TMI Blog1991 (5) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... of its closing stock and in that view allowing the deduction of Rs. 23,06,452 claimed by the assessee ? (iii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the cash payments on account of reimbursement of medical expenses of the employees could not be included in the value of benefit, amenity or perquisite for the purpose of disallowance in excess of the limits laid down under section 40(c)(iii) or 40(a)(v) of the Income-tax Act, 1961 ? " The second and third questions had been referred by the Tribunal under section 256(1) of the Income-tax Act, 1961. The said reference came up before this court and was decided in favour of the assessee. The said decision is reported in CIT v. National and Grindlays Bank Ltd. [1984] 145 ITR 457 (Cal). It appears that, by mistake, the aforesaid questions have been again referred to this court under section 256(2) of the Act. It further appears that there is some typographical mistake in the amount mentioned in question No. 1 in the earlier reference which is question No. 2 in the present reference. However, to avoid any controversy, we answer the second and third questions in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents P. Ltd. reported in [1980] 125 ITR 227. In that case, the income of the assessee comprised (1) managing agency business, (2) income from trading in shares, and (3) income from other sources, i.e., dividends. The assessee paid interest on the borrowings made by it. The assessee claimed payment of interest as deduction from its business income. The assessee also claimed deduction of tax on inter-corporate dividends, contemplated by section 85A of the Income-tax Act, 1961, without deducting the interest paid on borrowings made for the purpose of purchasing shares because, according to the assessee, the interest paid on these borrowings should be deducted from its business income. The Income-tax Officer refused to deduct the interest paid on the borrowings from the assessee's business income, but deducted the same from its dividend income from shares. He, accordingly, computed the deduction contemplated by section 85A on the dividend income reduced by the amount of interest paid on the borrowings. Being aggrieved by this decision of the Income-tax Officer, the assessee approached the Appellate Assistant Commissioner in appeal. In that appeal, it was held by the Appellate Assistant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, held that the Tribunal was not right in holding that the income arising out of the share investment made by the assessee should be held to be income from business. It should be charged under the head " Other sources " as dividends as laid down in section 56. So far as the second question is concerned, the Gujarat High Court held thus (at page 238 ) : " It is thus clear that even though an item of income falls under a specific head, in spite of the fact that that item is earned for the purpose of business, for purposes other than the computation of income, the commercial character of that income can be taken into account. In the case before us, the commercial character of that income becomes helpful to us in determining whether the borrowing on which the interest is paid was for the purpose of business. We, therefore, conclude on the second question that the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, payment of interest by the assessee on amounts borrowed for purpose of investments must be allowed as business expenditure, and not as expenditure incurred for earning dividends. " In dealing with the third question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overdraft and other loan accounts should be deducted in computing the income or loss under the head " Profits and gains of business " and that, while considering the deduction admissible under section 80M of the Income-tax Act, 1961, the Income-tax Officer should have taken into consideration the amount of gross dividend without deduction of interest. On further appeal, the Tribunal affirmed the order of the Appellate Assistant Commissioner. On those facts, the following two questions were referred to the High Court ( at page 100 ) : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire amount of interest paid by the assessee on money borrowed on overdraft and employed in the business of dealing in shares has to be deducted in arriving at the profits or loss under the head 'Profits and gains of business' or a part thereof should be apportioned and allowed against the income assessable as dividend under the head 'Other sources'? (2) Whether the relief under section 80M is to be granted on the gross amount of dividend received by the assessee or on the net amount as reduced by the interest attributable thereto ? " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich will be the amount with reference to which relief under section 80M will have to be worked out. Section 80AA makes no difference because in the instant case, there is no expenditure which is incurred for the purpose of earning the amount of dividends. The expenditure incurred by way of payment of interest was incurred for the purpose of carrying on the business of the assessee and that has been deducted under section 36(1)(iii) while computing the income of the assessee, for the purpose of profits and gains from business. " (emphasis supplied) The contention of Dr. Pal appears to be that, since the dividend received by the assessee is from a trading asset in the course of business, there cannot be any further deduction for earning the dividend under section 56 of the Act. It is true that the dividend income arising from investment in shares is income from business but such income must necessarily be computed in accordance with the provisions of the Income-tax Act, 1961. Even though it may be business income in the sense that the dividend is realised from a trading asset, but, none the less, if it falls under a specific head it has to be assessed only under that specific head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eads " Business " and " Other sources ". The Appellate Assistant Commissioner and the Tribunal, however, held that the entire expenditure was allowable as business expenditure. The Division Bench held as follows (at page 202): "There is no dispute that the assessee was doing investment business and holding of stocks and shares partook of the nature of circulating capital. It was not possible to distinguish shares held solely for the purpose of earning dividend and to determine the borrowings made for the purpose of acquiring such shares and the interest paid thereon. It was not possible to attribute any particular item of expenditure for having been incurred solely for the purpose of earning dividend income. The shares being held as circulating capital for the business, the expenditure including the interest, has to be allowed as deduction in computing the business profits. In the premises, there is no question of allocation of such expenses between business income and dividend income. It is only for the purpose of income-tax assessment that the dividend is shown under a separate head. The entire income has to be treated as business income and no part of the expenditure can be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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