2005 (9) TMI 50 - HC - Income Tax

Relief u/s 80M - Whether, Tribunal is right in holding that relief under section 80M should be granted without deducting from the gross dividend, the interest paid on overdraft and other expenditure incurred for the purpose of earning the dividend in view of the provisions of section 80AA read with section 80M? - In the case on hand, the interest on the overdraft and the expenses are related to the business of trading in shares and ought to be allowed as computed income under the head Business . The said expenses cannot once again be deducted from the dividend income for the limited purpose of computing the deduction under section 80M - There is no statutory provision requiring the Assessing Officer to deduct the same expenses under two different heads of income - we uphold the decision of the Tribunal

Summary

Issues:
Interpretation of provisions under Income-tax Act, 1961 regarding deduction under section 80M for a company dealing in shares and earning income from dividends and property.

Analysis:
The case involved a company dealing in shares and earning income from dividends and property. The primary issue was whether interest paid on borrowings for purchasing shares held as stock-in-trade should be considered under section 36(1)(iii) for computing business income and not deducted from dividend income for the purpose of granting deduction under section 80M. The company contended that expenses related to the business of trading in shares should not be deducted twice, once from business income and then from dividend income for section 80M deduction.

The Income-tax Officer initially computed the net dividend income and allowed a 60% deduction under section 80M. However, the Commissioner of Income-tax (Appeals) directed the deduction under section 80M to be granted on the gross dividend, following a Gujarat High Court decision. The Tribunal upheld this decision, stating that interest on borrowings for purchasing shares and other expenses should not be deducted from dividend income for section 80M deduction.

The High Court analyzed relevant sections of the Income-tax Act, including sections 36(1)(iii), 57(iii), 56, and 80M. It emphasized that for a dealer in shares, dividend income retains the character of business income, and interest on borrowings is allowable under section 36(1)(iii) as it is incurred for business purposes. The Court referred to previous judgments and highlighted that deduction under section 80M should be calculated based on the net dividend income after deducting interest on borrowed funds.

The Court distinguished a Supreme Court decision related to investment companies and reiterated that deduction under section 80M should be based on the net dividend income. It concluded that expenses related to trading in shares should not be deducted twice and that section 80M deduction should be granted with reference to the gross dividend income. Ultimately, the Court upheld the Tribunal's decision in favor of the assessee, emphasizing that expenses related to the business should not be double-counted while computing deductions under section 80M.

In conclusion, the Court disposed of the reference, ruling in favor of the assessee and against the Revenue, with no order as to costs.