TMI Blog1998 (3) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... income from other sources. It is impossible to believe that no expenditure was incurred by the assessee for earning this income. Therefore, expenditure so incurred is estimated at Rs. 27,98,979 i.e. 5% of the dividend income. The dividend income being Rs. 5,59,79,586 the disallowance works out to Rs. 27,98,979." On a perusal of the said assessment order, the CIT felt that the Assessing Officer had erred in framing the assessment inasmuch as the expenditure on account of interest amounting to Rs. 3.56 crores should have been reduced from the gross dividend in order to arrive at the correct deduction under section 80M. The Commissioner accordingly issued a show cause notice on July 19, 1995 under section 263 of the Income-tax Act proposing to revise the assessment and calling upon the assessee to show cause against such proposal. The assessee filed his representation on August 4, 1995 stating that the Assessing Officer had duly considered the matter and for the purposes of allowing deduction under section 80M an amount of Rs. 27,98,979 had already been deducted from the total dividend income on account-of expenditure incur-red by the assessee for earning the dividend income. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n deducted for computing the net dividend income for purposes of section 80M. Ld. counsel further stated that the essential conditions for invoking the provisions of section 263 were not fulfilled and therefore the order of the Commissioner was liable to be quashed. In support of his contentions, he placed reliance on the decisions of Madras High Court in the case of Venkatakrishna Rice Co. v. CIT[1987] 163 ITR 129/30 Taxman 528, and Bombay High Court in the case of CIT v. Gabriel India Ltd, [1993] 203 ITR 108. 4. Ld. counsel made strong grievance of the fact that the ld. Commissioner has unjustifiably and unfairly proceeded to cancel the entire assessment on the sole ground of excessive deduction allowed by the Assessing Officer under section 80M. It is argued that the action of the Commissioner was contrary to the principles of natural justice and was vitiated on facts and law. 5. The ld. counsel dealing with the factual merits of deduction under section 80M argued that the interest aggregating Rs. 3.56 crores claimed under the head "expenses' during the year was not attributable to the purchase of units and therefore no portion of the said interest was liable to be deducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on wholesalers deposits 2775568.00 ------------------ 35633499.05 ------------------- Regarding item No. 1 it was submitted that the sum of Rs. 1,09,64,026.46 represents interest paid to various banks on hundies raised for payment to the suppliers for supply of various items of raw-materials, packing materials etc. It is stated that payment against hundies are made by the banks directly to the suppliers and in any case the same not can be related to the investments made by the company for earning dividend from units. Regarding item No. 2 it is stated that the sum of Rs. 37,77,844 represents interest paid to various banks on day-to-day overdrafts for working capital requirements of the company. Regarding item No. 3, it is submitted that term loans have been taken from three banks, namely, American Express Bank, Bank of America and Grindlays Bank during the year by the company and the aggregate amount of interest paid on these loans works out to Rs. 1,50,60,691. With regard to packing credit, ie. item No. 4, it is stated that the sum of Rs. 6,19,151 represents interest paid to Bank of America on export packing credit obtained from them on 10-1-1991. This packing credit was ut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same master collection account for purchase of units, no part of the expenditure on account of interest is to be deducted from the dividend income and the entire interest expenditure would be liable for deduction as business expenditure, argued the ld. counsel. Reliance has been placed on the following decisions in support of the above contention: (i) CIT v. National Grindlays Bank Ltd [1993] 202 ITR 559 (Cal.), (ii) CIT v. Cotton Fabrics Ltd. [1981] 131 ITR 99/6 Taxman 231 (Guj.), (iii) CIT v. Anniversary Investments Agencies Ltd [1989] 175 ITR 199 [1988] 41 Taxman 101 (Cal.), and (iv) CIT v. National Grindlays Bank Ltd [1984] 145 ITR 457 [1983] 13 Taxman 420 (Cal.). 8. With out prejudice to his contentions aforesaid, the ld. counsel took up the alternative plea before us that the purchases of units made on May 30, 1990 and May 31, 1990 for an aggregate sum of Rs. 29 crores may be attributed to the loans aggregating Rs. 28.38 crores, taken from three banks as under : Name of bank Date of disbursement Amount of Loan Rs. Bank of America 30-5-90 90,000,000 American Express 30-5-90 50,000,000 30-5-90 59,400,000 31-5-90 40,000,000 Grindlays Bank 31-5- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oportionate allocation of interest to be allowed as deduction under section 36(1)(iii) and under section 57(iii). According to the ld. D.R., units have been purchased as a short-term investment and dividend income derived therefrom is liable to be assessed under the head 'other sources'. He argued that rational allocation of interest for the purposes of deduction of income under the two heads, namely, 'business income' and other sources' is a valid proposition endorsed by the Gujarat High Court in the case of H.K. Investment Co. (P.) Ltd. v. CIT [1994] 211 ITR 511. Further reliance has been placed by the ld. D.R. on the following decisions: (i) CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), (ii) Phaltan Sugar Works Ltd. v. CIT [1995] 216 ITR 479 (Bom.), (iii) Bagsu Devi Bafna v. CIT [1966] 62 ITR 506 (Cal.), (iv) CIT v. Panna Devi Saraogi [1970] 78 ITR 728 (Cal.), (v) Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC), (vi) Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312 (Guj.), (vii) Swarup Vegetable Products Industries Ltd (No.1) v. CIT [1991] 187 ITR 412/54 Taxman 175 (All.), and (viii) V.I.P. Industries Ltd. v. IAC (1991] 187 ITR 639/54 Taxman 577(Bom.). C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es relating to deduction under section 80M is erroneous and prejudicial to the interest of the revenue. In our opinion, the assumption of jurisdiction under section 263 in the instant case is fully justified. 13. The next contention of the ld. counsel for the assessee against the action of the Commissioner in setting aside the whole of the assessment order on the isolated ground of erroneous deduction under section 80M is however in our opinion, well-founded. The mere fact that the AO failed to compute deduction under section 80M in accordance with facts and law would not by itself justify the action of the Commissioner in setting aside the whole of the assessment order. Such a wholesale cancellation of the assessment with the direction to make a fresh assessment is called for only in cases where there is something totally or basically wrong with the assessment which is not capable of being remedied by amendment to the assessment order itself. Where the Commissioner comes to the conclusion that there is a defect in the assessment order in so far as deduction under section 80M has not been correctly arrived at, all that the Commissioner has to do is to direct the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 80M is therefore to be allowed with reference to the net dividend income as per the express provisions of section 80AA. The contention of the ld. counsel for the assessee for claiming deduction with reference to gross dividend is, therefore, rejected. 15. Now coming to the quantum of deduction on account of interest incurred on purchase of units, the facts regarding the purchase of units as well as details of interest amounting to Rs. 3.56 crores have already been indicated earlier. The ld. counsel for the assessee urged that since a master collection a/c has been maintained incorporating therein all receipts, including profits as well as the borrowed funds, payments made from this fund for purchase of units should be treated as paid out of profits and not out of borrowings. We have given our thoughtful consideration to the rival submissions on this aspect of the matter. In so far as the case made out on behalf of the department is concerned, we are convinced that it is not correct to attribute the entire amount of interest of Rs. 3.56 crores as pertaining to the purchase of units by the assessee. On going through the details of interest at page 12 of the paper-book, we find t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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