2013 (1) TMI 680 - HC - Income Tax

Deduction u/s 80M on the gross dividend - CIT(A) held that only the financial expenses incurred could be taken into consideration for working out the deduction and not the personnel and administrative & miscellaneous expenses - ITAT restricted the disallowance to the extent of Rs. 1,00,000/- instead of upholding the total disallowance of Rs. 6,66,035/- made by the A.O. - Held that - No authority taking a contrary view that the Revenue is entitled to reduce from gross dividend received, the presumptive expenditure in the absence of actual expenditure for determining the net dividend income, has been cited. The Revenue did not conduct an enquiry to determine the actual expenditure incurred in earning the dividend income by the assessee, which is a manufacturing concern and also deals in trading of the hosiery goods. It is not an investment company. It has been the categorical stand of the respondent-assessee that the investment, on which the dividend income is earned, was old and the total dividend warrants received by the assessee were only 2 to 3 on the shares held of the sister concern. The appellant s counsel urged that the ITAT or for that matter CIT(A) had no basis before them to determine the expenses incurred in earning dividend income by approximation but we find that for that matter the grievance could be raised by respondent assessee and not the Revenue which has come in appeal - no substantial question of law arises in these appeals.

Summary

Issues:
- Interpretation of Section 80M of the Income Tax Act, 1961 for deduction on dividend income.
- Determination of allowable deduction under Section 80M based on net dividend income.
- Disallowance of expenses for earning dividend income under Section 80M.
- Discrepancy in disallowance calculations by tax authorities.
- Applicability of presumptive expenditure for disallowance under Section 14A.

Analysis:
1. The case involved appeals arising from a common order passed by the Income Tax Appellate Tribunal (ITAT) regarding the deduction under Section 80M of the Income Tax Act, 1961 for various assessment years. The issue revolved around the interpretation of Section 80M and the determination of allowable deduction based on net dividend income.

2. The respondent-assessee claimed a deduction under Section 80M on the gross dividend received. Initially, the Assessing Officer (AO) reduced certain expenses to arrive at the net dividend income eligible for deduction. Subsequently, the Commissioner of Income Tax (Appeals) held that only financial expenses should be considered for the deduction calculation.

3. The ITAT, in its order, directed the AO to determine the issue in line with a decision of the Special Bench of the Tribunal. The AO, upon reconsideration, recalculated the disallowance based on personnel and administrative expenses. The appeals filed by the Revenue and the respondent-assessee led to different disallowance amounts for various assessment years.

4. The main question raised was whether the ITAT was justified in restricting the disallowance under Section 80M to a certain amount instead of upholding the total disallowance made by the AO based on proportionate expenses. The Revenue argued that estimation of allowance based on varying gross dividend incomes was illegal.

5. The Court referred to relevant case laws and highlighted that deduction under Section 80M should be allowed on net dividend income, not gross dividend. The Court also emphasized the need for actual expenditure to be considered for determining the deduction, rather than estimation or presumption.

6. In a related matter concerning disallowance under Section 14A, the Court reiterated that presumptive expenditure cannot be considered in the absence of actual expenditure for earning exempt income. The Court dismissed the appeals, stating that no substantial question of law arose in the case.

In conclusion, the judgment addressed the interpretation of Section 80M, the calculation of allowable deduction based on net dividend income, and the importance of considering actual expenditure for such deductions. It also clarified the applicability of presumptive expenditure for disallowance under Section 14A.