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Issues Involved: Interpretation of section 80M of the Income-tax Act, 1961 regarding deduction on net dividend income.
Summary: The reference u/s 256(1) of the Income-tax Act, 1961, was made by the assessee to determine if deduction u/s 80M should be given on the net dividend income after deducting proportionate expenses. The relevant assessment year was 1973-74, and the assessee, a limited company, received dividend income of Rs. 6,81,643. The Income-tax Officer deducted expenses of Rs. 18,300 from the net dividend income of Rs. 3,00,332, granting relief at 60% of this amount u/s 80M. The Appellate Assistant Commissioner and the Tribunal upheld this decision, rejecting the assessee's argument for computation based on gross dividend income. The High Court referred to the Supreme Court's decision in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120, which clarified that section 80M should be applied to net dividend income, not gross dividend income. The Supreme Court's ruling in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243, which initially supported gross dividend income computation, was superseded by the amendment introducing section 80AA. This amendment was made to align with the correct interpretation that the benefit under section 80M is based on net dividend income. The High Court concluded that the Tribunal's decision was correct, affirming that section 80M allows deduction only on net dividend income. Decision: The High Court ruled in favor of the Revenue, stating that the Tribunal was justified in interpreting section 80M to mean that the deduction should be given solely on the net dividend income. No costs were awarded in this matter.
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