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TMI Blog1992 (10) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 80M at 60 per cent not of the entirety of the dividend income of Rs. 1,84,820 but only of Rs. 1,34,102, being the resultant figure obtained by setting against the dividend income of Rs. 1,84,820, the unabsorbed depreciation of Rs. 50,712 relating to earlier years. He, therefore, put the assessee on notice of his intention to pass a suitable order under section 263 of the Act. 4. The assessee responded by pointing out that for purposes of computing the deduction admissible under section 80M, only the expenditure incurred in earning the dividend income could be deducted and not any other item. In this regard, reliance was placed not only on the Supreme Court case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120, but also a C. B. D.T. Circular dated 15-4-1971. 5. The aforesaid arguments did not find favour with the Commissioner. According to the Commissioner, deduction under section 80M was available to the assessee only on the net figure of Rs. 1,34,102. In this regard the following considerations weighed with him : (i) Section 80AA stipulates that 'before making any deduction under section 80M falling under Chapter VIA, the total income (sic) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier years. 7. It is in these circumstances that the assessee is now before us. 8. On hearing the rival submissions, we consider that the assessee is entitled to succeed. 9. During the relevant previous year the assessee received aggregate dividend income of Rs. 3,41,200. It had paid aggregate interest of Rs. 1,56,380 on the moneys borrowed by it for purposes of purchasing the shares in question. Thus, the assessee had disclosed a taxable dividend income of Rs. 1,84,820 under the head 'Other sources'. 10. The Assessing Officer computed the deduction admissible under section 80M by taking the sum of Rs. 1,84,820 as the base. According to the Commissioner, however, the proper method was first to set off the unabsorbed depreciation relating to earlier years of Rs. 50,712 against the dividend income of Rs. 1,84,820 and thereafter to calculate the deduction admissible to the assessee under section 80M with reference to the resultant figure of Rs. 1,34,102. 11. The question that arises for consideration is whether the view taken by the Commissioner is sustainable in law. 12. At the outset, we may notice the scheme of the Act relating to the Computation of total income in general, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 15. Once the income chargeable under the six heads listed in section 14 are computed, the other provisions of the Act contained in Chapter V (Income of other persons included in assessee's total income), and Chapter VI (Aggregation of income and set off or carry forward of loss) come into play for purposes of computing the total income of the assessee. 16. We then have Chapter VIA, which deals with deductions to be made in computing the total income of an assessee. This Chapter has been incorporated into the Act with a view to achieving the objective of State policy in diverse fields. Through the provisions contained in this Chapter Parliment has accorded favoured treatment to certain types of (i) expenditure and (ii) income. The provisions of sections 80C to 80G (both inclusive) falling under the heading "B--Deduction in respect of certain payments" relate to specified items of expenditure ; and those of sections 80M to 80TT (both inclusive) falling under the heading "C--Deduction in respect of certain income" deal with certain items of income. 17. Having identified the items of expenditure/income which qualify for favoured treatment, Chapter VIA has laid down the condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of National Engg. Industries Ltd. v. CIT [1978] 113 ITR 252. 21. The scheme of the Act in matters relating to the computation of the total income of the assessee may now be summarised as follows : (i) All the incomes of the assessee must first be identified. (ii) Secondly, incomes which by virtue of the provisions of Chapter III do not form part of the income of the assessee must be excluded. (iii) Thirdly, the taxable income of the assessee must be computed in accordance with the provisions of the Act and classified under the six heads listed under section 14. (iv) Fourthly, the provisions of Chapter V of the Act dealing with income of other persons which are to be included in the assessee's total income will have to be given effect to. (v) Thereafter the provisions of Chapter VI relating to aggregation of income and set off or carry forward of loss must be applied. At this stage we get what section 80B(5) calls "gross total income". (vi) Then the provisions of Chapter VIA will have to be applied. (vii) The resultant figure is the total income of the assessee which is chargeable to tax. 22. From the foregoing analysis of the scheme of the Act in matters relating to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion admissible in respect of intercorporate dividends. To be eligible for deduction under section 80M, it must be shown first that the assessee is a domestic company ; and secondly, that the gross total income of the assessee includes any income by way of dividend from domestic company/companies. 25. The question whether the term "income by way of dividend from a domestic company" appearing in the said section referred to gross dividend or dividend net of the deductions admissible under section 57 of the Act was the subject-matter of controversy. 26. In the case of Cloth Traders (P.) Ltd. the Supreme Court held that the term was merely descriptive of the nature of income and was not indicative of the quantum of income and that, consequently, section 80M deduction must be calculated with reference to the gross dividend. 27. Immediately on the handing down by the Supreme Court of the ruling in the case of Cloth Traders (P.) Ltd. Parliament, by section 12 of the Finance (No. 2) Act, 1980, introduced in the Income-tax Act, 1961 section 80AA with retrospective effect from April 1, 1968--the date when section 80M was originally enacted. In the case of Distributors (Baroda) (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny deduction under this Chapter) and not with reference to the gross amount of such dividend ". The underlined portion contains the key to the interpretation of section 80AA. As pointed out earlier, as soon as the decision of the Supreme Court in Cloth Traders (P.) Ltd.'s case was given, Parliament Introduced section 80AA with retrospective effect, clearly with a view to indicating that the said decision did not reflect the true intention of the Legislature. Thus, the sole purpose of section 80AA was to make it clear that the deduction would be calculated not with reference to gross amount of inter-corporate dividend, but with reference to inter-corporate dividend net of the deductions admissible under sections 57(1) and 57(3). We are unable to read anything more into section 80AA. 32. We may now notice the Supreme Court case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 which will clarify the position. That was a case concerning the provisions of section 80E of the Act. Under the said section certain companies were entitled to deduction in respect of profits and gains from specified industries. Section 80E(1) stipulated : " 80E. Deduction in respect of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of anything in the context suggesting to the contrary, be construed in accordance with this definition. (iii) Consequently, the profits and gains from specified industries must be computed in accordance with sections 30 to 43A of the Act. (iv) It should, therefore, follow first that section 41(2) profits must be taken into account for purposes of computing the deduction under section 80E(1) of the Act. Secondly, by the same token, unabsorbed development rebate and unabsorbed depreciation must first be deducted from the profits and gains of the industrial undertaking and the provisions of section 80E applied thereafter. In view of the foregoing, therefore, the Supreme Court dismissed both the departmental and the assessee's appeals. The significance of the said case lies in the fact that the said case is an authority for the proposition that the profits and gains from specified industries referred to in section 80E must be computed in accordance with the provisions of the Act governing the computation of business income. 33. As has been pointed out by the Supreme Court in the case of Distributors (Baroda) (P.) Ltd., the reasoning which prevailed with the Supreme Court in placi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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