1981 (2) TMI 61 - HC - Income Tax

Summary

Issues involved: The judgment addresses two main issues: (1) Whether interest paid by the assessee on money borrowed for business purposes should be deducted in arriving at profits or loss under 'Profits and gains of business' or apportioned against income assessable as dividend under 'Other sources'? (2) Whether relief under section 80M should be granted on the gross amount of dividend received or on the net amount after deducting interest attributable thereto?

Issue 1 - Interest Deduction: The case involved an assessee, a private limited company dealing in shares, where the interest paid on loans obtained for business purposes was in question. The Income Tax Officer (ITO) had apportioned the interest payment between business income and dividend income, reducing the loss under 'Profits and gains of business'. The Appellate Authority Commissioner (AAC) ruled in favor of the assessee, stating that the entire interest paid should be deducted from business income. The Tribunal upheld the AAC's decision, citing a previous Gujarat High Court ruling. The High Court affirmed this decision, emphasizing that interest paid for carrying on business is fully deductible under section 36(1)(iii) of the Income Tax Act.

Issue 2 - Relief under Section 80M: The judgment also delves into the interpretation of section 80M regarding the deduction of inter-corporate dividends. The Supreme Court's decision clarified that the deduction under section 80M should be based on the gross amount of dividends received, not the net amount after deductions. Subsequently, section 80AA was inserted with retrospective effect, emphasizing that the deduction under section 80M should be computed with reference to the net amount of dividends as per the provisions of the Income Tax Act. The High Court concluded that in the case at hand, relief under section 80M should be granted on the gross amount of dividends, as no interest was attributable to it.

Conclusion: The High Court ruled in favor of the assessee on both issues. It affirmed that the entire amount of interest paid for business purposes should be deducted from business income and that relief under section 80M should be granted on the gross amount of dividends received. The judgment aligned with previous court decisions and legislative amendments, providing clarity on the computation of income and deductions in such cases.