2006 (4) TMI 561 - AT - Income Tax

Deduction u/s 80M - Whether in computing the deduction proportionate management expenses/administrative expenses are to be deducted from the dividend income in computing the deduction u/s 80M - contention of the assessee that only actual expenditure incurred in realizing or in earning dividend income deductible under Section 57 and 58 of IT Act are to be deducted and not proportionate administrative or interest expenditure - Difference Of opinion between learned members - Third member Order - HELD THAT - In the present case the assessee was holding shares as a capital investment. The shares were not stock-in-trade of the assessee. The dividend income earned by the assessee might have some connection with business. But this connection is not sufficient to make dividend incomebusiness income. Shares were held by the assessee as a capital investment. Dividend received by the assessee-company can under no circumstances be held to be business income. It is incidental income received by the assessee on account of holding of a capital investment. It cannot have a character different from the character of shares in the hands of the assessee. Shares were not trading assets. Therefore dividend receipts could only be assessed under the head Other sources . Out of dividend receipts only expenditure referred to in Section 57 could be deducted i.e. any sum expended wholly and exclusively for the purpose of making or earning such income (dividend). Thus I am inclined to hold that there is no justification on the part of the AO in making a proportionate deduction of expenses. The AO has not placed any material on record to controvert or reject the contention of the assessee that no expenditure was incurred for earning dividend income. No material is available on record to show that assessee actually incurred expenses for earning dividend income and that claim of the assessee to the above effect was erroneous. Without material I see no justification on the part of the AO to deduct proportionate expenses. The Hon ble Vice President has laid down the proposition that where dividend income is earned in the course of business or where earning is incidental to the business carried on by the assessee expenses have got to be apportioned for determining the net component of income included in the total income. In the proposed order a finding has been recorded that assessee did incur expenses for earning business income and dividend. Expenditure incurred for earning such income are mixed and therefore all expenses are to be taken into account for determining net income which is chargeable to tax notwithstanding the fact that such expenditure is not covered under Sections 57 to 59 of the Act. With utmost respect and for reasons given above I am unable to agree to the above view. In my opinion there is no legal justification to brand dividend income in these cases as business income for purposes of Section 80M or treat dividend as earned in the course of the business. The ultimate conclusion of my learned Brother and Hon ble Vice President is reflected as which is as below A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources. The question is ultimately answered in the affirmative. With utmost respect I am unable to subscribe to the view. I have recorded above my reasons for not agreeing with the view taken by my learned Brother the Hon ble Vice President. The issue is not res Integra and is fully covered in favour of assessee as per direct decisions of various High Courts and of Supreme Court including Distributors (Baroda) 1985 (7) TMI 1 - SUPREME COURT . In my considered opinion all expenses incurred for earning making or realizing dividend income are to be deducted while computing dividend income. Only on net dividend deduction u/s 80M is to be allowed. Having regard to the scheme of the Act one has to determine first the business income of a dealer in shares in accordance with provisions of the Act. If interest has been paid for acquiring shares which are stock-in-trade and on which dividend is also received the interest is liable to be deducted u/s 36(1)(iii) of the IT Act and not u/s 57 of the IT Act. The reason being that income of a source is required to be computed under the residuary head i.e. Other sources if it is not classified for computation under any other heads mentioned in Section 14 of the IT Act. Therefore one has first to proceed to compute the income under the head Business and see what are the deductions permissible under the said head. If interest paid on borrowed funds for acquiring shares satisfies the conditions of Section 36(1)(iii) it is to be taken and allowed deduction while computing business income. Secondly as noted earlier expression for purposes of business is wider than the scope of expression for purposes of earning profit . It is therefore imperative that all permissible deduction under the head Business are first to be considered. Only left out deduction can be considered under the head Other sources . However if on the basis of material a finding can be recorded that shares were acquired with borrowed funds with main object of earning dividend then interest paid on borrowed funds is to be deducted u/s 57 of the IT Act. It is not possible to lay down any rule of universal application. The question has to be determined with reference to facts and circumstances of the case. But facts of a given case are required to be considered in the light of above principles. Hence the following propositions emerge (i) That deduction under Section 80M is to be allowed on net dividend income computed as per provisions of Sections 57 to 59 of the IT Act. The deduction is not to be allowed on gross dividend receipt. (ii) That net dividend income is to be computed under the head Other sources after deduction of expenditure incurred for purposes of earning making or realizing dividend income. (iii) The deduction to be allowed out of dividend income are as per specified provision of the statute. These cannot be allowed on general commercial considerations. (iv) That actual expenditure incurred are to be taken into consideration. There is no question of taking expenditure on estimate or presumption basis while computing dividend income or while allowing deduction u/s 80M of the IT Act. (v) That where shares are acquired out of borrowed funds on which dividend is received deduction of interest paid can be allowed under Section 57 provided loan was taken for making and earning dividend income. There is no question of deduction of any amount paid as interest to which provisions of Section 36(1)(iii) are applicable while computing deduction under Section 80M of the IT Act. Thus I am unable to agree with the order of the Tribunal for AY 1990-91 to 1992-93 in the case of the assessee. There is no material to hold that assessee spent any amount on earning or making or realizing any dividend. There is further no evidence to show that borrowed funds were utilized for acquiring shares on which dividend was paid to the assessee. No evidence of incurring of any actual expenditure has been shown. In the circumstances when no expenditure has been shown to have been incurred for earning making or realizing dividend income there is absolutely no question of deducting any part of interest or management expenses or expenses allowed as a deduction to the assessee u/s 36(1)(viii) or any other provision of the IT Act while computing dividend income. I therefore direct that deduction u/s 80M be allowed to the assessee as claimed by the assessee in all the assessment years under appeal. There are grounds other than u/s 80M for AY 1995-96 1996-97 1997-98 and 1998-99. These are referred to and discussed by the learned Vice President in the proposed order. Except on question of deduction u/s 80M on which I have given a separate decision I agree with my learned Brother on other issues disposed of in the proposed order. In the result appeals of the assessee and of Revenue are allowed in terms stated above.

Summary

Issues Involved:
1. Computation of deduction under Section 80M of the IT Act.
2. Deduction of proportionate administrative expenses from dividend income.
3. Deduction of interest on borrowed money under Section 36(1)(iii).
4. Allowability of guest house rent as business expenditure.
5. Treatment of project survey expenses.
6. Classification of profit on sale of shares as business income or capital gains.
7. Allowability of business promotion expenses.
8. Deduction of staff welfare expenses.

Issue-wise Detailed Analysis:

1. Computation of Deduction under Section 80M:
The main issue was whether proportionate management/administrative expenses should be deducted from dividend income for computing the deduction under Section 80M. The Tribunal held that deduction under Section 80M is on the net dividend income computed in accordance with the provisions of the Act, including Sections 56 to 59. The Tribunal emphasized that the tax is on real income, and necessary expenses must be deducted to ascertain the true income. The Tribunal followed the Supreme Court's decision in Distributors (Baroda) (P) Ltd. v. Union of India, which mandated that the deduction under Section 80M should be on the net dividend after deducting expenses incurred for earning such income.

2. Deduction of Proportionate Administrative Expenses:
The Tribunal analyzed whether establishment expenses are deductible in computing income from other sources. It referred to various cases, including Vijaya Laxmi Sugar Mills Ltd. v. CIT, which held that there should be a nexus between the expenditure and the earning of income. The Tribunal concluded that in cases where dividend income is incidental to business activities, proportionate administrative expenses should be deducted to determine the net dividend income.

3. Deduction of Interest on Borrowed Money:
The Tribunal considered the deduction of interest on borrowed money under Section 36(1)(iii). It was held that if borrowed money was used for business purposes, including investment in shares, the interest on such borrowings should be deducted from the gross dividend income. This view was supported by the decision in CIT v. Maganlal Chhaganlal (P) Ltd., where interest paid on borrowed funds for purchasing shares was allowed as a deduction.

4. Allowability of Guest House Rent as Business Expenditure:
The Tribunal upheld the disallowance of guest house rent as business expenditure, following the decision of the Special Bench in Eicher Tractors Ltd. v. Dy. CIT, which held that guest house expenses are not allowable as business expenditure.

5. Treatment of Project Survey Expenses:
The Tribunal held that project survey expenses are of revenue nature and not capital expenditure. This decision was based on the Tribunal's earlier order in the assessee's own case for the assessment years 1990-91 to 1992-93, where similar expenses were allowed as revenue expenditure.

6. Classification of Profit on Sale of Shares:
The Tribunal upheld the classification of profit on the sale of shares as capital gains. It reiterated its earlier decision that the assessee's investment in shares was in the nature of capital investment, and any profit on the sale of such shares should be assessed under the head "Capital gains."

7. Allowability of Business Promotion Expenses:
The Tribunal agreed with the CIT(A) that business promotion expenses incurred for promoting business and attracting industrial participation are of revenue nature. The CIT(A) had provided a detailed breakdown of the expenses, which were found to be incidental to the business.

8. Deduction of Staff Welfare Expenses:
The Tribunal upheld the CIT(A)'s decision to allow staff welfare expenses, including gifts to employees and expenditure on farewell parties, as these were incurred for commercial expediency to keep employees satisfied and motivated.

Separate Judgments Delivered:
The Tribunal's decision was not unanimous. The Vice President and the Accountant Member had differing views on the computation of deduction under Section 80M. The Vice President held that proportionate management expenses should be deducted, while the Accountant Member opined that only actual expenses incurred for earning dividend income should be deducted. The final decision was based on the majority view, which supported the deduction of proportionate expenses in cases where dividend income is incidental to business activities.