words refers to the expression gross total income of an assessee and thereafter stipulates that where gross total income of the assessee includes income by way of dividends etc. the deductions would be allowed - The expression gross total income for the purpose of Chapter VI-A as defined in Section 80B(5) meant total income computed in accordance with the provisions of this Act but before making any deductions under Chapter VI-A - the Section postulated that the gross total income meant total income computed under Chapter III of the Act - the total income computed u/s 28 of the Act after allowing deductions u/s 36(1)(viii) plus other income of the assessee as computed would constitute the gross total income on which deduction u/s 80M could be allowed - The deduction allowed u/s 36(1)(viii) of the Act got excluded and did not partake income included in gross total income on which deduction u/s 80M was to be allowed - The amounts deducted u/s 36(1)(viii) ceased to be part of the gross total income as stipulated in Section 80B(5). Section 80M stood enacted with the object to provide relief on inter-corporate dividends for the said income had already suffered incidence of tax in the hands of paying company and therefore should not be subjected to tax twice - where the dividend would not have otherwise suffered tax the said amount of dividend should not be allowed the deduction - The assessee had received dividend - The total income before deduction under VI-A necessarily would be much higher - the dividend income was a miniscule and a fraction of the total income - The total (taxable) income was computed after allowing deduction u/s 36(1)(viii) of Rs. 17.75 crores an amount if not subtracted would have further increased the quantum the total income it would not be correct to treat dividend income as a part of Rs. 17.75 crores deposited and transferred to the special reserve - The dividend income could well be treated and regarded as a part of and included in the total income subjected to tax of Rs. 25.35 crores/ Rs. 25.96 crores. There is therefore a basic fallacy and flaw in the argument raised by the Revenue. Section 36(1)(viii) required creation of a special reserve by a finance corporation engaged in long-term finance for industrial or agricultural development in India - Deduction could not exceed 40% of the total income computed before making any deduction under the clauses of section 36(1) or Chapter VI A - An amount not exceeding 40% of the total income could be allowed as a deduction under the headings profits and gains of business or profession. Reference was thereafter made to the heading income from other sources under Chapter III of the Act - Sections 36(1)(viii) and 80M read with Section 80AA operated in altogether different fields and in the absence of any provision prohibiting benefit appellate authorities were justified in deciding the issue in favour of the assessee Decided partly in favour of Partly.

Summary

Issues Involved:

1. Deduction under Sections 80M and 80K without reducing dividend income by the deduction under Section 36(1)(viii).
2. Deduction under Section 36(1)(viii) to the extent of 40% of the income without restricting the amount transferred to the reserve.
3. Allowance of amortization expenses for acquiring leasehold land.

Issue-wise Detailed Analysis:

1. Deduction under Sections 80M and 80K without reducing dividend income by the deduction under Section 36(1)(viii):

The appeal questioned whether the ITAT was correct in allowing deductions under Sections 80M and 80K without reducing the dividend income by the deduction under Section 36(1)(viii). The Assessing Officer had initially reduced the gross dividend income by 40% (as allowed under Section 36(1)(viii)) to compute the net dividend income eligible for deduction under Sections 80M and 80K. The CIT(A) reversed this, holding that deductions under Section 80M should be calculated without deducting the amount allowed under Section 36(1)(viii). The High Court upheld the CIT(A)'s decision, stating that the deduction under Section 36(1)(viii) should not be deducted from the gross total income for the purposes of Sections 80M and 80K. The court emphasized that the gross total income, as defined in Section 80B(5), should be computed before making any deductions under Chapter VI-A, ensuring no double deduction on the same income.

2. Deduction under Section 36(1)(viii) to the extent of 40% of the income without restricting the amount transferred to the reserve:

This issue was raised by the Revenue, arguing that the CIT(A) erred in directing the AO to allow the deduction under Section 36(1)(viii) to the extent of 40% of the income without restricting the amount transferred to the reserve created during the year. The High Court noted that the assessee had not challenged the application of the second proviso to Section 36(1)(viii) before the CIT(A), and this issue was neither raised nor decided in the appellate proceedings. Consequently, the Tribunal's consideration of this issue was deemed an error, and the question did not arise for consideration. The court held that the findings of the AO on this matter had attained finality.

3. Allowance of amortization expenses for acquiring leasehold land:

The third issue involved the disallowance of amortization expenses of Rs. 72,574/- for acquiring leasehold land, which the AO treated as capital expenditure. The CIT(A) reversed this, allowing it as a revenue expense. However, the High Court decided this issue against the assessee, referencing its earlier judgment in Gail India Limited vs. Joint Commissioner of Income Tax, which held that amortization of payments made towards long lease is capital expenditure, not revenue expenditure.

Conclusion:

The High Court disposed of the appeal with the following decisions:

1. The deduction under Section 80M should be calculated without reducing the dividend income by the deduction under Section 36(1)(viii), decided in favor of the respondent-assessee.
2. The issue regarding the deduction under Section 36(1)(viii) to the extent of 40% of the income without restricting the amount transferred to the reserve did not arise for consideration as it was not challenged in the appellate proceedings.
3. The allowance of amortization expenses for acquiring leasehold land was decided against the assessee, treating it as capital expenditure.

The appeal was disposed of with no order as to costs.