2004 (4) TMI 264 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance under Rule 6B.
2. Disallowance of guest-house expenses under Section 37(4).
3. Disallowance of donation to Banarso Devi Oswal Public Charitable Trust under Section 37.
4. Deduction under Section 80M on dividend income.

Detailed Analysis:

1. Disallowance under Rule 6B:
The first issue pertains to the disallowance of Rs. 7,322 under Rule 6B. The Tribunal noted that this issue was already covered in favor of the assessee by its own decisions for the assessment years 1991-92 to 1993-94. Respectfully following these precedents, the Tribunal deleted the disallowance made by the AO under Rule 6B.

2. Disallowance of Guest-House Expenses under Section 37(4):
The assessee's appeal included grounds against the disallowance of Rs. 3,64,213 on account of guest-house expenses under Section 37(4). However, the assessee did not press these grounds during the hearing, leading to their dismissal.

3. Disallowance of Donation to Banarso Devi Oswal Public Charitable Trust under Section 37:
Similarly, the assessee had contested the disallowance of Rs. 50 lakhs donated to Banarso Devi Oswal Public Charitable Trust, claiming it as revenue expenditure under Section 37. This ground was also dismissed as not pressed.

4. Deduction under Section 80M on Dividend Income:
The primary issue in both the assessee's and the Department's appeals was the deduction under Section 80M. The assessee claimed deduction on the gross dividend receipt of Rs. 65,34,792, while the AO reduced this amount by proportionate expenses, resulting in a net dividend income of Rs. 53,52,198 for the purpose of deduction.

The Tribunal examined whether the deduction under Section 80M should be on the gross or net dividend income. Citing the Supreme Court's decision in Distributors (Baroda) (P) Ltd. vs. Union of India, the Tribunal confirmed that the deduction should be on the net dividend income.

The Tribunal then considered the computation of net dividend income, emphasizing that interest on borrowed money used for acquiring shares should be deducted under Section 57. The Tribunal noted that if the borrowed money was not used for purchasing shares, proportionate disallowance on account of financial charges would not be justified. The AO was directed to reassess this issue, giving the assessee an opportunity to prove that borrowed money was not used for share purchases.

Regarding the deduction of proportionate management expenses, the Tribunal referred to the Supreme Court's decision in CIT vs. United General Trust Ltd., which mandated the deduction of such expenses. The Tribunal corrected the earlier misinterpretation by a co-ordinate Bench and held that proportionate management expenses must be deducted in computing the deduction under Section 80M. The Tribunal accepted the assessee's suggestion to attribute Rs. 1 lakh towards management expenses for the purpose of this deduction.

Conclusion:
The appeal of the assessee was partly allowed, with specific directions for reassessment of financial charges and a fixed deduction of Rs. 1 lakh for management expenses in computing the deduction under Section 80M.