1997 (7) TMI 110 - HC - Income Tax

Borrowed Capital, Business Expenditure, Income From Business, Indian Company, Preference Shares

Summary

Issues:
1. Deduction of liability on account of dividend on preference shares.
2. Deduction of tax payable in Malaysia under section 40(a)(ii) of the Income-tax Act, 1961.

Analysis:
1. The assessee, an Indian company, claimed deduction on account of dividend paid on preference shares during the assessment year 1982-83. However, the claim was disallowed under section 143(3) of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) and the Tribunal also confirmed the disallowance. The Tribunal referred two questions of law under section 256(1) of the Act. The first question was whether the assessee was entitled to the deduction of the liability on account of dividend on preference shares. The court answered this question against the company based on similar references for the earlier years, holding that the company is not entitled to claim such deduction.

2. The second question revolved around the deduction of tax payable in Malaysia under section 40(a)(ii) of the Income-tax Act, 1961. The court analyzed the relevant sections of the Act, particularly section 40(a)(ii) and section 5, to determine the tax treatment of income accrued in Malaysia. The court noted that the income arising in Malaysia was part of the total income of the company as per the Act's provisions, deeming the company a resident in India. The court emphasized that the tax paid in Malaysia on the profits accrued there cannot be deducted for computing taxable income under the Act. Section 40(a)(ii) clearly states that sums paid on account of tax levied on profits or gains of any business cannot be deducted, even if the tax is paid outside India. Therefore, the court answered the second question against the assessee, concluding that the tax paid in Malaysia cannot be claimed as a deduction.

3. In summary, the court's judgment upheld the disallowance of the deduction on account of dividend on preference shares and the tax payable in Malaysia for the assessment year 1982-83. The decision was based on the provisions of the Income-tax Act, 1961, specifically sections 40(a)(ii) and 5, which restrict the deduction of certain expenses and taxes for computing taxable income. The court's interpretation of the relevant sections led to the conclusion that the assessee was not entitled to claim these deductions, resulting in the dismissal of the company's claims in this regard.