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2006 (4) TMI 187 - AT - Income TaxComputation of deduction u/s 80M - Intercorporate Dividends - interest on borrowed funds - actual expenditure incurred in realizing or in earning dividend income deductible under sections 57-58 - difference of opinion between learned members - Third member Order - HELD THAT - I am inclined to hold that there is no justification on the part of the Assessing Officer in making a proportionate deduction of expenses. The Assessing Officer has not placed any material on record to controvert or reject the contention of the assessee that no expenditure was incurred for earning dividend income. No material is available on record to show that assessee actually incurred expenses for earning dividend income and that claim of the assessee to the above effect was erroneous. Without material I see no justification on the part of the Assessing Officer to deduct proportionate expenses. The Hon'ble Vice President has laid down the proposition that where dividend income is earned in the course of business or where earning is incidental to the business carried on by the assessee, expenses have got to be apportioned for determining the net component of income included in the total income. In para 76 of the proposed order a finding has been recorded that assessee did incur expenses for earning business income and dividend. Expenditure incurred for earning such income are mixed and, therefore, all expenses are to be taken into account for determining net income which is chargeable to tax notwithstanding the fact that such expenditure is not covered under sections 57 to 59 of the Act. With utmost respect and for reasons given above, I am unable to agree to the above view. In my opinion, there is no legal justification to brand dividend income in these cases as business income for purposes of section 80M or treat dividend as earned in the course of the business. My learned Brother and Hon'ble Vice President for his view has also relied upon the decision of Calcutta Bench of Income-tax Appellate Tribunal in the case of Dy. CIT v. S.G. Investments Industries Ltd. 1993 (7) TMI 341 - CALCUTTA HIGH COURT . The said decision was admittedly given having regard to provision of section 14A of the Income-tax Act and in my humble view has no application to the facts and circumstances of the case. The ultimate conclusion of my learned Brother and Hon'ble Vice President is reflected which is as 28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources. The question is ultimately answered in the affirmative. With utmost respect, I am unable to subscribe to the view taken in the above para. I have recorded above my reasons for not agreeing with the view taken by my learned Brother, the Hon'ble Vice President. The issue is not res integra and is fully covered in favour of assessee, as per direct decisions of various High Courts and of Supreme Court including Distributors (Baroda)(P.) Ltd.'s case 1979 (5) TMI 2 - SUPREME COURT . Deduction u/s 80M - In my considered opinion, all expenses incurred I or earning, making or realizing dividend income are lobe-deducted while computing dividend income. Only on net dividend deduction u/s 80M is to be allowed. Having regard to the Scheme of the Act, one has to determine first the business income of a dealer in shares in accordance with provisions of the Act. If interest has been paid for acquiring shares which are stock in trade and on which dividend is also received, the interest is liable to be deducted u/s 36(1)(iii) of the Income-tax Act and not u/s 57 of the Income-tax Act. The reason being that income of a source is required to be computed under the residuary head i.e. Other sources if it is not classified-for computation under any other heads mentioned in section 14 of the Income-tax Act. Therefore, one has first to proceed to compute the income under the head Business and see what are the deductions permissible under the said head. If interest paid on borrowed funds for acquiring shares, satisfy the conditions of section 36(1)(iii), it is to be taken and allowed deduction while computing business income. Secondly, as noted earlier, expression, For purposes of business is wider than the scope of expression, For purposes of earning profit . It is, therefore, imperative that all permissible deduction under the head Business are first to be considered. Only left out deduction can be considered under the head Other sources . Thus, the following propositions emerge (i) That deduction u/s 80M is to be allowed on net dividend income computed as per provisions of sections 57 to 59 of the Income-tax Act. The deduction is not to be allowed on gross dividend receipt. (ii) That net dividend income is to be computed under the head Other sources after deduction of expenditure incurred for purposes of earning, making or realizing dividend income. (iii) The deduction to be allowed out of dividend income are as per specified provision of the statute. These cannot be allowed on general commercial considerations. (iv) That actual expenditure incurred are to be taken into consideration. There is no question of taking expenditure on estimate or presumption basis while computing dividend income or while allowing deduction u/s 80M of the Income-tax Act. (v) That where shares are acquired out of borrowed funds, on which dividend is received, deduction of interest paid can be allowed u/s 57, provided unloan was taken for making and earning dividend income. There is no question of deduction of any amount paid as interest, to which provisions of section 36(1)(iii) are applicable, while computing deduction u/s 80M of the Income-tax Act. Thus, I am unable to agree with the order of the Tribunal for assessment years 1990-91 to 1992-93 in the case of the assessee. There is no material to hold that assessee spent any amount on earning or making or realizing any dividend. There is further no evidence to show that borrowed funds were utilized for acquiring shares on which dividend was paid to the assessee. No evidence of incurring of any actual expenditure has been shown. In the circumstances, when no expenditure has been shown to have been incurred for earning, making or realizing dividend income, there is absolutely no question of deducting any part of interest or management expenses or expenses allowed as a deduction to the assessee, u/s 36(1)(viii) or any other provision of the Income-tax Act, while computing dividend income. I, therefore, direct that deduction u/s 80M be allowed to the assessee as claimed by the assessee in all the assessment years under appeal. There are grounds other than u/s 80M for assessment years 1995-96, 1996-97, 1997-98 and 1998-99. These are referred to and discussed by the learned Vice President in the proposed order. Except on question of deduction u/s 80M, on which I have given a separate decision, I agree with my learned Brother on other issues disposed of in the proposed order. In the result, appeals of the assessee and of revenue are allowed in terms stated above.
Issues Involved:
1. Computation of deduction under section 80M of the Income-tax Act. 2. Deduction of proportionate management expenses/administrative expenses from dividend income. 3. Deduction under section 36(1)(viii) for computing net dividend income. 4. Disallowance of guest house rent. 5. Classification of profit on sale of shares as business income or capital gains. 6. Allowability of project survey expenses as revenue expenditure. 7. Disallowance of business promotion expenses. 8. Allowability of Udyog Sahayak expenses as revenue expenditure. 9. Disallowability of staff welfare expenses. Detailed Analysis: 1. Computation of Deduction under Section 80M: The main issue was whether proportionate management expenses/administrative expenses should be deducted from dividend income when computing the deduction under section 80M. The Tribunal held that deduction under section 80M is permissible only on the net dividend income computed in accordance with the provisions of the Act and included in the gross total income. The Tribunal emphasized that the computation of net dividend income should be based on the actual expenditure incurred for earning the dividend income, not on any notional or estimated expenses. 2. Deduction of Proportionate Management Expenses: The Tribunal discussed the principles laid down by the Supreme Court and various High Courts. It was concluded that in cases where the dividend income is part of business income or incidental to business activities, the indivisible expenses should be apportioned between the various receipts of business income, including dividend, and deduction under section 80M should be calculated on the net income accordingly. The Tribunal relied on the decision of the Supreme Court in CIT v. United General Trust Ltd., which supported the deduction of proportionate management expenses from the gross dividend for purposes of relief under section 80M. 3. Deduction under Section 36(1)(viii): The Tribunal upheld the view that the net dividend income for the purpose of deduction under section 80M should be computed after deducting the amount allowed under section 36(1)(viii). This position was consistent with the Tribunal's earlier decisions in the assessee's own case for previous assessment years. 4. Disallowance of Guest House Rent: The Tribunal dismissed the assessee's appeal on this issue, agreeing with the decision of the Special Bench in the case of Etcher Tractors Ltd. v. Dy. CIT, which held that guest house rent is not an admissible business expenditure. 5. Classification of Profit on Sale of Shares: The Tribunal upheld the classification of profit on the sale of shares as capital gains rather than business income. This decision was consistent with the Tribunal's earlier ruling in the assessee's case for assessment years 1990-91 to 1992-93, where it was held that the profit realized on account of disinvestment of shares should be taxed under the head "Capital gains." 6. Allowability of Project Survey Expenses: The Tribunal upheld the allowance of project survey expenses as revenue expenditure, following its earlier decision in the assessee's own case for assessment years 1990-91 to 1992-93. The Tribunal noted that these expenses were incurred in the course of the assessee's business activities and should be treated as revenue expenditure. 7. Disallowance of Business Promotion Expenses: The Tribunal agreed with the Commissioner of Income-tax (Appeals) that the business promotion expenses were incurred for the promotion of the assessee's business and for attracting industrial participation, and thus should be allowed as revenue expenditure. 8. Allowability of Udyog Sahayak Expenses: The Tribunal upheld the allowance of Udyog Sahayak expenses as revenue expenditure, agreeing with the Commissioner of Income-tax (Appeals) that these expenses were incurred for furthering the assessee's objective of industrializing the State of Punjab. 9. Disallowability of Staff Welfare Expenses: The Tribunal upheld the allowance of staff welfare expenses, agreeing with the Commissioner of Income-tax (Appeals) that these expenses were incurred for commercial expediency to keep the employees happy and satisfied, and thus were allowable as business expenditure. Conclusion: The Tribunal's detailed analysis emphasized the need to compute net dividend income based on actual expenditure incurred for earning the dividend income, not on any notional or estimated expenses. The Tribunal upheld the allowance of various business-related expenses as revenue expenditure and classified the profit on the sale of shares as capital gains. The Tribunal's decisions were consistent with the principles laid down by the Supreme Court and various High Courts.
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