2010 (5) TMI 818 - HC - Income Tax

Summary

Issues involved: Appeal by revenue challenging Tribunal's order allowing deduction u/s 80M on gross dividend income; Interpretation of section 80M and 80AA of the Income-tax Act; Whether actual expenditure for earning dividend income can be deducted for section 80M relief.

Interpretation of section 80M and 80AA:
The Tribunal allowed deduction u/s 80M on gross dividend income, contrary to Gujarat High Court's view that deduction is only on net dividend after reducing admissible deductions. The Supreme Court later held that deduction under section 80M is admissible only on dividend income computed as per Income-tax Act provisions, not on gross dividend. Section 80AA clarifies that deduction under section 80M is based on net dividend income. The Assessing Officer estimated expenditure for earning dividend income and reduced it from gross dividend for section 80M relief.

Actual expenditure deduction under section 80M:
The Madhya Pradesh High Court's decision emphasized against deduction of notional expenditure, not actual expenditure. The High Court concluded that actual expenditure for earning dividend income should be determined for section 80M deduction, not notional expenditure. The Assessing Officer's estimation of expenditure for earning dividend income was deemed justifiable, and deduction under section 80M should be granted only on net dividend income as per section 80AA. However, the High Court found the bifurcation of expenditure between business income and dividend income to be arbitrary and remanded the matter for the Assessing Officer to reassess and determine eligible deductions under the Act.

This judgment clarifies the interpretation of section 80M and 80AA regarding the deduction on dividend income and highlights the importance of considering actual expenditure for earning dividend income in granting relief under section 80M.