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Issues Involved:
1. Entitlement of the assessee company to relief under section 80M of the Income-tax Act, 1961. 2. Determination of whether the relief under section 80M should be on the gross dividend or the net dividend after deducting proportionate management expenses. Comprehensive, Issue-Wise Detailed Analysis: Issue 1: Entitlement to Relief under Section 80M The first issue revolves around whether the assessee company, which carries on general insurance business and is assessed under section 44 of the Income-tax Act, 1961, is entitled to relief under section 80M. The Tribunal held that the income of the insurance company is computed under section 44 read with the First Schedule as profits and gains of the business of insurance. The Tribunal further held that section 80M provides for deduction on income from dividends irrespective of the head under which the income is included in the assessee's total income. The Revenue contended that since the assessee's income is computed under section 44, the dividend income loses its character as such after merging with the business income, making section 80M inapplicable. However, the Tribunal, referencing the decision in CIT v. Darbhanga Marketing Co. Ltd. [1971] 80 ITR 72, concluded that the assessee was entitled to relief under section 80M on the entire dividend income. The judgment emphasized that section 44 deals with the computation of profits and gains of insurance business, and the First Schedule outlines the manner of computation. Despite the special provisions for insurance companies, the dividend income retains its character and is eligible for relief under section 80M. The court cited multiple precedents, including decisions from the Bombay High Court and the Supreme Court, which supported the view that insurance companies are entitled to such relief. Ultimately, the court concluded that the assessee, which carries on business in general insurance and is assessable under section 44, is entitled to relief under section 80M. The first question was answered in the affirmative and in favor of the assessee. Issue 2: Relief on Gross or Net Dividend The second issue concerns whether the relief under section 80M should be allowed on the gross dividend or the net dividend after deducting proportionate management expenses. The Tribunal had upheld the assessee's contention that deduction should be allowed on the gross dividend income, following the decision in Darbhanga Marketing Co. Ltd.'s case [1971] 80 ITR 72. The Revenue argued that section 80AA, inserted by the Finance (No. 2) Act, 1980, with retrospective effect from April 1, 1968, mandates that the deduction under section 80M should be computed with reference to the income by way of dividends as computed in accordance with the provisions of the Income-tax Act, and not the gross amount of such dividends. The court agreed with this interpretation, stating that section 80AA requires that the deduction under section 80M should be computed after considering the expenses incurred in earning the dividend income. The court noted that the assessee's contention that no expenditure should be deducted in computing the relief under section 80M was not raised before the Tribunal. The only contention raised was that the deduction should be allowed on the gross dividend income. The Tribunal had upheld this contention, but the court, having regard to the provisions of section 80AA, could not accept this. The court concluded that in cases where deduction is allowable to an assessee under section 80M, the deduction is to be allowed with reference to the amount of dividend computed in accordance with the provisions of the Income-tax Act, which includes deducting the proportionate managerial expenses. Therefore, the second question was answered in the negative and in favor of the Revenue. Conclusion: The judgment concluded with the first question answered in the affirmative and in favor of the assessee, confirming their entitlement to relief under section 80M. The second question was answered in the negative and in favor of the Revenue, establishing that the relief under section 80M should be computed on the net dividend after deducting proportionate management expenses. There was no order as to costs.
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