2014 (11) TMI 104 - HC - Income Tax

Allowability of deduction u/s 80M - Whether the Tribunal was right in holding that general establishment charges like audit fees, salary etc. could not be reduced from the dividend income for the purpose of allowing deduction u/s 80M of the Income Tax Act Held that - The Tribunal recorded the statement of the Assessee that there are no expenses incurred by the Assessee for earning the dividend relying upon Commissioner of Income Tax V/s. United Collieries Ltd. 1992 (4) TMI 18 - CALCUTTA High Court - no expenses were incurred for earning the dividend income, is a position which could not be controverted by the Revenue by bringing any material on record - the Assessee s claim for deduction u/s 80M could not have been reduced - only expenses directly incurred to earn dividend ought to be reduced while computing deduction u/s 80M and the Revenue cannot proceed to deduct some amount as expenses on notional basis thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
Interpretation of section 80M of the Income Tax Act - Allowability of general establishment charges for deduction.

Analysis:
The case involved a reference seeking the opinion of the Bombay High Court on the interpretation of section 80M of the Income Tax Act regarding the deduction of general establishment charges like audit fees and salary from dividend income. The Assessing Officer had reduced the deduction claimed under section 80M for the assessment years 1987-88 and 1988-89, as expenses incurred on establishment were not capitalized towards the project but claimed on revenue account. The Commissioner of Income Tax (Appeals) upheld this decision. However, the Tribunal, in further appeal, noted that no expenses were actually incurred by the Assessee for earning the dividend income, citing a judgment of the Calcutta High Court. The Tribunal held that the Assessee's claim for deduction under section 80M should not have been reduced as no expenses were incurred for earning the dividend income.

The High Court, after hearing both sides, observed that there was no necessity to refer the question for opinion if the issue had been conclusively answered based on uncontroverted facts against the Revenue and in favor of the Assessee. Nevertheless, considering the pending reference since 1997, the Court proceeded to examine the relevant statutory provisions and recent judgments. The Court referred to a Division Bench judgment in the case of Modern Terry Towels Ltd., which emphasized that only expenses directly incurred to earn dividend should be reduced while computing deduction under section 80M. Relying on previous judgments, the Court held that the Revenue cannot deduct expenses on a notional basis and that the deduction should be based on actual expenses incurred for earning dividend income.

In light of the authoritative pronouncements by the Court and previous judgments, the High Court concluded that the question referred by the Revenue should be answered against the Revenue and in favor of the Assessee. The Court disposed of the reference accordingly, upholding the position that only expenses directly incurred for earning dividend income should be considered for deduction under section 80M, rejecting the notion of reducing expenses on a notional basis.