2018 (7) TMI 1562 - HC - Income Tax

Claim of deduction u/s 80M - Expenses notionally allocable to the earning of dividend income - Held that - Only actual expenses incurred for earning dividend income ought to be taken into account while determining the deduction under Section 80M of the Act. Thus, there is no question of making allocation of expenditure on notional basis to earn dividend income, to determine the deduction of dividend under Section 80M of the Act. The contention on behalf of the Revenue that the Tribunal has rendered a finding of fact of ₹ 5 lakhs being incurred for earning dividend income, has not been challenged, is not correct. The very basis of allocating expenses on a notional basis to reduce the dividend, entitled to the benefit of Section 80M of the Act, is the subject matter of challenge before us. Therefore, even if the finding of fact viz. Notional expenditure has been incurred is not specifically challenged, the law is settled that it cannot be reduced from the dividend income for deduction under Section 80M of the Act. Expenses on account of stamp duty - Held that - We find that the impugned order of the Tribunal itself records that the same has been disallowed by the Assessing Officer. In any case, this Court in General Insurance Corporation (2000 (9) TMI 12 - BOMBAY HIGH COURT) has held that expenses incurred on account of stamp duty for transfer of shares is not directly related to earning of dividend income. Therefore, it cannot be reduced from the dividend income earned while computing the deduction under Section 80M of the Act. - Revenue appeal dismissed.

Summary

Issues involved:
1) Challenge to the order passed by the Income Tax Appellate Tribunal for Assessment Year 1997-98 under Section 260A of the Income Tax Act, 1961.
2) Interpretation of expenses allocable to earning dividend income under Section 80M of the Act.
3) Consideration of notional expenses and stamp duty as deductible expenses for earning dividend income.

Analysis:

Issue 1:
The appellant claimed a deduction under Section 80M of the Act for intercorporate dividend received, but the Assessing Officer restricted the deduction. The CIT(A) subsequently deleted the disallowance of notional expenses, but the Tribunal restored the disallowance based on the decision in Commissioner of Income Tax Vs. United General Trust. The High Court analyzed previous decisions and held that only actual expenses incurred for earning dividend income should be considered for deduction under Section 80M. The Tribunal's finding of notional expenses incurred was challenged, and the High Court ruled in favor of the appellant, allowing the appeal.

Issue 2:
The Tribunal disallowed stamp duty as an expense allocable to earning dividend income, which was challenged by the appellant. The High Court referred to previous judgments and held that expenses incurred on stamp duty for share transfer are not directly related to earning dividend income. Therefore, the stamp duty expense cannot be reduced from the dividend income while computing the deduction under Section 80M. The High Court ruled in favor of the appellant on this issue as well.

Issue 3:
The appellant argued that the Tribunal's finding of notional expenses being incurred for earning dividend income was not based on a challengeable fact. The High Court reiterated that only actual expenses should be considered for deduction under Section 80M and upheld the appellant's contention. The substantial questions of law were answered in favor of the appellant on all counts, and the appeal was allowed accordingly.