2003 (4) TMI 49 - HC - Income Tax

Claim for relief under section 80M on the dividends - gross dividend or net dividend Held that deduction under section 80M has to be calculated with reference to the amount of interest computed in accordance with the provisions of the Act after deducting interest on monies borrowed for earning such income and not with reference to the full amount of dividend received by the assessee - Whether the Department was entitled to import the rule of proportionate expenditure and interest contemplated by section 20 of the Act as it then stood into section 80M of the Act ? - Our answer to this question is in favour of the assessee-bank and against the Department

Summary

Issues: Determination of deduction under section 80M based on gross dividend or net dividend; Importing the rule of proportionate expenditure and interest from section 20 into section 80M.

Analysis:
The case involved a dispute regarding the deduction under section 80M of the Income-tax Act, 1961, concerning the assessment year 1970-71. The assessee, a bank, claimed relief under section 80M on dividends, but the Income-tax Officer calculated the eligible amount for relief by deducting a significant portion of the dividend income. The Commissioner of Income-tax (Appeals) and the Tribunal supported the assessee's position, directing the Income-tax Officer to allow the deduction on the full amount of dividends received. The Department challenged this decision through a reference to the High Court.

The first issue was whether the assessee was entitled to deduction under section 80M based on gross dividend or net dividend. The High Court clarified that the deduction under section 80M is based on net dividend received, as established in previous judgments. The court referenced the case law to support the Department's position that the deduction should be calculated after deducting interest on borrowed funds, not on the full dividend amount.

The second issue revolved around whether the Department could apply the rule of proportionate expenditure and interest from section 20 to section 80M. The High Court ruled in favor of the assessee, emphasizing the distinction between the deductions allowed under section 20 for banking companies and those under section 80M for intercorporate dividends. The court highlighted that section 80M allows deductions based on actual expenditure incurred, unlike the estimated proportionate expenses and interest under section 20. Citing relevant case law, the court concluded that section 80M should be applied to the net dividend after considering actual expenses, rejecting the notion of importing the rule of proportionality from section 20.

In conclusion, the High Court decided in favor of the assessee on the issue of applying the rule of proportionate expenditure and interest from section 20 to section 80M, emphasizing the need to consider actual expenditure for calculating deductions under section 80M. The reference was disposed of with no order as to costs.