1984 (8) TMI 127 - AT - Income Tax

Summary

Issues:
1. Deductibility of interest and share transfer fee as expenditure under s. 57(iii) for claiming deduction under s. 80M.
2. Interpretation of the treatment of dividend income and related expenses for an investment company.
3. Application of s. 80AA in allowing deduction on net dividend income.

Detailed Analysis:
1. The primary issue in this case revolves around the deductibility of interest and share transfer fee as expenditure under s. 57(iii) for claiming a deduction under s. 80M. The CIT (A) held that the ITO was incorrect in deducting interest and share transfer fee as expenditure deductible under s. 57(iii), directing the ITO to allow deduction under s. 80M with reference to the gross amount of dividends received by the assessee. The Revenue contested this decision, arguing that the interest on borrowed funds for share purchase should be deducted from gross dividend income, and deduction under s. 80M should be allowed on net dividend income as per the provisions of s. 80AA introduced by the Finance Act, 1980.

2. The second issue pertains to the interpretation of the treatment of dividend income and related expenses for an investment company. The CIT (A) relied on the decision in Addl. CIT vs. Laxmi Agents (P) Ltd. to assert that interest paid on borrowings for share acquisition and share transfer fees constitute business expenditure and should not be deducted from dividend income. The Revenue contended that dividends, even for an investment company, are to be assessed under the head 'income from other sources' post the amendment by the Finance Act, 1956. However, the tribunal noted that the commercial character of dividend income can be considered for determining the purpose of borrowing funds, as held by the Gujarat High Court in Laxmi Agents.

3. The final issue involves the application of s. 80AA in allowing a deduction on net dividend income. The tribunal referenced the decision in CIT vs. Cotton Fabrics Ltd., where it was established that s. 80AA did not alter the treatment of expenditure incurred for earning dividends. The court ruled that the expenditure on interest was for carrying on the business of the assessee and should be fully deducted under s. 36(1)(iii) while computing the profits and gains of the business. Consequently, the tribunal upheld the decision of the CIT (A) and dismissed the appeal brought by the Revenue.

In conclusion, the judgment clarifies the treatment of interest and share transfer fees for claiming deductions under s. 80M, emphasizing the commercial nature of dividend income for investment companies and the applicability of relevant provisions in determining allowable deductions.