1992 (10) TMI 132 - AT - Income Tax

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Deduction under section 80M of the Income-tax Act, 1961.
3. Interpretation of section 80AA and its impact on section 80M.
4. Computation of total income and gross total income under Chapter VIA.

Detailed Analysis:

1. Delay in Filing the Appeal:
The two-day delay in filing the appeal was condoned after hearing both sides.

2. Deduction under Section 80M of the Income-tax Act, 1961:
The assessment for the year 1985-86 initially allowed the assessee a deduction under section 80M at 60% of the dividend income of Rs. 1,84,820. However, the Commissioner of Income-tax, invoking section 263, found the assessment order erroneous and prejudicial to the interests of the revenue. The Commissioner argued that the deduction should be on the net figure of Rs. 1,34,102 after setting off the unabsorbed depreciation of Rs. 50,712 from the dividend income. The assessee contended that only the expenditure incurred in earning the dividend income should be deducted, relying on the Supreme Court case of Distributors (Baroda) (P.) Ltd. v. Union of India and a C.B.D.T. Circular dated 15-4-1971.

3. Interpretation of Section 80AA and its Impact on Section 80M:
The Commissioner argued that section 80AA stipulates that the total income must be computed taking into account all provisions of the Act other than Chapter VIA deductions. Therefore, the income from dividends qualifying for deduction under section 80M should be computed in accordance with the provisions of the Act, including sections 57, 71, and 32(2) read with section 72(2). The Commissioner rejected the assessee's contention and directed the Assessing Officer to modify the assessment by allowing the deduction under section 80M with reference to the net dividend after setting off the unabsorbed depreciation.

4. Computation of Total Income and Gross Total Income under Chapter VIA:
The Tribunal considered the scheme of the Act relating to the computation of total income and Chapter VIA. The Tribunal noted that income-tax is chargeable on the total income computed under the six heads listed in section 14. For dividend income, sections 57 to 59 deal with its computation under the head 'Income from other sources'. Section 57(i) allows deduction for any reasonable sum paid for realizing the dividend, and section 57(iii) allows deduction for any expenditure laid out wholly and exclusively for earning such income.

The Tribunal emphasized that Chapter VIA identifies types of expenditure/income eligible for favored treatment, lays down the mode and mechanics of computing the deduction, specifies pre-conditions for eligibility, and limits the aggregate deduction to the gross total income as defined under section 80B(5). The Tribunal referred to the Supreme Court's ruling in Cloth Traders (P.) Ltd. v. Addl. CIT, which clarified that deductions under Chapter VIA should be made from the gross total income computed in accordance with the Act's provisions.

The Tribunal concluded that the computation of the deduction under section 80M is controlled by section 80AA, which stipulates that the deduction shall be computed with reference to the dividend income as computed under sections 57(1) and 57(3), not the gross dividend. The Tribunal disagreed with the Commissioner's view that unabsorbed depreciation must be set off against the dividend income before computing the deduction under section 80M.

Conclusion:
The Tribunal held that the Commissioner was not justified in passing the impugned order in revision. The Tribunal set aside the Commissioner's order and allowed the assessee's appeal.