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Issues:
Assessment under section 263 of the IT Act for the assessment year 1981-82 regarding deduction u/s 80M on dividend income. Analysis: The appeal pertains to the assessment year 1981-82 and challenges the order of the Commissioner of Income-tax, Tamilnadu - III, Madras, passed under section 263 of the IT Act. The issue revolves around the treatment of dividend income in the assessment. The Income Tax Officer (ITO) excluded dividends from the head 'Business' and assessed them under 'Other sources', allowing deductions claimed by the assessee under 'Business'. The Commissioner held that deduction u/s 80M should have been allowed only on net dividends, not gross dividends, citing a mistake prejudicial to revenue under section 80AA introduced by the Finance Act of 1980. The CIT directed the ITO to redo the assessment by allowing deduction u/s 80M on gross dividend income minus proportionate expenditure, referencing a Delhi High Court decision. The assessee contended that as a dealer in shares, the entire expenditure was rightly deducted under 'Business', asserting that dividend income, though related to business, had to be shown under 'Other sources'. The department argued that significant expenditure would have been incurred for earning the dividend income due to the quantum of dividends. The ITAT considered the CIT's finding that the assessee was a dealer in shares for the relevant assessment year. The ITAT referred to precedents emphasizing the allocation of expenditure for earning dividend income before allowing deduction u/s 80M. Notably, the ITAT cited a case where the entire interest paid on overdrafts was deducted under 'Profits and gains of business' for a dealer in shares, impacting the deduction under section 80M. In analyzing the expenditure allowed under 'Business', the ITAT found items such as remuneration, salaries, rent, travel expenses, legal charges, and maintenance costs, all admissible under section 37 for computing business income. The ITAT concluded that no apportionment of expenditure between 'Business' and 'Other sources' was warranted, as the allowed expenses were rightly deducted under 'Business'. Consequently, the ITAT set aside the CIT's order under section 263 and reinstated the ITO's assessment. In conclusion, the ITAT allowed the appeal, emphasizing that the expenditure allocated under 'Business' was appropriate, and there was no mistake prejudicial to revenue in the assessment. The judgment highlights the importance of correctly allocating expenses and deductions concerning dividend income for dealers in shares, ensuring compliance with relevant provisions of the IT Act.
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