2007 (2) TMI 164 - HC - Income Tax

Tribunal hold that interest on the borrowed money utilised for the investment in shares cannot be set off against dividend income u/s 80M - held , allowing the revenue s appeal that where the main business of the assessee wasn t of dealing in shares but have business of drums, the assesses would be entitled to deduction of interest proportionate to the capital investment on shares on the dividend earned to earn the relief u/s 80-M newtr dividend alone can be taken into consideration u/s 80M

Issues Involved:
1. Whether the interest on borrowed money utilized for investment in shares can be set off against the dividend income under Section 80M of the Income Tax Act, 1961.
2. Whether the Tribunal was right in granting investment allowance when it was never claimed at any earlier stage.

Issue-wise Detailed Analysis:

1. Interest on Borrowed Money and Dividend Income under Section 80M:

The assessee, a non-banking finance company, declared a net income of Rs. 22,89,090 for the assessment year 1992-93. The assessing authority allocated a pro-rata interest liability to funds invested in shares, reducing the net dividend income available for deduction under Section 80M of the Income Tax Act. The officer argued that the borrowed money used for investments in units and shares was not relatable to business expenditure but to income from other sources. Consequently, no portion of the interest on borrowed funds could be excluded while computing business income.

The Commissioner of Income Tax (Appeals) disagreed, stating there was no proximate connection between the business interest liability and investment in shares. The appellate authority, following decisions from the Gujarat High Court, directed the assessing authority not to bifurcate the interest admissible under Section 36(1)(iii) and allowed the deduction under Section 80M on the gross dividend without considering any notional interest.

The Revenue appealed to the Tribunal, which upheld the Commissioner's decision, noting that the investments were made to comply with the Reserve Bank of India's directions and formed part of the business activity. The Tribunal dismissed the Revenue's appeal.

The Revenue further appealed to the High Court, arguing that the interest on borrowed capital should not be considered business expenditure as the dividend from shares is income from other sources. They cited the Supreme Court's decision in DISTRIBUTORS (BARODA) P. LTD. Vs. UNION OF INDIA, which held that the deduction under Section 80M should be calculated with reference to the dividend computed in accordance with the Act's provisions, forming part of the gross total income.

The High Court noted that no material was provided to support the contention that the investments were made purely to comply with the Reserve Bank of India's directions. The Court held that the deduction under Section 80M should be on the net dividend after deducting the interest paid on the borrowed money. The Court referenced its decision in CIT v. CHEMICAL HOLDINGS LTD, which emphasized that the expenditure laid out for earning dividend income must be deducted under Section 57(iii) before computing the benefit under Section 80M.

The Court concluded that the net dividend, not the gross dividend, should be considered for deduction under Section 80M. The Court dissented from the Gujarat High Court's view in CIT v. COTTON FABRICS LTD and aligned with the Supreme Court's decision in DISTRIBUTORS (BARODA) P. LTD. Vs. UNION OF INDIA.

2. Granting Investment Allowance:

The Tribunal allowed the investment allowance for the immediate earlier year, following the Supreme Court's decision in CIT Vs. SHAAL FINANCE (P) LTD., which stated that if the lessee carried on manufacturing activity with the leased machinery, it would comply with Section 32-A.

The Revenue argued that the investment allowance issue was not raised before the Commissioner of Income Tax (Appeals) and should not have been granted by the Tribunal without considering whether such a claim was part of the assessment.

The High Court did not specifically address the Tribunal's decision on the investment allowance in the detailed analysis but focused on the primary issue of interest on borrowed money and dividend income under Section 80M.

Conclusion:

The High Court allowed the Revenue's appeal, setting aside the Tribunal's order. The Court held that the net dividend, after deducting the interest on borrowed funds, should be considered for deduction under Section 80M. The Court emphasized that the computation for deduction under Section 80M must align with the provisions of Section 80AA, which requires the computation of dividend income in accordance with Sections 56 and 57 of the Act.

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