TMI Blog2006 (4) TMI 561X X X X Extracts X X X X X X X X Extracts X X X X ..... dental income received by the assessee on account of holding of a capital investment. It cannot have a character different from the character of shares in the hands of the assessee. Shares were not trading assets. Therefore, dividend receipts could only be assessed under the head Other sources . Out of dividend receipts only expenditure referred to in Section 57 could be deducted, i.e., any sum expended wholly and exclusively for the purpose of making or earning such income (dividend). Thus, I am inclined to hold that there is no justification on the part of the AO in making a proportionate deduction of expenses. The AO has not placed any material on record to controvert or reject the contention of the assessee that no expenditure was incurred for earning dividend income. No material is available on record to show that assessee actually incurred expenses for earning dividend income and that claim of the assessee to the above effect was erroneous. Without material I see no justification on the part of the AO to deduct proportionate expenses. The Hon'ble Vice President has laid down the proposition that where dividend income is earned in the course of business or where earning is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Business and see what are the deductions permissible under the said head. If interest paid on borrowed funds for acquiring shares, satisfies the conditions of Section 36(1)(iii), it is to be taken and allowed deduction while computing business income. Secondly, as noted earlier, expression, for purposes of business is wider than the scope of expression, for purposes of earning profit . It is, therefore, imperative that all permissible deduction under the head Business are first to be considered. Only left out deduction can be considered under the head Other sources . However, if on the basis of material, a finding can be recorded that shares were acquired with borrowed funds, with main object of earning dividend, then interest paid on borrowed funds is to be deducted u/s 57 of the IT Act. It is not possible to lay down any rule of universal application. The question has to be determined with reference to facts and circumstances of the case. But facts of a given case are required to be considered in the light of above principles. Hence, the following propositions emerge: (i) That deduction under Section 80M is to be allowed on net dividend income computed as per prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed in terms stated above. - HON'BLE VIMAL GANDHI, PRESIDENT, M.A. BAKSHI, VICE PRESIDENT AND N.K. SAINI, A.M. For the Appellant: M.L. Garg, Adv. For the Respondent: R.K. Goyal, Adv. ORDER M.A. Bakshi, Vice President 1. In this case, the Chandigarh Bench of the Tribunal for asst. yrs. 1990-91 to 1992-93 in ITA No.1333/Chd/1994, ITA Nos. 944 and 1591/Chd/1995 vide order dt. 22 Nov., 1996 held that deduction under Section 80M is permissible on the net dividend to be determined after deducting proportionate administrative expenses and also deduction allowed under Section 36(1)(iii) from the gross dividend. The assessee's appeal against the decision of the Tribunal is pending in the High Court. In the present case, the assessee made a request for constitution of the Special Bench in respect of common issue relating to computation of deduction under Section 80M as in the case of Mahavii Spinning MMs Ltd. in ITA No. 26/Chd/1996 for asst. yr. 1991-92 vide para 2 of its order the Tribunal held that no expenditure can be deducted on proportionate basis out of the common administrative expenses for the purpose of computation of deduction under Section 80M. The request of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asst. yrs. 1990-91 to 1992-93 the Tribunal has taken a wrong view in holding that proportionate expenses debited to the P L a/c are to be deducted for the purposes of computation of deduction under Section 80M. The assessee has taken the matter to the High Court and the same is pending adjudication. Relying upon the decision of the Bombay High Court in the case of CIT v. Central Bank of India , it was contended that deduction contemplated by Section 80M refers to the actual expenditure and, therefore, the rule of proportionality of expenses and interest cannot be imported into the computation of deduction under Section 80M. Reliance was also placed on the decision of the Calcutta Bench of the Tribunal in the case of Shaw Wallace Co. Ltd. v. Dy. CIT (2001) 71 TTJ (Cal) 478: (2002) 80 ITD 156 (Cal) at p. 174 para 19 of the order in support of the contention. Shri Garg also placed reliance on the decision of the Calcutta High Court in the case of CIT v. United Collieries Ltd. . Reliance was also placed on the following decisions in support of the contention: (i) Usha Martin Industries Ltd. v. Dy. CIT (2003) 79 TTJ (Kol) 23: (2003) 86 ITD 261 (Kol). (ii) East India Agencies (P) Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport his contention that intention of the legislature is evident from the incorporation of the said section. According to the learned Departmental Representative Section 14A debars deduction in respect of any expenditure which has been incurred towards the earning of income which is not liable to tax. It was contended by the learned Departmental Representative that same analogy is applicable in respect of the income out of which deduction is permissible under Chapter VI-A of the IT Act, 1961. 6. Relying upon the decision of the Supreme Court in the case of CIT v. United General Trust Ltd., it was contended that the issue is covered by the said decision of the Supreme Court in favour of the Revenue. It was pointed out that the Hon'ble Supreme Court has overruled the decision of the Bombay High Court in the case of CIT v. United General Trust (P) Ltd. to the contrary. It was claimed that in this case, reference was deemed to have been made and the question of law relating to deduction on proportionate management expenses for the purposes of computation of deduction under Section 80M decided in favour of the Revenue. 7. The learned Departmental Representative also relied upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 10(33) is to be allowed. 9. It was accordingly contended that there is no reason for taking a different view than the view expressed earlier by the Chandigarh Bench of the Tribunal in assessee's own case wherein the decision of the Supreme Court in the case of United General Trust Ltd. (supra) has been relied upon to arrive at the decision. The learned Departmental Representative also stated in writing that the decision of the Madhya Pradesh High Court in the case of State Bank of Indore (supra) cited on behalf of the assessee is distinguishable on facts and in any case the decision of the Supreme Court in United General Trust Ltd. (supra) has not been considered. It was further contended that proportionate management expenses have got to be deducted under Section 57 of the IT Act, 1961 10. In counter-reply, the learned Counsel for the assessee contended that the decision of Haryana State Co-operative Supply Marketing Federation (supra) is inapplicable to the facts of this case insofar as in that case the deduction was permissible out of the business income under Section 80P(2) and in the case of the assessee the deduction is permissible out of the income from oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domestic company, has been allowed under Sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year. Explanation: For the purposes of this section, the expression 'due date' means the date for furnishing the return of income under Sub-section (1) of Section 139. 14. Section 80AA reads as under: Section 80AA. Computation of deduction under Section 80MWhere any deduction is required to be allowed under Section 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends. 15. It may be pertinent to mention that Section 80M was omitted by the Finance Act, 1997 (26 of 1997) w.e.f. 1st April, 1998 in consequence of insertion of Section 10(33) of the IT Act, 1961 granting exemption in respect of dividend income. However, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income by way of dividends from a domestic company' describe the condition which must be fulfilled in order to attract the applicability of the provision contained in Section 80M, The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company. 'Gross total income' is defined in Section 80B, Clause (v), to mean 'total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or Section 280-O'. Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or in other words, forms part of the gross total income, the condition specified in the opening part of Sub-section (1) of Section 80M would be fulfilled and the provisions enacted in that sub-section would be attracted. What is included in the gross total income in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that rate or those rates shall be charged for that year in accordance with, and subject to the provisions including provisions for the levy of additional income-tax of, this Act in respect of the total income of the previous year of every person. Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under Sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of the Act. 21. Section 2(45) defines total income as under: Total income' mans the total amount of income referred to in Section 5, computed in the manner laid down in this Act. 22. Section 14 of the IT Act, 1961 provides for classification of income chargeable to tax. It reads as under: 14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income: A.-Salaries *** C.-Income from house property D.-Profits and gains of business or profession E.- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the nature referred to in Sub-clause (x) of Clause (24) of Section 2 which is chargeable to income-tax under the head 'Income from other sources', deductions, so far as may be, in accordance with the provisions of Clause (va) of Sub-section (1) of Section 36; (ii) in the case of income of the nature referred to in Clauses (ii) and (iii) of Sub-section (2) of Section 56, deductions, so far as may be, in accordance with the provisions of Sub-clause (ii) of Clause (a) and Clause (c) of Section 30, Section 31 and Sub-sections (1) and (2) of Section 32 and subject to the provisions of Section 38. (iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or (fifteen) thousand rupees, whichever is less. Explanation: For the purposes of this clause, family pension means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death; (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. Section 58 reads as under: (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection, 'horse race' means a horse race upon which wagering or betting may be lawfully made. Section 59 reads as under: (1) The provisions of Sub-section (1) of Section 41 shall apply, so far as may in computing the income of an assessee under the head 'Profits and gains of business or profession'. 23. A plain reading of the aforementioned provisions of the Act clearly indicates that income-tax is chargeable on the gross total income as computed in accordance with the provisions of the Act. The procedure for determination of income from business as well as income from other sources is provided under the statute. It may be pertinent to mention that certain deductions which may not be provided specifically under various provisions of the Act, can also be deducted in computing the net income from a particular source if deduction of such expenditure is necessary to ascertain the true income. We will deal with this aspect at a later stage. We shall initially deal with the deductions, which are permissible out of the dividend income assessed under the head Income from other sources specifically provided under the statute. The deductions under the head Income from other so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even at the cost of repetition, that the connection between the expenditure and earning of income need not to be direct as held by the Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. (supra). It may be indirect. In the case of Seth R. Dalmia v. CIT , their Lordships of Supreme Court at pp. 652-653 have also held as under: In CIT v. H.H. Maharani Shri Vijaykuveiba Saheb of Mom and Ors. (1975) 100 ITR 67 (Bom), a Division Bench of the Bombay High Court held that the deduction which is permissible under Sub-section (2) of Section 12 is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax and the dominant purpose of the expenditure incurred must be to earn income. It was further held that the connection between the expenditure and the earning of income need not be direct and even an indirect connection could prove the nexus between the expenditure incurred and the income. We fully agree with the view taken by the Bombay High Court. (Emphasis, italicised in print, supplied) In view of the direct decision of this Court in Eastern Investments Ltd. v. CIT , it is not necessary for us to multiply authorities. Summarising, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Supreme Court will enable the determination of the issue without any difficulty. There would also not be much difficulty in such cases where the assessee derives income from various sources but the income derived from other sources is unconnected with the business activities of the assessee. The difficulty arises in such cases where the assessee has income from various sources and the expenditure is combined expenditure taken into account in the computation of net income as per the books of account maintained by the assessee. 28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources. 29. It has to be borne in mind that no deduction would be permissible in respect of such establishment expenses which are unconnected with the earning of income assessable under the head Income from other sources . In case of company liquidation, the expenses incurred by a liquidator such as salary and other expenses were not allowed as deduction from income earned by way of interest from a fixed deposit in the relevant year on the ground that the expenses were not incurred for earning of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or earning the income shall have to be deducted in computation of the income for the purpose of inclusion in the gross total income. 32. It hardly needs to be emphasized that the tax is on income and certain expenditure even if it does not fall within the specified deductions would be deductible in computing the net income. 33. The concept of income is well understood not to be the gross receipts but only the net income properly so-called and, therefore, such deductions may be made as are necessary to ascertain the true income. In order to determine the net income derived by the assessee which forms the basis for taxation, it is necessary to take into account the gross receipts which are reduced by the outgoings. Under various heads of income, certain deductions are regulated under the Act and as such at times it is necessary to make adjustments in the net income determined in accordance with the recognized method of computation. In order to appreciate as to whether only deductions as provided under Section 57 are to be made in computing the dividend income, it will be useful to find out some precedents. 34. In the case of Probhat Chandra Barua v. Emperor 5 ITC 1 (PC), it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that profits should be computed after deducting the losses and expenditure incurred for the purpose of the business, profession or vocation, though such losses and expenses may not be expressly allowed under Sections 30 to 43 unless the losses and expenses are expressly or by necessary implication disallowed by the Act. The relevant portion of the judgment is reproduced as under: While Section 10(1) of the Indian IT Act, 1922. imposes a charge on the profits or gains of a business, it does not provide how these profits are to be computed. Section 10(2) enumerates various items which are admissible as deduction but they are not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under Section 10(1). Profits and gains which are liable to be taxed under Section 10(1) are what are understood to be such under ordinary commercial principles. When a claim is made for a deduction for which there is no specific provision under Section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lature intended to give relief to the assessee under Section 80M in excess of the tax that would otherwise be chargeable on dividend income in the hands of the recipient of such income. It is, therefore, in our view, necessary to determine the net component of dividends included in the gross total income on which deduction under Section 80M is permissible to the assessee. 43. Therefore, in order to determine the issue relating to the computation of deduction under Section 80M, it is necessary to trace out the source of income of dividend in the case of any assessee. The mere fact that the dividend income is to be computed under the head Income from other sources may not be decisive about the source of income by way of dividend. As pointed out earlier, in some cases the earning of dividend may be in the course of carrying on the business or may be incidental to the business. On the other hand, in some cases, the earning of dividend income may be unrelated to the activities of business of the assessee and may also not be incidental to business activities. 44. It has to be borne in mind that Heads of income and the Source of income are not the same. The Hon'ble Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and of unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, i.e., the quantum of income which is assessed to tax. (Emphasis, italicised in print, supplied) 46. In the case of CIT v. Cocanada Radhaswami Bank Ltd. , their Lordships of Supreme Court expressing similar view held as under: Some of the decisions cited at the Bar may conveniently be referred to at this stage. The Judicial Committee in Punjab Co-operative Bank Ltd. v. CIT has clearly brought out the business connection between the securities of a bank and its business, thus; In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash easily realizable securities to meet any probable demand by the depositors.. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h income arises. This is made clear in that business income is broken up under different heads only for the purpose of computation of the total income; by that break-up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Indian IT Act for computation of income. 48. In the case of Apollo Tyres Ltd. v. CIT, it was held as under: The Tribunal had found as a fact on material on record that the investment by the assessee-company in units of the UTI was in the course of its business and its business of manufacture and sale of tyres and the business of purchase and sale of units of the UTI were common in nature and both toe businesses were intertwined and interlaced; and, therefore, the business in purchase and sale of units was an eligible business within the meaning of the definition of 'eligible business in Section 32AB(2) and the assessee was entitled to deduction of 20 per cent of the profits from that business, though the income therefrom was declared by the assessee-company as 'Income from other sources'. The High Court, on a reference, accepted the finding and affirmed the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is necessary to trace the Source of dividend income notwithstanding the fact that it is assessable under the head Income from other sources . (iii) That computation of dividend income in accordance with Act does not restrict the scope of computation to Sections 56 to 59 of the Act. That the real component of dividend income included in the gross total income shall have to be computed in accordance with the Act and established principles of accounting. (iv) The nature of dividend income may vary from case to case. In some cases, the dividend earned by the assessee may be on investments made in the domestic company(s) de hors any business considerations (we will hereafter refer, to this category as category 'A'), In some cases, the earning of dividend may be in the course of business activities of the assessee or may be incidental to the business of the assessee (we will hereafter refer to this category as category 'B'). The computation of net income in the case of category 'A' cases and category 'B! cases will vary. 53. We first deal with category 'A' cases. The cases where the investments are made purely on consideration of long-term investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary to elaborately refer to such cases in support of this view: (vi) CIT v. Central Bank of India (supra), (vii) Shaw Wallace Co. Ltd. v. Dy. CIT (supra), (viii) CIT v. United Collieries Ltd. (supra), (ix) State Bank oflndore v. CIT (supra), (x) Usha Martin Industries Ltd. v. Dy. CIT (supra), (xi) East India Agencies (P) Ltd. v. CIT (supra), (xii) CIT v. Pfizer Corporation (supra), (xiii) CIT v. Jai Hind Investment Industries (P) Ltd. (supra), (xiv) CIT v. Mahendra Sobhagchand Shah (supra). 55. Reference may also be usefully made to some of the other decisions: 56. Their Lordships of Madhya Pradesh High Court in the case of State Bank of Indore v. CIT (supra) held as under: Held, that, since in the instant case, the taxing authorities had not taken into consideration the actual expenditure incurred by the assessee while earning the dividend but had only proceeded to take notional expenditure, the same was not sustainable in law. The expenditure of 10 paise per ₹ 100 of dividend income was not deductible for purposes of Section 80M. 57. The Bombay High Court in the case of CIT v. Central Bank of India (supra) held as under: As held in numerous cases by the Court, Chapter VI- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot expenditure incurred solely for the purpose of earning interest income and that those expenses are so remote that they have no connection with the earning of the interest, Incidentally, the question of the estimate of the expenditure made by the ITO for the purpose of earning income had also come up for consideration before the Madras High Court. It was contended that the allocation should have been with reference to the total expenditure and not with reference to the actual income earned in that year, The ITO had estimated the expenses at 10 per cent of the receipts and disallowed the balance of the claim. It was observed that no effort is necessary for receiving interest from fixed deposits and the compensation. It appears that, no material had been produced by the assessee to show that he was entitled to a larger allowance. In such situation, the Madras High Court held that the allocation made by the ITO has to be taken as a reasonable estimate. 59. It is, therefore, not difficult to appreciate that in such type of cases, i.e., category 'A' cases, the proportionate management expenses and other expenses unrelated to earning of dividend income are not to be deducted fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bombay High Court: Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. to the assessment year in question without considering the effect of the amendment operative from 1st April, 1968, and in thus holding that the assessee would be entitled to the deduction under Section 80M on the gross dividend before deduction of the proportionate management expenses? (Emphasis, italicised in print, supplied) 62. The Bombay High Court made following observations: Tulzapurkar J. The question in respect of which rule has been obtained by the CIT thus: Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. to the assessment year in question without considering the effect of the amendment operative from 1st April, 1968, and in thus holding that the assessee would be entitled to the deduction under Section 80M on the gross dividend before deduction of the proportionate management expenses. In our view, the quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities working under its jurisdiction. 65. Admittedly, the issue relating to reduction of proportionate management expenses from the gross dividend was not considered by the Hon'ble Supreme Court in detail. In such circumstances what is the effect of the decision of the Supreme Court when it does not contain reasons as to how proportionate management expenses are to be deduced for computation of dividend income included in the gross total income. 66. In our view, the effect of the decision of the Supreme Court can be ascertained from another decision of the apex Court in the case of Kunhayammed and Ors. v. State of Kerala and Anr. The relevant portion of the decision is reproduced as under: Once special leave to appeal from an order has been granted by the Supreme Court the order impugned before the Supreme Court becomes an order appealed against. Any order passed thereafter by the Supreme Court would be an appellate order and would attract the applicability of the doctrine of merger. It would not make any difference whether the order is one of reversal or of modification or of dismissal affirming the order appealed against. It would not also make any difference if the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt held, rejecting the claim of the appellant, that the only way of working out the scheme of the provisions of Section 81(i)(d) in the light of Sections 66 and 110 was first to calculate to total income and the income-tax thereon, secondly, to ascertain the net profits in respect of the activities on which income-tax was not payable by setting off against the gross profits the proportionate amount of expenditure and then to determine the profits and gains from the taxable activities and thereafter from the income-tax on the total income grant a rebate at the average rate of income-tax on the amount on which no tax was payable. On appeal to the Supreme Court: Held, (i) affirming the decision of the High Court, that since Section 66 required the computation of the total income by including all income on which no income-tax was payable under Chapter VII, the income on which no income-tax was payable by a co-operative society under Section 81(i)(d) falling in Chapter VII had to be necessarily included in its total income. Section 110 was then attracted. Hence, when the income of the co-operative society on which no tax was payable was included in its total income, it became entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i), requires that in the case of dividends or interest on securities any reasonable sum paid by way of commission or remuneration of a banker or any other person for the purposes of realizing the dividend, interest on behalf of the assessee should be deducted. Where moneys are borrowed for investment in shares, to the extent the interest charged is capable of being regarded as expenditure laid out or expended wholly and exclusively for the purpose of making or earning dividend income, the interest so paid is liable to be deducted under Section 57(iii) before computing the benefit under Section 80M. It is not possible to hold that an assessee has, by reason of being a dealer in shares, an option not available to other assessees also deriving income from dividends, to deduct the interest paid on the amount borrowed for investing in he shares for which dividend is earned as expenditure in relation to his business, and deduct the same under Section 36(1)(iii). The assessee, a dealer in shares, claimed deduction under Section 80M in respect of the gross amount of dividends received by it. The Tribunal upheld the claim of the assessee. On a reference: Held, that the relief under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of the assessee. In earning the business income, the assessee has incurred indivisible expenditure between the receipts, which shall have to be taken into account, for the purpose of determination of the net income chargeable to tax. It is, therefore, evident from the above example that in computation of the net income which is included in the gross total income, all the provisions of the Act have got to be kept in mind and not merely provisions of Sections 56 to 59. The charging section has also to be kept in mind in determining the net component of income which is included in the gross total income as it is only the net income which is included in the gross total income. Having held that the dividend income is incidental to the business activities of the assessee, there is no escape from the view that it is the net component of dividend income determined after deduction of proportionate expenses for determining the net component of dividend income which is included in the gross total income. 77. It may be pertinent to mention that the decision of the Calcutta Bench of the Tribunal in the case of Dy. CIT v. S.G. Investments Industries Ltd. (supra) was sought to be di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll prevail. We accordingly, with utmost respect to the decisions of the High Courts referred to above follow the principle laid down by the Hon'ble Supreme Court (supra). 79. We, therefore, hold that in category 'B' cases, i.e., the cases where income by way of dividend is part of the business income or is incidental to the business income, the expenses incurred shall be apportioned between the gross dividend and other receipts of business proportionately and deduction allowed on the net dividend so calculated. 80. The summary of the Special Bench decision on the main issue is thus as under: That for purposes of calculating deduction under Section 80M (i) Where the dividend received is on investments unrelated to the business of the assessee or is not incidental to the business activities of the assessee the gross dividend shall be reduced by specified deductions and the proportionate management/overhead expenses related to the business income of the assessee would not fall under Section 57(iii) of the Act and, therefore, not to be deducted. (ii) That where the dividend receipt is part of the business income of the assessee or is incidental to the business activities of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision for depreciation in the value of investment has been made as per the guidelines provided in terms of IDBI Circular dt. 26th April, 1994, 23rd June, 1994 and 8th May, 1996 and 19th Feb., 1997, (e) The market value of shares in case of quoted shares is calculated on the basis of shares last quoted in a recognized stock exchange on or before 31st March as the case may be. However, in case of shares which are not quoted in stock exchange since long have been started at cost. (4) Project promotion expenses In promotion of projects being undertaken by the corporation, the expenses incurred on such projects during the implementation stages are charged to the Revenue of the year in which the payment are made and shown under the head 'Project Survey Expenses'. The recovery of such expenses of the respective projects (excepting the cases of abandoned projects where no recoveries are made) are credited to the head 'Receipts on account of projects matured' in the years of maturity of respective projects. The above policy has been adopted because promotion of projects is a major activity of the corporation. Recovery, if any, made in the subsequent years on account of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d income as computed in accordance with the provisions of the IT Act (before making any deduction in Chapter VI-A) and not with respect to gross amount of such dividend. This provision was introduced with retrospective effect from 1st April, 1968. The decision in the case of Cloth Traders (P) Ltd. (supra) was subsequently overruled by the Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors. and the Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. (supra) after referring to the decision in the case of Distributors (Baroda) (P) Ltd. (supra) as well as the fact of introduction of Section 80AA by the Finance (No. 2) Act, 1980 with retrospective effect from 1st April, 1968, overruled the judgment of the Bombay High Court; in the case of CIT v. United General Trust (P) Ltd. . The position which emerges after the decision of the Hon'ble Supreme Court in the case of United General Trust (P) Ltd. referred to supra in that, proportionate management expenses have to be deducted from the gross dividend for purposes of relief admissible under Section 80M. In the case of the assessee, from the statement annexed along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned first appellate authority was justified in estimating the net dividend income at 50 per cent of the gross dividend income as per the guidelines of the Hon'ble Supreme Court in the case of United General Trust Ltd. Accordingly, we uphold the order of the learned CIT(A) in this regard and dismiss the ground taken by the assessee. 86. For asst. yr. 1996-97, the Chandigarh Bench of the Tribunal in ITA No. 539/Chd/2000 also decided the issue against the assessee by following its earlier order or reference for asst. yrs. 1990-91 to 1992-93 but no appeal or reference for the aforementioned assessment years has been filed against the said order to the High Court. 87. It is evident from the order of the Tribunal in assessee's own case that the decision of the Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra) has been relied upon by the Tribunal for arriving at the decision. The another Bench of the Tribunal in the case of Mahavir Spinning Mills Ltd. have referred to the decision of the Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra) and pointed out that the said decision has got to be seen in the context in which it was rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his observation may be elaborated with an example. We may take a case where the assessee purchases vehicles from a party and provides the same to the seller of the vehicles for use on payment of lease rent. The investment in vehicles would be capital investment but the lease rent for the exploitation of the vehicle would be a revenue receipt. As and when vehicles are sold by the assessee the gain, if any, on such sale would be assessed as capital gain. In this case, the assessee has purchased shares and such shares not having been treated as stock-in-trade, the profit on the sale of such shares, in our view, is bound to be assessed under the head Capital gains . This finding, in our humble view, does not contradict our finding that the dividend earned by the assessee is in the course of carrying on of its business. We have expressed the view that whereas purchase of shares is a capital investment in the course of business, the dividend has been realized in the course of exploitation of the capital asset of the assessee, namely, the investment in shares. We are, therefore, of the view that there is no contradiction in the order, 90. We now proceed to consider the grounds of appeal r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dividend income computed after allowing deduction under Section 36(1)(viii) of the IT Act. The counsel of the appellant has made reference to the decision of the Tribunal in the case of the appellant itself for the asst. yr. 1980-81 and subsequent assessment years to support the contention that deduction under Section 36(1)(viii) is admissible from total income inclusive of dividend income irrespective of the fact that this is income under the head other sources and further deduction under Section 80M is admissible with reference to the dividend income before allowing deduction under Section 36(l)(viii) of the II' Act; in this regard, reference was made to the assessment records. It appears that the issue whether deduction under Section 36(1)(viii) of the IT Act was admissible from the dividend income came up for consideration in this year for the first time. At the time of framing the assessment the AO held that dividend income was income from other sources, therefore, deduction under Section 36(1)(viii) was not admissible with respect of this income, Therefore, dividend income was excluded for the purpose of allowing deduction under Section 36(1)(viii) and deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the AO as the claim under Section 36(1)(viii) of the IT Act has been allowed and there is no dispute regarding this issue. In this view of the matter, the first ground of appeal is rejected and it is held that the deduction under Section 80M of the IT Act is admissible only with reference to the net dividend income after deducting allowance under Section 36(1)(viii) of the IT Act claimed at the rate of 40 per cent. 94. Respectfully following the order of the Tribunal in assessee's own cases for asst. yrs. 1990-91 to 1992-93 (supra), we uphold the orders of the Revenue authorities in this regard and dismiss the grounds of appeal raised by the assessee. 95. Second ground of appeal in asst. yr. 1994-95 and ground No. 1 in asst. yr. 1997-98 in assessee' appeal are common and are as under: Asst yr. 1994-95 2. That the learned CIT(A) was further (sic-not) justified in upholding the disallowance of rent of ₹ 3 lacs of guest house expenditure as business expenditure. It is against the order of the Hon'ble Tribunal in earlier years wherein it was held that rent of guest house is an admissible business expenditure. Asst. yr. 1997-98 1. The learned CIT(A) was not justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has further erred in directing the AO to allow the deduction under Section 80M. Asst. yr. 1996-97 5. Learned CIT(A) has erred in directing AO to allow the deduction under Section 80M of the Act after deducting expenditure, if any, incurred by the assessee under Section 57 of the Act and the administrative expenses estimated at ₹ 3 lacs. Asst. yr. 1997-98 5. Learned CIT(A) has also erred in directing AO to allow the deduction under Section 80M of the Act after deducting expenditure, if any, incurred by the assessee and the administrative expenses estimated of ₹ 3 lakhs as against expenses @ 95.24 per cent of the earnings worked put by the AO. 99. We have elaborately discussed that deduction under Section 80M is permissible to the assessee in respect of the net income and since in this case the dividend earned by the assessee is in the course of the business, the expenses incurred for the purpose of business income have got to be apportioned between the business receipts including dividend proportionately. In asst. yrs. 1990-91 to 1992-93 the Tribunal has considered 50 per cent of the gross dividend income as expenses attributable to the earning of the dividend in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have considered the rival submissions and have also gone through the orders passed by the AO as well as the learned CIT(A). The assessee corporation is a wholly owned Government company of the Punjab Government and is inter alia, engaged in the business of promoting and operating scheme for the industrial development of Punjab. In the course of its business activities, the assessee gets projects report and feasibility studies prepared by qualified persons and incur expenditure over them. Upto the asst. yr. 1989-90, such expenditure was claimed as revenue expenditure and was allowed as such by the AO however, for the asst. yr. 1990-91, the AO held it to be capital expenditure . On appeal, the CIT(A) treated the expenditure of revenue nature but held that the assessee ought to have shown the value of unsold project reports/feasibility study reports as stock-in-trade to arrive at the correct profits. The learned first appellate authority before whom the decision of the Karnataka High Court referred to supra was cited, observed that the full facts of the case were not discussed in the judgment cited and there was no discussion as to part of the closing stock of the assessee corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent being claimed and allowed by the AO in relation to expenditure on preparation of project/feasibility reports upto asst. yr. 1989-90 which was to treat the expenditure as of revenue nature Accordingly, the addition of ₹ 7,47,078 sustained by the CIT(A) is directed to be deleted. 102. Another common issue involved in the appeals of the Revenue is relating to assessing the profit on sale of shares under the head Capital gains . The Revenue has raised the ground of appeal in this regard in ground No. 2 in asst. yr. 1994-95 ground No. 2 in asst. yr. 1995-96 and ground No. 1 in asst. yr. 1996-97 and ground No. 1 in asst. yr. 1997-98. These grounds are reproduced hereunder for the sake of ready reference: Asst. yr. 1994-95 2. The learned CIT(A) has further erred in deleting the addition of ₹ 28,88,58,740 made on account of sale of shares and directing the AO to assess it under the head 'Capital gain'. Asst. yr. 1995-96 2. The CIT(A) has erred in deleting the addition of ₹ 12,10,97,295 rightly made by AO by treating the profit on sale of shares as business income. Asst. yr. 1996-97 1. On the facts and circumstances of the case, the learned CIT(A) in appeal No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yr. 1994-95 raised by the Revenue is as under: 4. The learned CIT(A) has also erred in directing the AO to afford opportunity to the assessee to create further reserve for claiming deduction under Section 36(1)(viii). 105. This issue is also covered in favour of the assessee by the decision of the Tribunal in assessee's own case in ITA Nos. 1319 and 1318/Chd/1987 and ITA No. 527/Chd/1999 for asst. yr. 1984-85, 1982-83 and 1983-84. Since the decision of the CIT(A) is in conformity with the decision of the Tribunal in assessee's own case for earlier years, we find no justification to interfere. 106. Ground No. 3 in asst. yr. 1996-97 of the appeal of the Revenue is as under: 3. Learned CIT(A) erred in deleting the disallowance of ₹ 7,77,594 made on account of expenditure under the head 'Business promotion expenses'. 107. The AO had treated the expenditure as capital expenditure. The CIT(A) has given details of the expenditure in para 4.3 of his order as under: 4.3 The submissions made by the appellant have been considered carefully and I have also gone through the details of the expenses which are as under: (i) Conference on Chandigarh Gateway to golden opportun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue is as under: 3. Learned CIT(A) has erred in deleting the disallowance of ₹ 82,168 made on account of expenditure under the head Udyog Sahayak Expenses . Learned CIT(A) has erred in holding this expenditure of revenue nature. 110. The relevant facts relating to this issue are that the assessee had incurred expenditure as a contributor for running a cell Udyog Sahayak for providing assistance/guidance to entrepreneurs for setting up of industries in the State of Punjab. During the year total expenditure on running the cell amounted to ₹ 4,93,010. The assessee had to contribute 30 per cent which works out to ₹ 82,168. The AO treated this expenditure as of capital nature. The CIT(A) considering the facts that one of the objective of the corporation was to industrialise the State of Punjab and that the expenditure had been incurred by the assessee for furtherance of business and for industrialization of the State held the expenditure as of revenue nature. The CIT(A) has also relied upon the decision of the Supreme Court in the case of Sassoon J. David Co. (P) Ltd. v. CIT and that of the Bombay High Court in the case of CIT v. Sales Magnesite (P) Ltd. to arriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterfere. 115. In the result, the appeals of the Revenue as well as appeals of the assessee are partly allowed. Vimal Gandhi, 10-04-2006 1. At the very outset, I apologies for the delay in disposal of these appeals. These were first heard by the Special Bench on 24th May, 2005 and my learned Brother Shri M.A. Bakshi, the Hon'ble Vice President, Chandigarh Zone had agreed to propose an order on behalf of the Bench. The said order was accordingly proposed. I had reservation on the view taken in the proposed order and felt need to have further discussion with other Hon'ble Members of this Bench. The discussion was only possible during my camps at Chandigarh. It emerged in the course of discussion that my Brother Shri M.A. Bakshi, the Hon'ble Vice President had strong views about his approach in the case. But all the same, he agreed to consider my points of view. Accordingly, I had prepared a written note for consideration of the learned Members of the Bench. The said note was duly discussed and after discussion, it was thought appropriate by the Bench to allow further hearing to the parties as considerable time had elapsed between the last hearing of case and disposal of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of the Act can also be deducted in computing the net income from a particular source, if deduction of such expenditure is necessary to ascertain the true income. My learned Brother has stated at p. 13 that he would deal with this aspect of the matter at a later stage. He has stated that deduction under the head Income from other sources are specifically provided under Section 57 and as per Clause (iii) of said section, any expenditure laid out or expended wholly and exclusively for purposes of making or earning of income is deductible. He, thereafter quotes from the decision of the Hon'ble Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. v. CIT and emphasized that as per the above decision, connection between expenditure and earning of income need not be direct and it may be indirect. My Brother further quotes, but expenditure must have been incurred for purpose of that income and, there should be some nexus between expenditure and the earning of income. It is further quoted that expenditure in the said case was not held to be deductible under Section 57 as interest had accrued sui generis and expenses were not incurred with the object or for purpose of earni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d factory on which expenditure were incurred). Their Lordships treated the question as fully covered by decision of Hon'ble Madras High Court in the case of CIT v. Gannon Dunkarlay Co. (P) Ltd. (1999) 152 CTR (Mad) 106: (2000) 243LTR 646 (Mad) and allowed the expenses. In the case of CIT v. Gannon Dunkerlay Co. (supra), the official Liquidator in the case of winding up of company, had claimed certain expenditure against interest income. The deduction was allowed with the following observations: Held, that the expenditure was incurred in the performance of his duties by the official liquidator and the nature of the expenditure clearly showed that the expenditure was incurred to protect and preserve the assets. The finding of the Tribunal in the instant case was that the expenditure was incurred to maintain the infrastructure for earning or making interest income and without incurring expenditure, it would not have been possible to earn income by way of interest. The finding of the Tribunal clearly showed that there was a nexus between the expenditure and the interest income earned and that finding regarding the nexus was a finding of fact. The Tribunal was correct in holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In my humble opinion to accept the general proposition de hors of facts of a given case is not possible. 10. The learned Vice President has also discussed concept of income. There is no dispute that total income (after deducting expenditure) computed in accordance with provisions of the IT Act is to be charged to tax. 11. The learned Vice President has referred to the cases of Probhat Chandra Barua v. Emperor 5 TTC 1 and CIT v. Raja Sri Sri Kalyani Prasad Deo (1945) 13 ITR 17 (Bom). In the first case of Probhat Chandra Barua (supra), their Lordships of Privy Council observed as under: At p. 240 his Lordship observed: Their Lordships were unable to ascertain upon what footing the appellant had been assessed in respect of the income derived from his zemindari, i.e., whether on the gross income or after some allowance had been made in respect of the jama assessed and paid upon the lands. Their Lordships are of opinion that, in assessing the appellant to income-tax in respect of the income derived from the zamindari, his income, profits and gains from that source should be computed after making proper allowance in respect of the jama assessed and paid. The assessee is sought to be ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rawn the following inference: It would be unreasonable to presume that the legislature intended to give relief to the assessee under Section 80M in excess of the tax that would otherwise be chargeable on dividend income in the hands of the recipient of such income. It is, therefore, in our view, necessary to determine the net component of dividends included in the gross total income on which deduction under Section 80M is permissible to the assessee. There can be no dispute on above proposition as similar observations have been made in the decision of Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors. . 16.1 further agree with the proposition that dividend although assessable under the head, Income from other sources may nevertheless be treated as business income . But I can agree with my learned Brother to the above extent only. I am unable to share my learned Brother's views that for purposes of computation of deduction under Section 80M, it is necessary to trace out the source of income of dividend. I am not sure with reference to which decision or statutory provisions, above observations have been made. I am also further unabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net dividend income computed in accordance with the provisions of the Act and included in the gross total income. (ii) That for determination of net dividend income included in the gross total income, it is necessary to trace the 'source of dividend income' notwithstanding the fact that it is assessable under the head 'Income from other sources'. (iii) That computation of dividend income in accordance with Act does not restrict the scope of computation to Sections 56 to 59 of the Act. That the real component of dividend income included m the gross total income shall have to be computed in accordance with the Act and established principles of accounting. (iv) The nature of dividend income may vary from case to case. In some cases, the dividend earned by the assessee may be on investments made in the domestic company(s) de hors any business considerations (we will hereafter refer to this category as category 'A'). In some cases, the earning of dividend may be in the course of business activities of the assessee or may be incidental to the business of the assessee (we will hereafter refer to this category as category 'B'). The computation of net income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Pfizer Corporation ; (vii) CIT v. Jai Hind Investment Industries (P) Ltd. , (ix) CIT v. Mahendra Sobhagchand Shah. It has been observed that expenses in above category of cases are unrelated to earning of dividend income and, therefore, not deductible. One cannot challenge above legal proposition and, therefore, I do not make any further comments on view expressed by my learned Brother in 'A' category cases. It has been observed that as per decision of Supreme Court in the case of Badridas Daga v. CIT , expenditure on embezzlement were allowed in computing income from business notwithstanding the fact that there is no specific provision for allowance of deduction of such expenses. On the basis of above and other authorities, my learned Brother has concluded that expenditure even while computing income from other sources can be allowed although not specified in Sections 57 to 59 of the IT Act and above expenses can also be taken into account while computing deduction under Section 80M of the IT Act. I am unable to subscribe to the above view. 22. In the case of Badridas Daga (supra), the question of law referred to the Court was as under: Whether the said sum of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n shares and in that case dividend as incidental income would be business income. I have already said about this proposition in the earlier part and need not elaborate further on the point. 25. In order to hold that proportionate management and other expenses can be deducted either under Section 57 or otherwise my learned Brother has referred to and relied upon the decision of Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. . My learned Brother has also reproduced decision of Bombay High Court in the above case holding that question as framed was not arising out of the order of the Tribunal. Since only question which was considered by the Tribunal was whether deduction under Section 80M of the IT Act was to be computed with reference to gross dividend income without deducting therefrom the proportionate management expenses. The Tribunal relying upon decision of Bombay High Court held that relief was to be allowed with reference to gross dividend income. My Brother has held that question was answered in favour of the Revenue and said decision relating to deduction of proportionate management expenses is binding upon any authority working under its jurisdict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said question relating to deduction of proportionate management expenses under Section 80M was neither considered nor decided by the Tribunal in the light of the view that deduction was to be allowed on gross dividend, a legal view which was reversed. As per the settled law, the said question of deduction of proportionate expenses was required to be decided by the Tribunal on taking up the matter after receiving answer to the question referred to the Court. As the question was not considered and decided by the Tribunal, the question of answering said question or laying down any legal proposition relating to same did not arise. At any rate, the Bench of apex Court has not laid down any proposition beyond what was laid by Constitutional Bench in the case of Distributors (Baroda) (P) Ltd. (supra). A reference to aforesaid decision would be made a little later. 27. My learned Brother has also drawn support from the decision of Hon'ble Supreme Court in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT for the proposition that expenses can be apportioned in case of claim of indivisible expenses. In the aforesaid case, the Supreme Court has followed the case of Distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Chemical Holdings Ltd. . In that case Hon'ble Madras High Court has held as under: Held, that the relief under Section 80M could not be granted on the gross amount of dividend received by the assessee but on the gross amount as reduced by the amount of interest attributable to the money borrowed for the purpose of investment and the expenditure incurred in realizing the dividend income. There can be no dispute on the proposition that expenditure incurred in realizing dividend income are deducted. If shares on which dividend is received are purchased with borrowed funds, then interest paid can be deducted while computing dividend income under Section 57 of the IT Act and deduction under Section 80M is to be allowed accordingly. But the pertinent question is to find nexus between expenditure and income. In the above referred to case, their Lordship ultimately observed as under: Counsel for the assessee points out that from the order of the AO and of the CIT, it is not clear as to whether the amount of interest deducted was the whole of the amount paid as interest by the assessee or only the portion relatable to the amount used by the assessee for investing in shares to earn t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of computation under the income-tax law, the income from such securities would be computed not under the head Income from business but under the head Interest on securities . In United Commercial Bank Ltd. v. CIT , this Court pointed out that business income was broken up under different heads only for the purpose of computation of the total income, and that by such break-up the income did not cease to be the income of the business. This principle was followed by this Court in CIT v. Chugandas Co. commercial considerations may properly describe the source differently. For instance, a banking concern may hold securities in the course of its business. The securities constitute its trading assets and income from them would, in the commercial sense, be regarded as business income. (Underlined, italicised in print, to emphasise) From the above it is clear, (a) that dividend income can be business income although computed under the head Other sources . (b) For determining nature of dividend income, the nature of holding of shares is to be seen. If income is from securities, it has to be seen whether securities are held in the course of the business and are its trading assets. Income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already considered decision of Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. (supra) where deduction of certain expenses out of interest was not allowed as expenses were not incurred with object or purpose of earning the income. The head of the income may not be conclusive and dividend income, although computed under the head Other sources can be treated as business income for certain specified sections where there is no restriction or condition and word business is to be taken as taken under common parlance. But whereas in the provision under consideration there is restriction or conditions are attached for allowing deduction, the deduction can be allowed only if conditions are satisfied. For purpose of Section 80M the deduction has to be out of dividend income computed in accordance with provisions of this Act. There is no question of considering anything else but dividend income under the head Other sources , (and) not under the head Business . No provision authorizes re-computation of dividend income for purposes of Section 80M of the Act. 34. The effect and implication of restriction placed by statutory provisions was also considered by their Lordship in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the tax was at any time charged on the owner of any business. If that condition be fulfilled in respect of the income of the business under the Act of 1918, the owner or his successor-in-interest qua the business, will be entitled to get the benefit of the exemption under it if the business is discontinued. The section in terms refers to tax charged on any business, i.e., tax charged on any person in respect of income earned by carrying on the business. Undoubtedly, it is not all income earned by a person who conducted any business, which is exempt under Sub-section (3) of Section 25; non-business income will certainly not qualify for the privilege. But there is no reason to restrict the condition of the applicability of the exemption only to income on which the tax was payable under the head Profits and gains of business, profession or vocation. The legislature has made no such express reservation and there is no warrant for reading into Sub-section (3) such a restricted meaning. Sub-section (3) it may be noticed does not refer to chargeability of income to tax under a particular head as a condition of obtaining the benefit of the exemption. Diverse other provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... challenging amendment introduced in the shape of Section 80AA through Finance (No. 2) Act, 1980 with retrospective effect. It was the claim of the assessee that above amendment could not be introduced with, retrospective effect in the light of decision of Hon'ble Supreme Court in the case of Cloth Traders (P) Ltd. v. Addl. CIT . Their Lordship rejected above contention and held that provisions of Section 80AA were merely declaratory of the law as it always was and it was further held that an erroneous view was taken by the Supreme Court in the case of Cloth Traders (P) Ltd. (supra). 36. In reaching above conclusion, their Lordship set out the history of legislation preceding enactment of Section 80M. Their Lordships considered various decisions on Section 99 of the IT Act as also on Section 85A of IT Act. Thereafter, the Hon'ble Court proceeded to consider Section 80M of IT Act which is reproduced at p. 132 of the report. The decision of Hon'ble Gujarat High Court in Addl CIT v. Cloth Traders (P) Ltd. and of Supreme Court (supra) were thoroughly analyzed. Their Lordship placed strong reliance on the decision of Supreme Court in the case of Cambay Electric Supply Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputing the total income of the concerned assessee, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figure that will become exigible to the deduction of 8 per cent contemplated by Section 80E(1). It will thus be seen that, according to this decision, the words such profits and gains in the latter part of Sub-section (1) of Section 80E were referable to the quantum of the profits and gains attributable to the specified business included in the total income as referred to in the earlier part of the provision. If this decision lays down the correct interpretation of Sub-section (1) of Section 80E, the same interpretation must also govern the language of Sub-section (1) of Section 80M. Structurally, there is hardly any difference between Section 80E, Sub-section (1), and Section 80M, Sub-section (1), and the reasoning which appealed to the Court in the interpretation of Sub-section (1) of Section 80E must apply equally in the interpretation of Sub-section (1) of Section 80M. We find ourselves wholly in agreement with the view taken by this Court in Cambay Electric Supply Co. Ltd. v. CIT and we must, therefore, dissent f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred solely for the purpose of making or earning the interest income. After pointing out that the assessee was not carrying on any business during the relevant assessment years, it was held that the deductions claimed by the assessee were not expenditure incurred solely for the purpose of earning interest income and that those expenses are so remote that they have no connection with the earning of the interest. Incidentally, the question of the estimate of the expenditure made by the ITO for the purpose of earning income had also come up for consideration before the Madras High Court. It was contended that the allocation should have been with reference to the total expenditure and not with reference to the actual income earned in that year. The ITO had estimated the expenses at 10 per cent of the receipts and disallowed the balance of the claim. It was observed that no effort is necessary for receiving interest from fixed deposits and the compensation. It appears that no material had been produced by the assessee to show that he was entitled to a larger allowance. In such situation, the Madras High Court held that the allocation made by the ITO has to be taken as a reasonable esti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend income and that there was no scope for any estimate of expenditure being made and there was no scope for allocation of notional expenditure unless the facts of a particular case so warranted. In our view, Section 20(1) contains a rule of proportionality of expenses and interest and that rule is based on estimation of expenditure whereas, Section 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend unless the facts of a particular case warrant otherwise. Therefore, we answer the latter question in favour of the assessee-bank and against the Department. 41. In the case of State Bank of Indore v. CIT (supra), their Lordship of Madhya Pradesh High Court (Indore Bench) after considering decision of Hon'ble Supreme Court in the case of Distributors (Baroda)(supra) held as under: A careful perusal of Section 80M as interpreted by the Supreme Court in Distributors (Baroda) (P) Ltd. v. Union of India and Ors. r/w Section 57 would only suggest that while giving benefit under Section 80M, the gross income of dividend cannot be taken into account but an income calculated after making deduction a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stributors (Baroda) (P) Ltd.'s case (supra). Indeed, we may make it clear that in case, the taxing authorities or the assessee, as the case may be, is able to prove or show that a particular amount was actually incurred by the assessee in earning dividend income, then certainly to the extent the amount actually incurred has got to be deducted from the gross dividend income and then the same is to be taken into consideration under Section 80M. Since, in this case, the taxing authorities have not taken into consideration, the actual expenditure incurred by the assessee while earning the dividend, but have only proceeded to take notional expenditure, the same cannot he held to be sustainable into law. We cannot countenance such view. In our opinion, it is not in accordance with the view even taken by the Supreme Court in the case of Distributors (Baroda)'s case (supra) and the view taken by the Calcutta High Court in the cases referred supra. Such view, thus needs to be overruled. In view of the foregoing discussion, we answer the question referred to us in favour of the assessee and against the Revenue. In other words, we answer the question by holding that the Tribunal was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the assessee that no expenditure was incurred for earning dividend income. No material is available on record to show that assessee actually incurred expenses for earning dividend income and that claim of the assessee to the above effect was erroneous. Without material I see no justification on the part of the AO to deduct proportionate expenses. 43. The Hon'ble Vice President has laid down the proposition that where dividend income is earned in the course of business or where earning is incidental to the business carried on by the assessee, expenses have got to be apportioned for determining the net component of income included in the total income. In para 76 of the proposed order, a finding has been recorded that assessee did incur expenses for earning business income and dividend. Expenditure incurred for earning such income are mixed and, therefore, all expenses are to be taken into account for determining net income which is chargeable to tax notwithstanding the fact that such expenditure is not covered under Sections 57 to 59 of the Act. With utmost respect and for reasons given above, I am unable to agree to the above view. In my opinion, there is no legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns permissible under the said head. If interest paid on borrowed funds for acquiring shares, satisfies the conditions of Section 36(1)(iii), it is to be taken and allowed deduction while computing business income. Secondly, as noted earlier, expression, for purposes of business is wider than the scope of expression, for purposes of earning profit . It is, therefore, imperative that all permissible deduction under the head Business are first to be considered. Only left out deduction can be considered under the head Other sources . However, if on the basis of material, a finding can be recorded that shares were acquired with borrowed funds, with main object of earning dividend, then interest paid on borrowed funds is to be deducted under Section 57 of the IT Act. It is not possible to lay down any rule of universal application. The question has to be determined with reference to facts and circumstances of the case. But facts of a given case are required to be considered in the light of above principles. 46. In the light of above discussion, the following propositions emerge: (i) That deduction under Section 80M is to be allowed on net dividend income computed as per provisions of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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