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2006 (2) TMI 131 - HC - Income Tax


Issues:
- Deduction under section 80M of the Income-tax Act, 1961

Analysis:
The High Court of Karnataka was presented with a reference by the Tribunal regarding the justification of allowing a claim for deductions under section 80M of the Income-tax Act. The case revolved around the treatment of expenditure related to dividend income. The assessee had made investments in shares and received dividend income, claiming deductions under section 80M. The assessing authority initially deducted 10% of the gross dividend received towards expenditure, which was later modified by the Tribunal to 2 1/2%. The Tribunal considered certain expenditures like salary, stationery, rent, and electricity as attributable to the dividend income and made a notional deduction. The assessee challenged this decision, arguing that notional deductions are not permissible under the law.

The Court analyzed the facts and found that the assessing authority's initial deduction of 10% towards expenditure was not justified. The Tribunal's decision to notionally deduct 2 1/2% for certain expenditures was also deemed incorrect. The Court referred to relevant judgments, such as CIT v. United Collieries Ltd. and CIT v. General Insurance Corporation of India, which emphasized that deductions under section 80M should be based on actual expenditure incurred in earning dividend income, not on estimates or notional amounts. The Court highlighted that when no actual expenditure is incurred, no notional expenditure can be deducted from the dividend income.

Ultimately, the Court concluded that as the assessee had not actually incurred any expenditure, the Tribunal's decision to allow a deduction based on notional expenditure was erroneous. The Court ruled in favor of the assessee, stating that no estimate or notional deduction should be made when no actual expenditure is involved in earning dividend income. The question of law was answered in the negative against the Revenue and in favor of the assessee, leading to the disposal of the reference with no costs awarded.

 

 

 

 

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