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TMI Blog1973 (11) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessment a question arose whether for the purpose of deduction contemplated by section 85A of the Income-tax Act, 1961, which is hereinafter referred to as " the Act ", average rate of tax on gross amount of Rs. 6,09,101 should be calculated or whether the said average rate of tax should be calculated on the net amount thereof after deducting Rs. 23,594, paid by way of interest on the borrowings made to earn the said dividends. Similar question also arose in regard to the next assessment year 1966-67. The Income-tax Officer and the Appellate Assistant Commissioner held that for the purpose of deduction under section 85A only the net and not the gross amount of dividends should be taken into account. Being aggrieved by this decision of the Appellate Assistant Commissioner the assessee preferred an appeal to the Appellate Tribunal. The Appellate Tribunal relied upon the decision given by the Bombay High Court in Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd. and the Calcutta High Court decision in Commissioner of Income-tax v. Darbhanga Marketing Co. Ltd., and came to the conclusion that for the purpose of deduction under section 85A, it is the gross di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in providing for this deduction is to encourage investment by a company in shares of another company by substantially avoiding the tax burden. It is obvious that the dividend becomes liable to tax in the hands of the company which declares it. If the extent of its liability to tax is the same in the hands of the company which holds the shares, it is obvious that there would be less inducement to the companies to make investment in other companies. The legislature has, therefore, provided for the relief contemplated by the section. The question, however, is what is the extent of this relief ? Is the relief to be calculated on the basis of the gross income of dividend or net income of dividends obtained after deducting the expenditure incurred for earning these dividends ? Answer to these questions depends upon a proper interpretation of the provisions of section 85A. Analysis of the section shows that it consists of two parts. The first part speaks of the conditions which make a company eligible to deduction contemplated by the section, while the second part speaks about the actual deduction and also supplies the method of calculating the same. It follows, therefore, that only tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come ". Provisions of this section are not relevant for the present purpose. We shall, therefore, go to Chapter IV which speaks about the computation of "total income ". Section 14 which is the first section in this Chapter provides for six heads of income. Out of these six heads, the sixth head which is shown against "F" is " income from other sources ". It is an admitted position that dividend income received from shareholding falls under this head. We shall then go to section 56 which deals with the 6th head of income, namely, "Income from other sources ". This section says that income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income-tax under the head " Income from other sources ", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Sub-section (2) of this section specifically refers to dividend as one of the incomes which is chargeable to income-tax under this head. Then follows section 57 which is very material for our purpose. This section 57 provides for deductions under the head " F ". It says that income chargeable under the head "Income from other sources" shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of section 85A does not carry the same meaning which is attributed to it by the definition clause as well as other provisions of the Act. His contention was that the first part of the section speaks of the inclusion of " any income, by way of dividend received by the assessee " in the total income of that assessee. But since the definition of the word income " as given in clause (24) of section 2(1) of the Act shows that income means gross income the concept of total income which is found in the first part of section 85A is not the concept of total net income. It was submitted that the meaning of the expression " total income " should not be confined to the definition because the use of the word " income " by reference to dividend proves a contrary intention of the legislature. Shri Shah pointed out that if once it is believed that the expression " total income " connotes the total gross income of the assessee then the reference to this expression in the first part of the section becomes merely descriptive and points out at a category in which the item of dividend income is included. In support of this proposition Shri Shah has relied heavily upon the two decisions on which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the second part of the section contemplates rate of tax which is chargeable on total income. The stipulation about the rate of tax which becomes chargeable on total income is clearly suggestive of the fact that the expression " total income " is used in this section in the same sense which is attributed to it by the definition clause of section 2. Shri Shah argues that the expression " total income " found in the section refers to mere description of items included in the total income and nothing more than that. We fail to comprehend how and on what basis such a construction can be put on this expression, if once we arrive at a conclusion that the meaning which this expression carries with it is in no manner different from the meaning attributed to it by section 2. But even if it is believed that the expression " total income " is merely a description of the items which are included in the " total income " that situation does not help the assessee in any manner because, if once we believe that it is the net dividend income which can be included in the computation of total income, it is only that net income which can earn deduction contemplated by the second part of the section. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares) within India ........" The provisions of this section are interpreted by the Calcutta High Court in Commissioner of Income-tax v. Darbhanga Marketing Co. Ltd. as well as by the Bombay High Court in a recent decision in Commissioner of Income-tax v. New Great Insurance Co. Ltd. The last referred decision of the Bombay High Court has also considered the provisions of section 85A with which we are concerned in this reference. As already noted above, this section was put on the statute book as from April 1, 1965. The relevant portion thereof is already quoted by us in the foregoing judgment. The Bombay decision given in Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd. refers to the notification quoted above and on a construction of that notification it has held that the assessee concerned was entitled to exemption from super-tax on the whole of the dividend income without deducting therefrom the proportionate expenses attributable to the same. While considering the language of this notification the court has put reliance upon the decision given by the Supreme Court in Commissioner of Income-tax v. South Indian Bank Ltd. In that case the Supreme Court has cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the present case. What was exempted by the notification considered by the Supreme Court was the amount of interest " receivable " on tax-free loans issued by the Government of Travancore and Cochin. In that notification the word " interest " was not qualified in any manner and, therefore, the Supreme Court held that the interest receivable was an unambiguous expression and it could only mean the amount of interest calculated in accordance with the terms of the securities and it could not mean interest receivable minus the amount spent in receiving the same. In the case before, us, the word " income " is limited in its meaning inasmuch as it is the income which could be included in the computation of total income because both the first and the second parts of section 85A stipulated only that income which can enter in the computation of total income as one of its components. In our opinion, therefore, the Supreme Court's decision in South Indian Bank's case would have no application to the facts of the present case. The same can be said also about the decision given by the Bombay High Court in Industrial Investment Trust Co. Ltd., because, under Notification No. 47 which is quot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee ? ', the obvious answer would be that it is the gross or full amount of the dividend as declared by the Indian company which paid it to them and it is that dividend which is by the section declared to be exempt. The plain reading of the section, in our opinion, therefore, leaves no scope for argument that any amount less than the gross dividend received by the assessee qualifies for exemption under section 99." These observations show that the court's interpretation of section 99 is based mainly on the unqualified use of the words " any dividend ". Since the court found that, so far as deduction is concerned, it was the amount of dividend received by the assessee which should be taken into account, the court held that no deduction can be made from this amount on account of expenditure incurred by the assessee to earn the same. This is also the reasoning given by the Calcutta High Court in Darbhanga Marketing Co. Ltd. We find that none of these decisions would be useful to us in interpreting the language of section 85A because, as already pointed out by us above, this section limits the meaning of income received by way of dividend inasmuch as the expression " in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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