1982 (9) TMI 103 - AT - Income Tax

Summary

Issues:
1. Whether deduction under section 80M should be on gross dividend or net dividend.
2. Interpretation of section 80AA and its retrospective effect.
3. Applicability of deductions under section 57(iii) to dividend income.

Detailed Analysis:

1. The case involved a limited company with income from dividends. The Income Tax Officer (ITO) allowed a deduction of 60% under section 80M on the net dividend income after deducting various expenses. The Commissioner (Appeals) directed the ITO to calculate the deduction on the gross dividend income based on a Supreme Court decision. The department appealed this decision, arguing that deduction should be on net income. The assessee contended that deductions under section 57(iii) were applicable to all income chargeable to tax, including dividend income. The department referred to the introduction of section 80AA and its impact on the deduction calculation.

2. The introduction of section 80AA with retrospective effect from 1-4-1968 was a crucial point of contention. The department argued that deduction under section 80M should be computed with reference to net dividend income as per the provisions of section 80AA. The assessee, supported by judicial pronouncements, maintained that deductions under section 57(iii) were applicable to dividend income, even after the introduction of section 80AA. The Commissioner (Appeals) had allowed the deduction on gross dividend income following the Supreme Court's decision in Cloth Traders case.

3. The judgment extensively analyzed the applicability of deductions under section 57(iii) to dividend income. Citing various judicial decisions, including the Supreme Court's ruling in Raghunandan Prasad Moody, it was established that expenses laid out for making or earning income, including dividend income, were deductible under section 57(iii). The Finance Minister's speech and expert commentary further supported the view that such deductions were permissible. Ultimately, the Tribunal reversed the Commissioner (Appeals) decision, maintaining the deduction allowed by the ITO on the net dividend income under section 80M.

In conclusion, the Tribunal allowed the department's appeal, emphasizing the correct computation of deductions under section 80M based on net dividend income as per the provisions of section 80AA, despite the availability of deductions under section 57(iii) for dividend income.