1984 (11) TMI 128 - AT - Income Tax

Summary

Issues Involved:
1. Determination of relief under section 80M of the Income-tax Act, 1961.
2. Allocation of interest expenses under section 57 of the Act.
3. Deduction of dividend exempt under section 80K in arriving at the dividend on which deduction under section 80M is available.

Issue-wise Detailed Analysis:

1. Determination of Relief under Section 80M:
The first objection in the appeal concerns the determination of relief under section 80M of the Income-tax Act, 1961. The assessee, a private limited company, claimed relief on the entire dividend income of Rs. 26,27,907. However, the Income Tax Officer (ITO) deducted Rs. 5,99,340 as interest paid on money borrowed for investment in shares, allowing relief on the balance amount. The Tribunal previously held that the relief should be based on net dividend income, not gross, and directed the Appellate Assistant Commissioner (AAC) to ascertain the interest allocable to the dividend. The Commissioner (Appeals) upheld the ITO's allocation of Rs. 5,99,340 based on a formula used in earlier years, which was contested by the assessee.

2. Allocation of Interest Expenses under Section 57:
The second issue involves the allocation of interest expenses under section 57. The assessee argued that its business activities were an integrated whole, making it impossible to segregate interest expenses attributable to dividend income from other business activities. The Commissioner (Appeals) rejected this argument, adhering to the Tribunal's directions to ascertain the allocable interest. The Tribunal clarified that the Commissioner (Appeals) had the authority to examine the matter comprehensively, including whether any interest should be allocated to dividend income. The Tribunal emphasized that the Commissioner (Appeals) should have considered the assessee's contention that no borrowed funds were used for purchasing shares and that any interest should be net of interest received by the assessee.

3. Deduction of Dividend Exempt under Section 80K:
The third issue pertains to the deduction of dividend exempt under section 80K in arriving at the dividend on which deduction under section 80M is available. The Commissioner (Appeals) interpreted sections 80AA and 80M to mean that the deduction under section 80M should be computed with reference to the net dividend income, not the gross amount. The Tribunal upheld this interpretation, stating that section 80AA was introduced to supersede the Supreme Court's decision in Cloth Traders (P.) Ltd. v. Addl. CIT, which allowed deduction on the gross dividend income. The Tribunal concluded that the relief under section 80M should be computed after deducting the expenses allocable to the dividend and the deduction under section 80K, ensuring no double benefit to the assessee.

Conclusion:
The Tribunal allowed the appeal in part, directing the Commissioner (Appeals) to re-examine the allocation of interest expenses under section 57 comprehensively and upheld the interpretation that the deduction under section 80M should be computed with reference to the net dividend income after considering section 80K.