1986 (11) TMI 86 - AT - Income Tax

Summary

Issues:
1. Computation of deduction under section 80M for dividend income.
2. Allowability of collection expenses for computing net dividend income.
3. Interpretation of sections 57(i) and 57(iii) of the Income Tax Act, 1961.

Analysis:
1. The appeal pertains to the computation of deduction under section 80M for dividend income. The assessee earned gross dividend income, part of which related to the original holding and part to a merged entity. The Income Tax Officer (ITO) estimated expenses for earning dividend income and computed the deduction under section 80M on the net dividend income after deducting these expenses. The CIT(A) directed the ITO to re-compute the deduction considering collection expenses at a specific amount. The assessee challenged this direction in the appeal.

2. The CIT(A) estimated collection expenses for earning dividend income based on the volume of income and the responsibilities of the employees involved in dividend collection. The CIT(A) considered salaries, emoluments, and other expenses related to the collection process. The assessee contended that collection expenses should not be considered for deduction under section 80M as they are incurred after the dividend income has been earned. The departmental representative supported the CIT(A)'s order.

3. The Tribunal analyzed the provisions of the Income Tax Act, specifically sections 80AA, 57(i), and 57(iii). It was noted that deduction under section 80M should be computed based on the net dividend income after permissible deductions. The Tribunal disagreed with the assessee's contention that collection expenses are not deductible, citing section 57(i) which allows deduction for expenses related to realizing dividends. The Tribunal also interpreted section 57(iii) to include any expenditure expended for realizing or collecting dividend income as an allowable deduction. The Tribunal upheld the CIT(A)'s decision on considering collection expenses for computing net dividend income.

4. However, the Tribunal found the estimated collection expenses of Rs. 50,000 by the CIT(A) to be on the higher side. Considering the number of dividend warrants received and the circumstances of the case, the Tribunal reduced the estimated expenditure to Rs. 25,000. The Tribunal allowed the appeal in part based on this adjustment and confirmed the ITO's decision regarding interest expenses on borrowed capital.

5. No other points were pressed before the Tribunal in the appeal. The Tribunal's decision provided a detailed analysis of the applicable provisions of the Income Tax Act and upheld the deduction of collection expenses for computing net dividend income under section 80M.