1985 (7) TMI 1 - SC - Income Tax

Question of construction of s. 80M - Intercorporate Dividends - it cannot be said that s. 80AA has the effect of imposing any fresh tax with retrospective effect. Section 80AA is clearly declaratory in nature and merely declares what the correct position has always been - held that for deduction of intercorporation dividends u/s 80Mm, the net dividend income forming part of the gross total income is to be considered, and not the full dividend received by the assessee

Issues Involved:
1. True construction of Section 80M of the Income Tax Act, 1961.
2. Constitutional validity of Section 80AA, introduced by the Finance (No. 2) Act, 1980.
3. Retrospective application of Section 80AA.
4. Interpretation of legislative history and prior judicial decisions.

Issue-wise Detailed Analysis:

1. True Construction of Section 80M of the Income Tax Act, 1961:
The primary issue was the interpretation of Section 80M, which allows a deduction in respect of intercorporate dividends. The court had to decide whether the deduction should be calculated on the full amount of dividends received by the assessee or the dividend income computed in accordance with the provisions of the Act. The court concluded that the decision in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 (SC), which allowed deductions on the full amount of dividends received, was erroneous. The court held that the deduction should be calculated based on the dividend income computed in accordance with the provisions of the Act, i.e., after deducting expenses incurred in earning such income.

2. Constitutional Validity of Section 80AA:
Section 80AA was introduced to override the interpretation of Section 80M given in Cloth Traders' case with retrospective effect. The court observed that if the interpretation of Section 80M as given in Cloth Traders' case was incorrect, then Section 80AA would merely be clarificatory and not impose any new tax burden. Since the court found the decision in Cloth Traders' case to be incorrect, Section 80AA was deemed to be declaratory of the law as it always was, and thus, no question of its constitutional validity arose.

3. Retrospective Application of Section 80AA:
The petitioners challenged the retrospective application of Section 80AA, arguing that it imposed an unreasonable restriction on their right to carry on business, thus breaching Article 19(1)(g) of the Constitution. The court noted that retrospective legislation is permissible if it clarifies the law as it always was. Given that the court found the interpretation of Section 80M in Cloth Traders' case to be incorrect, Section 80AA was merely clarificatory, and its retrospective application did not impose any new tax burden. Therefore, the retrospective application was held valid.

4. Interpretation of Legislative History and Prior Judicial Decisions:
The court reviewed the legislative history and prior judicial decisions, including CIT v. Industrial Investment Trust Co. Ltd. [1968] 67 ITR 437 (Bom) and CIT v. South Indian Bank [1966] 59 ITR 763 (SC), which dealt with similar provisions. The court emphasized that the interpretation of Section 80M should be based on its own language and not influenced by interpretations of earlier provisions which were structurally different. The court also referred to the decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC), which supported the view that deductions should be based on income computed in accordance with the provisions of the Act.

Conclusion:
The court dismissed the writ petition, holding that the decision in Cloth Traders' case was erroneous and that Section 80AA was merely declaratory of the law as it always was. Consequently, the retrospective application of Section 80AA was valid, and no constitutional issue arose. Each party was directed to bear its own costs.

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