TMI Blog2002 (8) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of section 256(1) of the Income-tax Act, 1961 (hereinafter for the sake of brevity referred to as, "the said Act"): "1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in confirming the order of the Commissioner of Income-tax (Appeals) thereby directing the Income-tax Officer to adjust the deduction under section 80K/80M of the Income-tax Act, 1961, against the dividend income before arriving at the gross total income of the assessee? 2. Whether, on the facts and in the circumstances of the case, the directions of the Tribunal are not against the specific provisions of section 80A of the Income-tax Act?" The assessment year in question is 1976-77. The assessee submitted a return showing its income at a loss of Rs. 23,612 which was computed in the following manner: "That the assessee-company had returned its income at a loss of Rs. 23,612 computed in the following manner: ------------------------------------------------------------------------------------------------ Rs. Rs. -------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50,664 (-)41,160 --------- 9,504 Less : Deduction under section 80K/80M to the extent of profits 9,504 --------- Assessed at Nil income Nil" ----------------------------------------------------------------------------------------- According to the assessee, the Assessing Officer had not granted to him the benefit of deductions under sections 80K and 80M of the said Act as a result whereof it was denied the right to carry forward the business loss as returned. An appeal was preferred against the order of assessment by the assessee and the Commissioner of Income-tax (Appeals) (in short, "the CIT(A)"), allowed the assessee's claim stating: "2. The first ground urged in this appeal is that the Income-tax Officer erred in not allowing full deductions under sections 80K and 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms: " 80K. Deduction in respect of dividends attributable to profits and gains from new industrial undertakings or ships or hotel business.-Where the gross total income of an assessee, being (a) the owner of any share or shares in a company, or (b) a person who is chargeable to tax under this Act on the income by way of dividends on any share or shares in a company owned by any other person, includes any income by way of dividends paid or deemed to have been paid by the company in respect of such share or shares, there shall, subject to any rules that may be made by the Board in this behalf, be allowed, in computing his total income, a deduction from such income by way of dividends of an amount equal to such part thereof as is attributable to the profits and gains derived by the company from an industrial undertaking or ship or the business of a hotel, on which no tax is payable by the company under this Act for any assessment year commencing prior to the 1st day of April, 1968, or in respect of which the company is entitled to a deduction under section 80J for the assessment year commencing on the 1st day of April, 1968, or for any subsequent assessment year: Provided th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of such amount in any other previous year. (3) Where the dividend distributed is in respect of any period comprised in the previous year ending on the 31st day of March, 1990, no deduction shall be allowed in respect of such dividend. Explanation.-For the purposes of this section, the expressions (i) 'scheduled bank' means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), and which is a domestic company; (ii) 'public financial institution' shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (iii) 'State financial corporation' and 'State industrial investment corporation' shall have the same meanings as in section 43B; (iv) 'due date' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 'such income by way of dividends' and not from the gross total income. Sub-section (1) of section 80M provides that in computing the total income of the assessee there shall be allowed a deduction from 'such income by way of dividends' of an amount equal to the whole or a specified percentage of such income. Now, when in computing the total income of the assessee, a deduction has to be made from 'such income by way of dividends', it is elementary that 'such income by way of dividends' from which deduction has to be made must be part of gross total income. It is difficult to see how the language of this part of sub-section (1) of section 80M can possibly fit in if 'such income by way of dividends' were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income: what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how for the purpose of computing the total income from the gross total income, any deduction should be required to be made from the full amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing such income or from total income of dividends without so deducting the interest amount. In the earlier decision in Cloth Traders Pvt. Ltd.'s case [1979] 118 ITR 243, a three-judge Bench of this court had held that the deduction required to be allowed under section 80M must be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, i.e., after making the deduction as provided under the Act. In the said decision in Cloth Traders Pvt. Ltd.'s case [1979] 118 ITR 243 (SC), the court did not notice the earlier decision of a two judge Bench of the court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, wherein, in the context of section 80E, it was held that for the purpose of allowing deduction under the said provision, it was necessary to first compute the total income of the assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except section 80E. The decision in Cloth Traders Pvt. Ltd.'s case [1979] 118 ITR 243 (SC), has been overruled by the Constitution Bench in Distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that deduction is to be allowed on the gross total income and not on the net income. But then the decision in Cloth Traders (P.) Ltd.'s case [1979] 118 ITR 243 (SC) was overruled in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC). After the decision in Cloth Traders (P.) Ltd.'s case [1979] 118 ITR 243 (SC), two sections 80AA and 80AB were introduced by the Finance (No. 2) Act, 1980. While section 80AA was to have retrospective effect with effect from April 1, 1968, section 80AB was to have operation with effect from April 1, 1981. Section 80AA had the effect of effacing the decision of this court in Cloth Traders (P.) Ltd.'s case [1979] 118 ITR 243, which had interpreted section 80M. Section 80AB was made applicable to all the sections in Chapter VI-A except section 80M. In Distributors (Baroda) P. Ltd.'s case [1985] 155 ITR 120 (SC), however, this court specifically overturned its earlier decision in Cloth Traders (P.) Ltd.'s case [1979] 118 ITR 243 (SC) and held that deduction is to be allowed only on the net income and not on the gross income. With reference to section 80AB, this court said it was merely of a clarificatory nature and the decision of this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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