TMI Blog2006 (4) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... cation on the part of the Assessing Officer 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 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 justification to brand dividend income in these cases as business income for purposes of section 80M or treat dividend as earned in the course of the business. My learned Brother and Hon'ble Vice President for his view has also relied upon the decision of Calcutta Bench of Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble deduction under the head Business are first to be considered. Only left out deduction can be considered under the head Other sources . Thus, the following propositions emerge: (i) That deduction u/s 80M is to be allowed on net dividend income computed as per provisions of sections 57 to 59 of the Income-tax Act. The deduction is not to be allowed on gross dividend receipt. (ii) That net dividend income is to be computed under the head Other sources after deduction of expenditure incurred for purposes of earning, making or realizing dividend income. (iii) The deduction to be allowed out of dividend income are as per specified provision of the statute. These cannot be allowed on general commercial considerations. (iv) That actual expenditure incurred are to be taken into consideration. There is no question of taking expenditure on estimate or presumption basis while computing dividend income or while allowing deduction u/s 80M of the Income-tax Act. (v) That where shares are acquired out of borrowed funds, on which dividend is received, deduction of interest paid can be allowed u/s 57, provided unloan was taken for making and earning dividend income. There is no question of deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80M as in the case of Mahavir Spinning Mills Ltd. [I.T. Appeal No. 26 (Chd.) of 1996] for assessment year 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 assessee was accepted by the President of Tribunal. The Special Bench is constituted mainly for deciding the common issue relating to computation of deduction under section 80M of the Income-tax Act, 1961. Three appeals have been filed by the assessee for assessment years 1994-95, 1995-96 and 1997-98. The appeal of the assessee for assessment year 1996-97 stands decided against the assessee by the Tribunal. There are cross appeals by the Revenue for the aforementioned assessment years. The Revenue has also filed an appeal for assessment year 1996-97. 2. We have heard the parties and perused the record. Since all the appeals (seven in number) were allotted to the Special Bench for disposal, we proceed to decide the same on all issues including the hotly contested issue relating to computation of deduction under section 80M. The main issue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 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. [1993] 203 ITR 857. Reliance was also placed on the following decisions in support of the contention:- (i) Usha Martin Industries Ltd. v. Dy. CIT [2003] 86 ITD 261 at page 273 (Cal.). (ii) East India Agencies (P.) Ltd. v. CIT [1991] 189 ITR 44 (Ker.). (iii) CIT v. Pfizer Corpn. [19931 202 ITR 115, 120 (Bom.). (iv) CIT v. Jai Hind Investment Industries (P.) Ltd. [1993] 202 ITR 316, 323 (Cal.). (v) CIT v. Mahendra Sobhagchand Shah [1993] 203 ITR 178 (Bom.). 4. After hearing of the appeals, the learned counsel filed a letter inviting our attention to the decision of Madhya Pradesh High Court in the case of State Bank of Indore v. CIT [2005] 275 ITR 23 to support the contention that the proportionate management expenses are not to be deducted for the purposes of computation of deduction under section 80M. 5. The learned Departmental Representative, Shri R.K. Goyal, on the other hand, contended that the issue has been decided in favour of the Revenue by the Tribunal for the assessment years 1990-91 to 1992-93 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. [1979] 119 ITR 664 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 computation of deduction under section 80M decided in favour of the Revenue. 7. The learned Departmental Representative also relied upon the decision of the Chandigarh Bench of the Tribunal in the case of Haryana State Co-operative Supply Marketing Federation [IT Appeal Nos. 681 to 683 (Chd.) of 2002] in support of the contention that deduction under Chapter VI-A is to be allowed after taking into account the proportionate management and other indivisible expenses. Reliance was also placed on the following decisions to support the contention that deduction of expenses on proportionate basis has been recognized by Supreme Court and various High Courts and the principle that deduction under section 80M is permissible in respect of net dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Madhya Pradesh High Court in the case of State Bank of Indore 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.'s case has not been considered. It was further contended that proportionate management expenses have got to be deducted under section 57 of the Income-tax Act, 1961. 10. In counter reply, the learned counsel for the assessee contended that the decision of Haryana State Co-operative Supply Marketing Federation's case 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 other sources. It was further contended that borrowed money has not been utilized for acquisition of share yielding dividend income. 11. We have given our careful consideration to the rival contentions and have also considered the earlier order of the Tribunal in the case of the assessee for assessment years 1990-91 to 1992-93 and order of the Tribunal in the case of Mahavir Spinning Mills Ltd. We first consider the main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 80M.- Where 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. 1-4-1998 in consequence of insertion of section 10(33) of the Income-tax Act, 1961 granting exemption in respect of dividend income. However, the said section was re-introduced from assessment year 2003-04 as the exemption in respect of dividend income was removed. Subsequently, it was again omitted by the Finance Act, 2003 w.e.f 1-4-2004 as the dividend income is now exempt in the hands of the shareholders. However, section 14A has been incorporated with retrospective effect to ensure that exemption under section 10(33) is granted only on the net co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 such a case is a particular quantum of income belonging to the specified category. Therefore, the words 'such income by way of dividends' must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words 'such income by way of dividends' must have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous 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' means the total amount of income referred to in section 5, computed in the manner laid down in this Act. 22. Section 14 of the Income-tax 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.- Capital Gains F.- Income from other sources Chapter VI deals with deductions out of gross total income. Some of the relevant provisions are as under:- Section 80A reads as under:- 80A.(1) In Computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 36; (ii) in the case of income of the nature referred to in clauses (x) and (24) 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) Notwithstanding anything to the contrary contained in section 57, the following amounts shall not be deductible in computing the income chargeable under the head 'Income from other sources' namely:- (a) in the case of any assessee, (i) any personal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 A 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 latter 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 sources are specifically provided under section 57 of the Act which has been quoted elsewhere in this order. Section 58 restricts the deductions in certain circumstances. Section 57(iii) is a general clause for admissibility of deduction in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 110 ITR 644, Their Lordships of Supreme Court at pages 652-53 have also held as under:- In CIT v. H.H. Maharani Vijaykuverba Saheb of Morvi [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. In view of the direct decision of this Court in Eastern Investments Ltd.'s case [1951] 20 ITR 1 (SC), it is not necessary for us to multiply authorities. Summarising, therefore, the facts of the present case, the position which emerges is as follows: (1) that a genuine and bona fide contract had been entered into between the assessee and the bank for transfer of large number of shares to the assessee. (2) that the assessee in pursuance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nected 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 income. The Hon'ble Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. v. CIT [1991] 191 ITR 641 has laid down the following principles for the purposes of deducting the expenses out of the income from other sources :- (i) It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 Raja Probhat Chandra Barua v. CIT 5 ITC I (PC), it was held that lax under the head Income from the sources' is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT [1959] 37 ITR 1 and CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86. In the case of Badridas Daga, Their Lordships of the Supreme Court held 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 Income-tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons will fall into place if we bear in mind a fundamental though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed . 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. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad bear a particular relevance to the nature of the income. The statute operates on the principle that it is the net income under each head which should be considered as a component of the total income. The statute permits specified deduction from gross receipts in order to compute the net income. The net income under the different heads is then pooled together to constitute 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. 46. In the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, 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 Cooperative Bank Ltd. v. CIT 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in CIT v. Chugandas Co. [1965] 55 ITR 17, 24, is also relevant. In this case, it was held as under:- The heads described in section 6 and further elaborated for the purpose of computation of income in sections 7 to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of income; the heads do not exhaustively delimit sources from which 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 Income-tax Act for computation of income. 48. In the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 at page 275 (SC), it was held as under:- The Appellate Tribunal had found as a fact on material on p 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 the businesses were intertwined and interlaced; and, therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otwithstanding the fact that it has got to be computed under the head Income from other sources . 52. On the analysis of above decisions, following principles of law emerge:- (i) That deduction under section 80M is permissible on the 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 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 divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred by the assessee for the purposes of business between receipts of business and dividend received on investment unconnected with the business of the assessee. This view that the proportionate management expenses are not to be deducted in computation of such dividend income for the purpose of deduction under section 80M is supported by various Authorities, some of which may be mentioned hereunder to complete the record as it is not necessary to elaborately refer to such cases in support of this view. (vi) CIT v. Central Bank of India [2003] 264 ITR 522 (Bom.) (vii) Shaw Wallace Co. Ltd. v. Dy. CIT [2002] 80 ITD 156 (Cal.) (viii) CIT v. United Collieries Ltd. [1993] 203 ITR 857 (Cal.) (ix) State Bank of Indore v. CIT [2005] 275 ITR 232 (MP) (x) Usha Martin Industries Ltd. v. Dy. CIT [2003] 86 ITD 261 at page 273 (Kol.) (xi) East India Agencies (P.) Ltd v. CIT [1991] 189 ITR 443 (Ker.) (xii) CIT v. Pfizer Corpn. [1993] 202 ITR 115, 120 (Bom.) (xiii) CIT v. Jai Hind Investment Industries (P.) Ltd. [1993] 202 ITR 316, 323 (Cal.) (xiv) CIT v. Mahendra Sobhagchand Shah [1993] 203 ITR 178 (Bom.) 55. Reference may also be usefully made to some of the other decisions:- 56. Their Lordship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ips of Kerala High Court in the case of East India Agencies (Pvt.) Ltd. v. CIT [1991] 189 ITR 44 have followed decision of Madras High Court in the course of South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469 wherein it was observed as under:- On a reference to the Madras High Court under section 256(1) of the Income-tax Act, 1961, it was held that the income assessed was the 'interest income' and the expenditure allowed was not incurred 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 Income-tax Officer 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 actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of one or the other source of receipts. It is in this type of cases that the principle of proportionality is applicable. The principle of apportionment of proportionate expenses for computation of deduction under section 80M has been approved by the Supreme Court in the case of CIT v. United General Trust Ltd. [1993] 200 ITR 488. In this case, Hon'ble Supreme Court had reversed the decision of the Bombay High Court. It would, therefore, be useful to refer to the decision of the Bombay High Court in the case of CIT v. United General Trust (P.) Ltd. [1979] 119 ITR 664 which has been reversed by the Supreme Court in the case of United General Trust Ltd. In this case, the following question of law was raised by the Revenue before the Bombay High Court:- Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was justified in applying the decision of the Bombay High Court in the case of New Great Insurance Co. Ltd. [1973] 90 ITR 348 to the assessment year in question without considering the effect of the amendment operative from 1-4-1968, and in thus holding that the assessee would be entitled to the deduction under section 80M on the gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We may clarify that the assessment years concerned herein are 1970-71, 1971-72 and 1972-73. 64. As a result of the decision of the Supreme Court, the question of law sought by the Revenue as to whether the assessee would be entitled to deduction under section 80M on the gross dividend before deduction of the proportionate management expenses, was answered in favour of the Revenue. Their Lordships of the Supreme Court have referred to its own decision in the case of United General Trust Ltd. and the provisions of section 80AA introduced by the Finance (No. 2) Act, 1980 w.e.f. 1-4-1968 to support the answer in favour of the Revenue. The Hon'ble Supreme Court having answered the question raised by the Revenue in favour of the Revenue, its esteemed opinion is binding upon any authorities 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 divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, seeds, livestock and other articles intended for agriculture for the purpose of supplying them to its members as well as to non-members. For the assessment years 1964-65, 1965-66 and 1966-67 the appellant claimed exemption from Income-tax under section 81(i)(d) of the Income-tax Act, 1961, on the gross profits and gains of the business with its members. But the Income-tax Officer granted relief only on the net amount as was includible in the computation of its total income under section 110, since the income exempted under section 81(i)(d) was to be included in its total income as required by section 66. For the first two years, the Appellate Tribunal accepted the claim of the appellant but for the third year the Tribunal rejected the claim and upheld the Income-tax Officer's order. On reference, the High Court 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim of the assessee was rejected by the Hon'ble High Court. 71. In the case of Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CIT [1998] 232 ITR 718 Their Lordships of the Himachal Pradesh High Court held that proportionate expenses were to be deducted from computation of income qualifying for deduction under section 80P(2)(a)(iii) of the Act. 72. In the case of Shekhavati General Traders Ltd. v. CIT [1987] 167 ITR 116, Their Lordships of Rajasthan High Court held that relief in respect of dividends received from a domestic company was available only with respect to net amount of dividend after deducting proportionate expenses. 73. In the case of CIT v. Chemical Holdings Ltd. [2001] 249 ITR 540, Their Lordships of Madras High Court held as under:- The computation insofar as dividends are concerned is to be made under section 57. Section 57, clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature has been incurred by the assessee for earning the dividend income. If this contention were to be accepted and the income computed under sections 56 to 59 then the gross dividend income received by the assessee would be liable to tax without any other deduction for the expenses incurred. However, it is not so insofar as it is well established principle of law that the tax is on real income. The assessee in fact, has incurred expenses for earning the business income. If the receipts of the business are by way of dividends, the expenditure incurred by the assessee in earning such income by way of carrying on the business activities shall have to be taken into account for determining the net income which is chargeable to tax notwithstanding the fact that such expenditure is not covered under sections 57 to 59 of the Act. In this case, the interest and dividend receipts of the assessee are from activities of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quences, insofar as the two decisions of the Hon'ble Supreme Court, one in the case of United General Trust Ltd. and another in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. relate to deductions/rebate out of the income included in the gross total income. The decisions cited on behalf of the assessee have been considered by us. Most of the decisions relate to the dividend earned on pure investments unrelated to business of the assessee. Some of the High Court decisions may appear contrary to the decisions of the Supreme Court referred to above. In none of the decisions cited before us, the aforesaid decisions of the Supreme Court have been considered. We hardly need to mention that if there is a conflict between the decision of the High Court and that of the Supreme Court, the decision of the Supreme Court will 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. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the collaborators/Promoters with the corporation. (d) As per financial collaboration agreements the collaborators have to buy-back the shares at the end of specified period at the highest market price quoted on recognized stock exchange(s) or the book value along with the simple interest at the lending rate at which the financial institutions/banks have provided long-term finance to the company, whichever is higher. However, the terms of standard Financial Collaboration Agreement have been amended w.e.f. 18-10-1996 which provide for buy-back of the Corporation's investments at the highest price quoted on the Stock Exchanges 3 months prior to the date of option or with interest at the rate of which the Corporation provides term loans to the loanees, compounded half yearly, whichever is higher. Hence no provision for depreciation in the value of investment has been made as per the guidelines provided in terms of IDBI circular dated 26-4-1994, 23-6-1994 and 8-5-1996 and 19-2-1997. (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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax (Appeals), relevant portion of which has been extracted by us extensively in para 16 to bring the whole controversy into close focus. Earlier deduction admissible in the intercorporate dividend was to be calculated with respect to the gross amount of dividend received by a domestic company from an Indian Company and not with respect to the dividend income as computed in accordance with the provisions of the Act i.e. after making deduction provided under the Act as per the decision of the Hon'ble Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. In order to get over the difficult caused by the decision in the case of Cloth Traders (P.) Ltd., the Finance (No. 2) Act, 1980 instead of new section being section 80AA to provide that deduction under section 80M in respect of inter-corporate dividend will be calculated with respect to the dividend income as computed in accordance with the provisions of the Income-tax 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 1-4-1968. The decision in the case of Cloth Traders (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elp to the assessee because in that judgment, it is specifically held that deduction under section 80M is allowable only on the net dividend after taking into account the expenditure, if any, incurred for the purpose of earning such dividend. The contention of the learned counsel for the assessee that in the case of the assessee-corporation, gross dividend income was the net dividend income, cannot be accepted on its fact value because it cannot be presumed that no expenditure whatsoever was incurred for the purpose of earning a huge dividend income of Rs. 2,21,77,240. In the present case, admittedly in the profit and loss account, the assessee had claimed an expenditure of Rs. 6,88,13,469 against the total income of Rs. 10,45,23,890. This comes to about 60 per cent of the total income. In this view of the matter, we are of the opinion that the learned 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 Commissioner of Income-tax (Appeals) in this regard and dismiss the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head Capital gains and for the purpose of deduction under section 80M, the dividend income earned by the assessee has been held to be incidental to the carrying on the activities of business by the assessee. It is, however, not so. The assessee has made investment in the course of business by purchasing shares of the companies promoted by it. The investment in purchase of shares though for the purpose of business, is a capital investment as the assessee is not dealing in shares. Therefore, when the shares are held for more than the specified period, the profit derived on sale of such shares has been held to be assessable under the head 'Capital gains'. However, the dividend earned on investment made in the course of business, has been held to be from the source of business as the yield of investment would be on revenue account and not necessarily on capital account. This 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 36(1)(viii). The Assessing Officer had computed the deduction under section 80M first determining the net dividend income after apportionment of expenses and further reducing the same by deduction claimed and allowed to the assessee under section 36(1)(viii). The Commissioner of Income-tax (Appeals) has upheld the view of the Assessing Officer that the net dividend computed has got to be further reduced by deduction allowed under section 36(1)(viii) for the purpose of computation of the amount on each deduction under section 80M is to be calculated. 93. It has been agreed by the parties before us that the issue is covered in favour of the Revenue by the decision of the Tribunal in assessee's own cases in Income-tax Appeal Nos. 1333/Chandi./94, 944 1591/Chandi./95 for assessment years 1990-91 to 1992-93. The operative portion of the order in para 15.5 is reproduced hereunder:- Thus, as per combined reading of sections 80AA and 80M of the Income-tax Act, the deduction under section 80M would be admissible with reference to the amount of dividend income computed after allowing deduction under section 36(1)(viii) of the Income-tax Act. The counsel of the appellant has mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Act was held to be allowable deduction under section 80M needed reconsideration under the provisions of section 80AA of the Income-tax Act which does not appear to have been carried on. Thus there is no finding of any appellate authority at any stage that deduction under section 80M is permissible with reference to dividend in one p before allowing deduction under section 36(1)(viii) of the Income-tax Act irrespective of the fact that the deduction under section 36(1)(viii) @40 per cent is being allowed from the said dividend income. By claiming deduction under section 36(1)(viii) from the dividend income and again claiming deduction under section 80M of the Income-tax Act with reference to the dividend income before deducting allowance under section 36(1)(viii) @60 per cent, the appellant is in fact claiming 100 per cent exemption in respect of dividend income which is not permissible under any provisions of the Income-tax Act. From the discussion and reference to the assessment record, it is evident that the finding of the Income-tax Appellate Tribunal is regarding allowing deduction under section 36(1)(viii) of the Income-tax Act out of dividend income also irrespective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the net dividend income for purpose of deduction under section 80M. There is no scope for estimating any expenditure under section 57, and the expenditure ordered to be deducted do not fall under section 57. Assessment year 1997-98 2. That the learned Commissioner of Income-tax (Appeals) was further not justified in holding that an amount of Rs. 3 lakhs on estimate be deducted from dividend income to allow deduction under section 80M. The gross dividend received by the assessee is the net dividend income as no expenses as provided under section 57 have been incurred to earn the dividend. 98. The abovementioned grounds of appeal relate to computation of deduction under section 80M. The Commissioner of Income-tax (Appeals) has estimated the expenses attributable to the earning of dividend income at Rs. 2 lakhs for assessment year 1995-96 and Rs. 3 lakhs for assessment year 1997-98. There are cross grounds of appeal raised by the Revenue in regard to d computation of deduction under section 80M. Such grounds are ground No. 2 in assessment year 1994-95, ground No. 3 in assessment year 1995-96 and ground No. 5 in assessment year 1997-98. For assessment year 1996-97, the Revenue has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax (Appeals) and those of the Assessing Officer for the respective assessment years are modified accordingly. There is no other ground of appeal in the appeals of the assessee. 100. Now we deal with the remaining grounds of appeal of the Revenue. Ground No. 1 in assessment year 1994-95, ground No. I in assessment year 1995-96, ground No. 2 in assessment year 1996-97 and ground No. 2 in assessment year 1997-98 relate to deduction on account of project survey expenses. These grounds of appeal are reproduced hereunder for the sake of ready reference:- Assessment year 1994-95 1. On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in deleting the addition of Rs. 2,03,574 made on account of project survey expenses. Assessment year 1995-96 1. On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals), Chandigarh has erred in deleting the addition of Rs. 9,23,404 rightly made by the Assessing Officer treating it as capital expenditure. Assessment year 1996-97 2. Learned Commissioner of Income-tax (Appeals) erred in deleting the addition of Rs. 5,22,435 made on account of project survey expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred by the assessee in the assessment under consideration is a revenue expenditure or a capital expenditure. The learned first appellate authority has held it to be revenue expenditure and that decision is in accordance with the ratio of the decision of the Karnataka High Court referred to supra. However, the learned first appellate authority has sustained the addition to the extent of Rs. 7,47,078 on the ground that the assessee had not accounted for the valuation of these project/feasibility reports in the closing stock as according to her the assessee itself had pleaded that the project/feasibility reports generated by the assessee were stock-in-trade. The Hon'ble Supreme Court in the case of Kedar Nath Jute Mfg. Co. v. CIT [1971] 82 ITR 363 has held that 'whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might taken of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter'. Therefore, merely because the assessee had pleaded that the preparation of project reports/feasibility reports would resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) in appeal No. 538/P/98-99 has erred in deleting the addition of Rs. 3,52,52,583 made on account of business income from sale of shares, by holding that the income arising on the sale of shares is to be assessed under the head 'Capital gains' and not Business income'. Assessment year 1997-98 1. On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals), Chandigarh in appeal No. 427/P/99-2000 has erred in deleting the addition of Rs. 14,55,55,035 which was made by treating the profit on sale of investment as business income as against long-term capital gain of Rs. 7,08,03,637 shown by the assessee. 103. This issue is also covered in favour of the assessee by the order of Tribunal for assessment years 1990-91 to 1992-93. The operative portion is in para 11 of the order which is hereby adopted and reproduced hereunder:- 11. We have carefully considered the rival submissions and have gone through the orders of the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals). As per the Industrial policy of the Punjab Government, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the expenditure as capital expenditure. The Commissioner of Income-tax (Appeals) 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 opportunities of business in Punjab heard by C.M. of Punjab. 73,217.00 (ii) Meeting of Senior Executives of Financial Institutions along with Chief Minister DCMD to promote the industry in Punjab 6,903.08 (iii) Meeting of COMPANY and other Officers with Ambassadors of Latin American Countries to Promote Trade Co-operation between their countries and the State of Punjab. 5,258.00 (iv) Air ticket of C.M. and other Officers for meeting with Investors in Bombay 76,940.00 (v) Printing of new diaries 90,620.00 (vi) National Seminal Dynamics of Rural Transformation in India, held at Punjab University on developmental topics. 10,000.00 (vii) PSIDC share towards Hall reserved for DI for Display of products in Exhibition Literature in a trade show by CII on Good Health held at Udyog Sahayak, Chandigarh 35,313.00 (viii) Paid to M/s. Hindustan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner of Income-tax (Appeals) 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 Commissioner of Income-tax (Appeals) has also relied upon the decision of the Supreme Court in the case of Sassoon J. David Co. (P.) Ltd. v. CIT [1979] 1 18 ITR 261 and that of the Bombay High Court in the case of CIT v. Sales Magnesite (P.) Ltd. [1995] 214 ITR 1 to arrive at the conclusion. 111. In our considered view, there is no infirmity in the order of the Commissioner of Income-tax (Appeals) insofar as the expenditure has been incurred by the assessee for furtherance of its objective of industrialization of the State of Punjab. The Assessing Officer had wrongly treated this expenditure of capital nature. We accordingly decline to interfere. 112. Ground No. 4 in the appeal of the Revenue for assessment year 1997-98 reads as under:- 4. Learned Commissioner of Income-tax (Appeals) has erred in deleting the disallowance of Rs. 1,59,312 made on account of staff welfare expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 V.P. had strong views about his approach in the case. Bu t 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 the matter. 2. Accordingly a fresh hearing was granted to the parties on 6-3-2006 and certain doubts were got clarified from learned representatives of the parties. The matter was again discussed. However no consensus could be reached and accordingly my brother Shri Bakshi, the Hon'ble V.P. has sent a signed proposed order for consideration of other Members. 3. I have very carefully gone throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 [1991] 191 ITR 641 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 earning the income and were not deductible. 8. The learned Vice President thereafter quotes the following from decision of Hon'ble Supreme Court in the case of Seth R. Dalmia v. CIT [1977] 110 ITR 644 as under: ... 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Appellate 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 lethal finding regarding the nexus was a finding of fact. The Tribunal was correct in holding that the entire expenditure incurred by the assessee was deductible under the provisions of section 57(iii). In the above case, Their Lordships of Hon'ble Madras High Court distinguished decision of Hon'ble Supreme Court in Vijaya Laxmi Sugar Mills Ltd.'s case by observing that in the case before them, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct is to be charged to tax. 15. The learned Vice President has referred to the cases of Raja Probhat Chandra Barua v. CIT 5 ITC 1 (PC) and CIT v. Raja Sri Sri Kalyani Prasad Deo [1945) 13 ITR 17 (Pat). In the first case of Raja Probhat Chandra Barua Their Lordships of Privy Council observed as under: At page 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 zamindari, 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 assessed in respect of the non-agricultural income derived from the coal fields which are situated within his zamindari. The assessee is, therefore, entitled to claim a deduction for the jama which should be ascertained as paid by him for the lands in his zamindari which produced him the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 [1985] 155 ITR 120. 20. 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 unable to agree that in some cases, the earning of dividend may be in the course of carrying on the business or may be incidental to business. 21. In my humble opinion, shares may be held by an assessee as a capital investment or as stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal 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 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. 20. After careful consideration, I accept principle (i) above but am unable to subscribe to the princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1993] 202 ITR 316, 323 (Cal.), (ix) CIT v. Mahendra Sobhagchand Shah [1993] 203 ITR 178 (Bom.). 22. 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. 23. It has been observed that as per decision of Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10, 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 Income-tax Act and above expenses can also be taken into account while computing deduction under section 80M of the Income-tax Act. I am unable to subscribe to the above view. 24. In the case of Badridas Daga, the question of law referred to the Court was as under: Whether the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n shares and thus carry business in 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. 27. 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. [1993] 200 ITR 488. 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 Income-tax 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 expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities. The portion of the referred question underlined by my learned Brother is consequential. The 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. A reference to aforesaid decision would be made a little later. 29. 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 [1993] 203 ITR 1027 for the proposition that expenses can be apportioned in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Brother Hon'ble Vice President also referred to and relied upon the decision of Hon'ble Madras High Court in the case of CIT v. Chemical Holdings Ltd. [2001] 249 ITR 540. 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 Income-tax 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 case. Their Lordships ultimately observed as under: Counsel for the assessee points out that from the order of the Assessing Officer and of the Commissioner, it is not clear as to whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its business. The securities constitute its trading assets and income from them would, in the commercial sense, be regarded as business income. However, for the purposes 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 [1957] 32 ITR 688, 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 and Co. [1965] 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. 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd income, the deduction of expenditure was allowed. There has to be nexus between expenditure and income to claim deduction although such nexus may not be direct. I have already considered decision of Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. 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 where as 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 , not under the head Business . No provision authorizes re-computation of dividend income for purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associations of persons or partners of firms and members of associations individually, and business, profession or vocation is not a unit of assessment. When, therefore, section 25(3) enacts that tax was charged at any time on any business, it is intended 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 been titled 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors (Baroda)(P.) Ltd. v. Union of India [1985] 155 ITR 120 (SC), does clinch the matter. In the said case, the issue was as to how and on what amount deduction under section 80M is to be allowed. The question was raised in a Writ 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 [1979] 118 ITR 243. Their Lordships 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. 40. In reaching above conclusion, Their Lordships set out the history of legislation preceding enactment of section 80M. Their Lordships considered various decisions on section 99 of the Income-tax Act as also on section 85A of Income-tax Act. Thereafter, the Hon'ble Court proceeded to consider section 80M of Income-tax Act which is reproduced at page 132 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted in accordance with the provisions of the Act except section 80E and since in this case it is income from business, the same will have to be computed in accordance with sections 30 to 43A which would include section 32(2) (which provides for carry forward of depreciation) and section 33(2) (which provides for carry forward of development rebate for eight years). In other words, in computing 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 subsection (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44, Their Lordships of Kerala High Court have followed the decision of Madras High Court in the case of South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469, wherein it was observed as under: On a reference to the Madras High Court under section 256(1) of the Income-tax Act, 1961, it was held that the income assessed was the 'interest income' and the expenditure allowed was not incurred 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 Income-tax Officer 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 Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by section 20(1) are estimated proportionate expenses and interest. Therefore, one cannot import deductions from interest on securities in the case of a banking company under section 20(1) into the deductions contemplated by section 80M. In the case of CIT v. United Collieries Ltd. [1993] 203 ITR 857 the Calcutta High Court has held that the special deduction under section 80M is allowable on the net dividend which is arrived at after taking into account actual expenditure incurred by the assessee in earning the 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. 46. In the case of Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the gross dividend income. There is no scope for any estimate of expenditure being made and no notional expenditure can be allocated also for the purpose of earning income unless the facts of a particular case warrant such allocation. In that new of the matter, we are of the view that only the actual expenses should be taken into account in reducing the dividend income and not any notional expenditure as has been done in the instant case.' In our opinion, the view that we have taken is not in conflict with the decision of the Supreme Court in Distributors (Baroda)(P.) Ltd.'s case [1985] 155 ITR 120. 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 p consideration the actual expenditure incurred by the assessee while earning the dividend, but have only proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stification to deduct expenses on estimate basis or in proportion of the receipts shown by the assessee from various sources. The Assessing Officer has to make deduction of Actual expenses or of such expenses which could be held to have been incurred by the assessee and deductible from the dividend income under the head 'Other sources'. In the light of above discussion, I am inclined to hold that there is no justification on the part of the Assessing Officer in making a proportionate deduction of expenses. The Assessing Officer 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 Assessing Officer to deduct proportionate expenses. 48. 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, one has to determine first the business income of a dealer in shares in accordance with provisions of the Act. If interest has been paid for acquiring shares which are stock in trade and on which dividend is also received, the interest is liable to be deducted under section 36(1)(iii) of the Income-tax Act and not under section 57 of the Income-tax Act. The reason being that income of a source is required to be computed under the residuary head i.e. Other sources if it is not classified-for computation under any other heads mentioned in section 14 of the Income-tax Act. Therefore, one has first to proceed to compute the income under the head Business and see what are the deductions permissible under the said head. If interest paid on borrowed funds for acquiring shares, satisfy 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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