2004 (10) TMI 47 - HC - Income Tax

Deduction under section 80M dividend income - The assessee also in addition to their banking business derives income from dividend i.e. income from other sources as defined under section 56 Since in this case the taxing authorities have not taken into consideration the actual expenditure incurred by the assessee while earning the dividend but have only proceeded to take notional expenditure the same cannot be held to be sustainable in law. - Tribunal was not right in confirming the order of the lower authorities and was further not right in holding that the expenditure at 10 paise per Rs. 100 of dividend income be taken for deduction under section 80M

Summary

Issues:
Interpretation of section 80M for deduction of expenditure on dividend income.

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the deduction under section 80M for expenditure on dividend income earned by a bank. The question was whether the expenditure at 10 paise per Rs. 100 of dividend income should be taken for deduction under section 80M. The assessee claimed a deduction at the rate of 60% of gross dividend income, which was disputed by the taxing authorities. The Assessing Officer allowed deduction after considering interest payable and proportionate expenditure. The Commissioner of Income-tax (Appeals) restricted the deduction on account of collection to 10 paise per Rs. 100 of dividend income. The Tribunal upheld this finding, leading to a reference to the High Court.

The main contention was whether notional or actual expenditure should be considered for deduction under section 80M. The assessee argued that only actual expenditure should be deducted, not hypothetical or notional expenditure. They relied on previous court decisions to support their claim. On the other hand, the Revenue contended that the issue was settled by a Supreme Court decision and favored their stance.

The High Court analyzed the legal history and interpretation of section 80M, particularly in light of the Supreme Court case of Distributors (Baroda). The Supreme Court had clarified that the deduction under section 80M should be based on the amount of dividend computed according to the provisions of the Act, not the full amount received. The High Court emphasized that only actual expenses should be considered for reducing dividend income, not notional expenditure unless proven otherwise.

The High Court concluded that the taxing authorities had not considered the actual expenditure incurred by the assessee, relying instead on notional expenditure, which was deemed unsustainable in law. They held that the view taken was not in line with the Supreme Court's decision and the consistent stance of the Calcutta High Court. Therefore, the High Court ruled in favor of the assessee, stating that the Tribunal was wrong in confirming the lower authorities' order and in allowing the 10 paise per Rs. 100 of dividend income as expenditure for deduction under section 80M.

In summary, the judgment clarified the proper interpretation of section 80M, emphasizing the need for actual expenditure to be considered for deduction on dividend income. The decision was based on legal precedents and the legislative intent behind the relevant provisions of the Income-tax Act.