1994 (2) TMI 306 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee is entitled to relief under section 80M(1) of the Income-tax Act, 1961, on the net dividend income before or after deduction of the amount admissible under section 80K of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Entitlement to Relief under Section 80M(1) Before or After Deduction under Section 80K:

Relevant Provisions:
- Section 80AA: Specifies that the deduction under section 80M should be computed with reference to the income by way of dividends as computed according to the provisions of the Act, not with reference to the gross amount of such dividends.
- Section 80M(1): Allows a domestic company to claim a deduction on income by way of dividends from another domestic company.
- Section 80M(2): States that if a company is entitled to deductions under both section 80K and section 80M(1), the deduction under section 80M(1) should be allowed on the dividend income reduced by the amount of deduction under section 80K.
- Section 80K: Provides for a deduction on income by way of dividends from industrial undertakings, ships, or hotels, on which no tax is payable by the paying company.

Contentions and Interpretations:
- The Tribunal initially held that the deduction under section 80M should be computed before deducting the amount admissible under section 80K, based on a decision by the Bombay Bench.
- The Special Bench of the Bombay Tribunal later took a contrary view, stating that the deduction under section 80M should be allowed on the net dividend income included in the gross total income, not the gross dividend income.

Supreme Court Precedents:
- Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120: The Supreme Court held that the deduction under section 80M should 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.
- CIT v. P. K. Jhaveri [1990] 181 ITR 79: The Supreme Court reiterated that deductions should be allowed on net dividend income, not gross dividend income, and clarified that section 80AB was introduced to affirm this position.

High Court's Conclusion:
- The High Court observed that section 80A, introduced with retrospective effect, is explanatory and clarifies that deductions under section 80M should be computed on net dividend income before making any deduction under Chapter VI-A.
- The non obstante clause "notwithstanding anything contained in that section" in section 80A does not affect the operation of section 80M(2). Section 80A deals only with section 80M(1) and not section 80M(2).
- The Court concluded that the deduction under section 80M(1) should be computed on the net dividend income after reducing the amount of deduction allowable under section 80K, as provided in section 80M(2).

Judgment:
- The High Court answered the questions in favor of the Revenue, holding that in computing deductions allowable under section 80M(1), the net dividend income should be reduced by the deductions allowable to the assessee under section 80K, as provided in section 80M(2).
- The references were disposed of accordingly with no order as to costs.