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2002 (8) TMI 85 - HC - Income Tax1. Whether on the facts and in the circumstances of the case the Tribunal was correct in law in confirming the order of the Commissioner of Income-tax (Appeals) thereby directing the Income-tax Officer to adjust the deduction under section 80K/80M of the Income-tax Act 1961 against the dividend income before arriving at the gross total income of the assessee? - 2. Whether on the facts and in the circumstances of the case the directions of the Tribunal are not against the specific provisions of section 80A of the Income-tax Act? - both the questions are answered in the negative i.e. in favour of the Revenue and against the assessee.
Issues Involved:
1. Adjustment of deductions under sections 80K/80M against dividend income before arriving at the gross total income. 2. Whether the Tribunal's directions contradict section 80A of the Income-tax Act. Issue-wise Detailed Analysis: 1. Adjustment of Deductions under Sections 80K/80M Against Dividend Income: The Tribunal confirmed the Commissioner of Income-tax (Appeals)'s order directing the Income-tax Officer to adjust the deductions under sections 80K/80M against the dividend income before arriving at the gross total income of the assessee. The assessee had returned its income at a loss of Rs. 23,612, which included deductions under sections 80K and 80M. The Assessing Officer assessed the income as Nil, not granting the benefit of deductions under these sections, thus denying the right to carry forward the business loss. The Commissioner of Income-tax (Appeals) allowed the assessee's claim, stating that the Income-tax Officer erred in not allowing full deductions under sections 80K and 80M out of the dividend income and then taking the balance dividend income for setting off against the business loss. The Tribunal upheld this decision, stating that section 80AA was not attracted. However, the court referred to the Supreme Court's decision in Distributors (Baroda) Pvt. Ltd. v. Union of India [1985] 155 ITR 120, which held that the deduction under section 80M must be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income, not the full amount of dividend received by the assessee. This decision overruled Cloth Traders P. Ltd. v. Addl. CIT [1979] 118 ITR 243 (SC), which the Tribunal and the Commissioner had relied upon. The court reiterated this view, citing subsequent Supreme Court decisions in CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. [1997] 224 ITR 604 and Motilal Pesticides (I) Pvt. Ltd. v. CIT [2000] 243 ITR 26, which confirmed that deductions are to be allowed on net income, not gross income. 2. Tribunal's Directions and Section 80A: The court noted that the Commissioner of Income-tax (Appeals) and the Tribunal overlooked the definition of "gross total income" as per section 80B(5), which means the total income computed in accordance with the provisions of the Act before making any deductions under Chapter VI-A. Therefore, while computing the income, all provisions must be applied first, and then the deductions should be allowed. Section 80AA, before its repeal, provided that the deduction under section 80M must be computed with reference to the income by way of dividends as computed in accordance with the provisions of the Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends. The retrospective effect of this provision has been upheld in the aforementioned judgments. Conclusion: For the reasons mentioned, both questions were answered in the negative, in favor of the Revenue and against the assessee. The reference was disposed of accordingly without any order as to costs.
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