TMI Blog1990 (7) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... the said year, the assessee also received a sum of Rs. 2,77,717 as interest on taxable Government securities held by it. From this amount, the assessee deducted a sum of Rs. 2,29,579 being the proportionate interest on the funds borrowed by the assessee for purchasing these securities as also proportionate expenses in that connection. The balance amount of Rs. 48,138 was also included by the assessee in its income-tax return as part of its total income. This figure was later revised. The revised amount has been accepted by the Income-tax Officer. In the course of assessment proceedings under the Companies (Profits) Surtax Act, 1964, the assessee contended before the Income-tax Officer that the sum of Rs. 2,75,974 being the net interest received by it from Indian companies as also the net interest received by the assessee from taxable Government securities should be excluded from the total income for the computation of surtax by reason of rule 1 (x) of the First Schedule to the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as "the Surtax Act"). The Income-tax Officer excluded from the total income interest received from the Indian concerns under rule 1 (x). The In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the circumstances of the case, the Tribunal was right in holding that the entire amount of Rs. 15,92,135 received by way of interest from Indian concerns, without reducing the sum by any proportionate expenses, was deductible in computing the chargeable profits in terms of rule 1 (x) of the First Schedule to the Companies (Profits) Surtax Act, 1964 ?" It is an accepted position that question No. (1) is covered by a decision of this court in the assessee's own case in CIT v. Banque Nationale de Paris [1981] 130 ITR 534, where the court held that rule 1 (x) of the First Schedule to the Surtax Act was wide enough to cover income by way of interest received from taxable Government securities. Hence, question No. (1) must be answered in the affirmative and in favour of the assessee. Whether, under rule 1(x), gross interest received by the assessee is liable to be deducted from total income or the net interest is liable to be so deducted is the subject-matter of the next two questions. It is, therefore, necessary to consider the scheme of the Companies (Profits) Surtax Act, 1964, and the provisions of the First Schedule where rule 1 (x) finds place. The Companies (Profits) Surtax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT v. South Indian Bank Ltd. [1966] 59 ITR 763, the Supreme Court was required to consider a notification under section 60A of the Indian Income-tax Act, 1922, which provided, inter alia, that (at p.766): "no income-tax shall be payable by an assessee on the interest receivable on certain income-tax free loans .... provided that such interest is received within the territories of the State of Travancore-Cochin and is not brought into any other part of the taxable territories to which the said Act applies. Such interest shall, however, be included in the total income of the assessee for the purposes of section 16 of the Indian Income-tax Act, 1922." (italics ours). The Supreme Court said that the phrase "interest receivable" was an unambiguous expression. It could only mean the gross interest as per the terms of the securities. It could not mean interest receivable minus the amount spent in receiving the same. In the case of CIT v. Industrial Investment Trust Co. Ltd. [1968] 67 ITR 436, this High Court was required to construe a notification which exempted from super tax, "so much of the income of any investment trust company as is derived from dividends paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded . . ." Applying the same reasoning, the court said that dividends received from an Indian company, in section 85A, referred to the full amount of dividend received and not the dividend income as computed for the purpose of income-tax. Section 99(1)(iv) of the Income-tax Act and section 80M came up for consideration before the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. Section 80M provides as follows (at p. 252) : " 80 M. Deduction in respect of certain inter-corporate dividends. (1) Where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to . . ." The Supreme Court considered the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348, as also the decision of the Calcutta High Court, in the case of CIT v. Darbhanga Marketing Co. Ltd. [1971] 80 ITR 72 and a similar view taken by the Madras High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the net income of the kind specified as included in the total income and not on the gross income. The constitutional validity of section 80AA was challenged before Bench of the Supreme Court consisting of five judges in the case of Distributors (Baroda) Pvt. Ltd. v. Union of India [1985] 155 ITR 120. It was contended before the Supreme Court that the retrospective operation of amended section 80AA would enhance the tax burden of the assessee and, therefore, it would infringe the fundamental rights of the assessee under article 19(1)(g) of the Constitution of India. The Supreme Court examined section 80M in order to decide whether there was such retrospective enhancement of the tax burden or whether section 80AA merely brought out more clearly what was already contained in section 80M. Once again the Supreme Court considered the decisions of the Bombay, Calcutta and Madras High Courts dealing with the interpretation of section 99(1)(iv) of the Income-tax Act referred to above. The Supreme Court did not, however, make any observations on the finding given by the three High Courts relating to the interpretation of section 99(1)(iv). The Supreme Court next considered section 85 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80M in the case of Cloth Traders (Pvt.) Ltd. [1979] 118 ITR 243, and held that section 80M granted a deduction only in respect of the net dividend forming part of the total income. In the case of Distributors (Baroda) Pvt. Ltd. [1985] 155 ITR 120, therefore, the Supreme Court has taken the view that a provision of the Income-tax Act which grants any deduction either in respect of inter-corporate dividend or in respect of interest on securities will have to be considered on its own language and in its own context. The interpretation put upon previous similar sections by courts need not be automatically applied to similar provisions which may have either replaced them or which may be inserted subsequently. It is, however, argued by Mr. Dastur, learned counsel for the assessee, that Distributors (Baroda) Pvt. Ltd.'s case [1985] 155 ITR 120 has overruled the case of Cloth Traders P. Ltd. [1979] 118 ITR 243 only regarding interpretation of section 80M. He submits that the case of Cloth Traders P. Ltd. [1979] 118 ITR 243 (SC) is still good law for other sections. He has drawn our attention to a decision of the Calcutta High Court in the case of Pilani Investment Corporation Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of dividends within India. The exclusion, therefore, of income by way of interest received from the Government or any Indian concern can only be of that income (by way of interest received from the Government or any Indian concern) which forms part of the total income computed for that year under the Income-tax Act. Such income from interest, therefore, must necessarily be the net income which forms part of the total income, after making permissible deductions. Exclusion has to be of that which originally formed a part of the total income. Mr. Dastur, learned counsel for the assessee, emphasised the words "interest received" in rule 1 (x) and said that these words would indicate gross interest received as in the Cloth Traders' case [1979] 118 ITR 243 (SC) and in the earlier decisions of the Bombay, Calcutta and Madras High Courts referred to above relating to the interpretation of sections 99(1)(iv) and 85A. In our view, such a phrase cannot be construed in isolation. As per Distributors (Baroda) Pvt. Ltd.'s case [1985] 155 ITR 120 (SC), the entire rule has to be construed as a whole in the context in which it occurs. The operative words which cover all exclusions under rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any interference. The High Court, therefore, was not required to pronounce upon this question. The High Court did, however, observe as follows (at p. 540) : "Clause (x) does not expressly provide for any scaling down of the interest earned. In CIT v. Jupiter General Insurance Co. [1975] 101 ITR 370, a Division Bench of this court considered clause (viii) of rule 1 of the First Schedule to the Super Profits Tax Act, 1963, where income by way of dividends from an Indian company is, inter alia, to be excluded for the purposes of computation of chargeable profits for the purposes of super profits tax. It was held by the Division Bench that the Tribunal had rightly taken the view in the said matter that it was the gross dividend received by the assessee-company that was required to be excluded and not the net dividend arrived at by excluding proportionate management expenses." These observations are obiter dicta. Secondly, these observations are in the light of an earlier decision of this court in Jupiter General Insurance Co.'s case [1975] 101 ITR 370. In that case, the court has merely followed the interpretation given to section 80M and other similar sections of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held that, in computing the taxable income for the purposes of the Income-tax Act, the deduction in respect of inter-corporate dividends should be allowed on the gross amount of such dividends received by the company and not with reference to the net amount . . . Since this decision ran counter to the legislative intent to grant such deduction with reference to the net income by way of dividends only, the Finance (No. 2) Act, 1980, inserted a new section 80AA in the Income-tax Act clarifying the intention with retrospective effect from April 1, 1968. In several cases, High Courts have held that, even for the purposes of determining chargeable profits under the Companies (Profits) Surtax Act, the gross amount of dividends should be excluded from the total income ... and, accordingly, the High Court rulings have resulted in giving an unintended benefit to companies in respect of dividends received by them from domestic companies." Hence, the Explanation was added to rule 1 of Schedule I. The insertion of the Explanation, therefore, does not help the assessee in any way. It was also submitted by Mr. Dastur that if one examines the various exclusions granted under rule 1, cla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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