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TMI Blog2006 (4) TMI 561X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Tribunal held that no expenditure can be deducted on proportionate basis out of the common administrative expenses for the purpose of computation of deduction under Section 80M. The request of the assessee was accepted by the President of Tribunal. The Special Bench is constituted mainly for deciding the common issue relating to computation of deduction under Section 80M of the IT Act, 1961. Three appeals have been filed by the assessee for asst. yrs. 1994-95, 1995-96 and 1997-98. The appeal of the assessee for asst. yr. 1996-97 stands decided against the assessee by the Tribunal. There are cross-appeals by the Revenue for the aforementioned assessment years. The Revenue has also filed an appeal for asst. yr. 1996-97. 2. We have heard the parties and perused the record, Since all the appeals (seven in number) were allotted to the Special Bench for disposal, we proceed to decide the same on all issues including the hotly contested issue relating to computation of deduction under Section 80M. The main issue involved in the present appeals is as to whether in computing the deduction under Section 80M proportionate management expenses/administrative expenses are to be deducted f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. . Reliance was also placed on the following decisions in support of the contention: (i) Usha Martin Industries Ltd. v. Dy. CIT (2003) 79 TTJ (Kol) 23: (2003) 86 ITD 261 (Kol). (ii) East India Agencies (P) Ltd. v. CIT . (iii) CIT v. Pfizer Corporation , (iv) CIT v. Jai Hind Investment Industries (P) Ltd. , (v) CIT v. Mahendra Sobhagchand Shah . 4. After hearing of the appeals, the learned Counsel filed a letter inviting our attention to the decision of Madhya Pradesh High Court in the case of State Bank of Indore v. CIT to support the contention that the proportionate management expenses are not to be deducted for the purposes computation of deduction under Section 80M. 5. The learned Departmental Representative, Shri R.K. Goyal, on the other hand, contended that the issue has been decided in favour of the Revenue by the Tribunal for the asst. yrs. 1990-91 to 1992-93 (supra) on the basis of the facts and circumstances of this case. It was submitted that each case has got to be decided on the basis of its own facts and, therefore, if a different view has been taken in any other case, that decision may not have any bearing on the facts of this case. It was further cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of law relating to deduction on proportionate management expenses for the purposes of computation of deduction under Section 80M decided in favour of the Revenue. 7. The learned Departmental Representative also relied upon the decision of the Chandigarh Bench of the Tribunal in the case of Haryana State Co-op. Supply & Marketing Federation Ltd. v. Asstt. CIT, ITA Nos. 681, 682 and 683/Chd/2002, reported at (2005) 92 TTJ (Chd) 1269Ed. in support of the contention that deduction under Chapter VI-A is to be allowed after taking into account the proportionate management and other indivisible expenses. Reliance was also placed on the following decisions to support the contention that deduction of expenses on proportionate basis has been recognized by Supreme Court and various High Courts and the principle that deduction under Section 80M is permissible in respect of net dividend income after giving effect to all the provisions of the Act.: (i) Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CIT; (ii) CIT v. Sonepat Co-operative Marketing Society Ltd.; (iii) Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT; (iv) Kota Co-operative Marketing Society Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply & Marketing Federation (supra) is inapplicable to the facts of this case insofar as in that case the deduction was permissible out of the business income under Section 80P(2) and in the case of the assessee the deduction is permissible out of the income from other sources. It was further contended that borrowed money has not been utilized for acquisition of share yielding dividend income. 11. We have given our careful consideration to the rival contentions and have also considered the earlier order of the Tribunal in the case of the assessee for asst. yrs. 1990-91 to 1992-93 (supra) and order of the Tribunal in the case of Mahavir Spinning Mills (supra). We first consider the main issue in these appeals relating to computation of deduction under Section 80M of the IT Act, 1961. 12. It hardly needs to be mentioned that the IT Act, 1961 provides for taxation of income of various persons. The Act recognizes some of the artificial entities as persons such as partnership firm is recognized as a person under the provisions of the Act. The Act also provided for taxation of the income of the firm as well the share income of the partners from the firm, which had suffered tax in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of such dividends. 15. It may be pertinent to mention that Section 80M was omitted by the Finance Act, 1997 (26 of 1997) w.e.f. 1st April, 1998 in consequence of insertion of Section 10(33) of the IT Act, 1961 granting exemption in respect of dividend income. However, the said section was reintroduced from asst. yr. 2003-04 as the exemption in respect of dividend income was removed. Subsequently, it was again omitted by the Finance Act, 2003 w.e.f 1st April, 2004 as the dividend income is now exempt in the hands of the shareholders. However, Section 14A has been incorporated with retrospective effect to ensure that exemption under Section 10(33) is granted only on the net component of dividend included in gross total income. 16. Section 80M applied to only one category of dividend, i.e., dividend received by domestic company from a domestic company. A domestic company means an Indian company or any foreign company which makes prescribed arrangement for the declaration and payment, within India of the dividend payable out of its income liable to tax under the IT Act, 1961. In order to get the benefit of this section, it was necessary that the company receiving dividend sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income, or in other words, forms part of the gross total income, the condition specified in the opening part of Sub-section (1) of Section 80M would be fulfilled and the provisions enacted in that sub-section would be attracted. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words 'such income by way of dividends' must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words 'such income by way of dividends" must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. That would obviously be the income by way of dividends computed in accordance with the provisions of the Act. (Emphasis, italicised in print, supplied) 18. As is evident from the decision of the Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors. (supra) and the provisions of Section 80AA the deduction under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as under: 14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income: A.-Salaries *** C.-Income from house property D.-Profits and gains of business or profession E.-Capital gains F.-Income from other sources Chapter-VI deals with deductions out of gross total income. Some of the relevant provisions are as under: Section 80A reads as under: 80A. (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in Section 80C to 80U. (2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee. (3) Where, in computing the total income of an AOP or a BOI any deduction is admissible under Section 8-G or Section 80GGA or Section 80GGC or Section 80HH or Section 80HHA or Section 80JJB or Section 80HHC or Section 80HHD or Section 80-1 or Section 80-IA or Section 80-IB or Section 80J or Section 80JJ, no deduction under the same section shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause, "family pension" means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death; (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. Section 58 reads as under: (1) Notwithstanding anything to the contrary contained in Section 57, the following amounts shall not be deductible in computing the income chargeable under the head 'Income from other sources' namely: (a) in the case of any assessee, (i) any personal expenses of the assessee; (ia) any expenditure of the nature referred to in Sub-section (12) of Section 40A; (ii) any interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938) on which tax has not been paid or deducted under Chapter XVII-B; (iii) any payment which is chargeable under the head "Salaries", if it is payable outside India, unless tax has been paid thereon or deducted therefrom under Chapter XVII-B; (1A) The provisions of Sub-clause (iia) of Clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me from a particular source if deduction of such expenditure is necessary to ascertain the true income. We will deal with this aspect at a later stage. We shall initially deal with the deductions, which are permissible out of the dividend income assessed under the head "Income from other sources" specifically provided under the statute. The deductions under the head "Income from other sources" are specifically provided under Section 57 of the Act which has been quoted elsewhere in this order. Section 58 restricts the deductions in certain circumstances. Section 57(iii) is a general clause for admissibility of deduction in respect of any expenditure laid out or expended wholly and exclusively for the purpose of making or earning the income. In the case of Vijaya Laxmi Sugar Mills Ltd. v. CIT , their Lordships of the Supreme Court have laid down the following principles for the purpose of deducting the expenses out of the income from other sources under Section 57(iii) of the Act: That the requirement under Section 57(iii) that the expenditure should have been incurred 'for the purpose of making or earning such income' shows that the object of spending or the end or aim or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure and the earning of income need not be direct and even an indirect connection could prove the nexus between the expenditure incurred and the income. We fully agree with the view taken by the Bombay High Court. (Emphasis, italicised in print, supplied) In view of the direct decision of this Court in Eastern Investments Ltd. v. CIT , it is not necessary for us to multiply authorities. Summarising, therefore, the facts of the present case, the position which emerges is as follows: (1) that a genuine and bona fide contract had been entered into between the assessee and the bank for transfer of large number of shares to the assessee. (1) that the assessee in pursuance of this agreement had raised a loan of Rs. 44,14,990 from the bank in order to acquire the shares and had paid interest of Rs. 2,04,744 for this purpose; and (3) as a result of the aforesaid acquisition, under Clause (3) of the agreement the dividends, rights, bonuses, etc., held by the bank were held for the benefit of the assessee after they were declared. It is obvious that if the assessee would not have paid the interest on the loan raised by him he would not have been able to get the dividend in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of such establishment expenses which are unconnected with the earning of income assessable under the head "Income from other sources". In case of company liquidation, the expenses incurred by a liquidator such as salary and other expenses were not allowed as deduction from income earned by way of interest from a fixed deposit in the relevant year on the ground that the expenses were not incurred for earning of the income. The Hon'ble Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd v. CIT (supra) has laid down the following principles for the purposes of deducting the expenses out of the "income from other sources": (i) It is true that the connection between the expenditure and the earning of income need not be direct and it may be indirect. But, since the expenditure must have been incurred for the purpose of that income, there should be some nexus between the expenditure and the earning of the income. (ii) The requirement under Section 57(iii) that the expenditure should have been incurred "for the purpose of making or earning such income" shows that the object of spending or the end or aim of the intention of such spending was for earning the interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of income, certain deductions are regulated under the Act and as such at times it is necessary to make adjustments in the net income determined in accordance with the recognized method of computation. In order to appreciate as to whether only deductions as provided under Section 57 are to be made in computing the dividend income, it will be useful to find out some precedents. 34. In the case of Probhat Chandra Barua v. Emperor 5 ITC 1 (PC), it was held that tax under the head income from other sources is not upon gross receipt but upon income properly so-called and, therefore, such deduction may be made as are necessary to ascertain the true income. In this case, it was held that while assessing the income from zamindari the annual jama or Government revenue should be deducted. In the case of CIT v. Raja Sri Sri Kalyani Prasad Deo (1945) 13 ITR 17 (Pat), it was held that in respect of non-agricultural income derived from coal fields situated in zamindari, a proportionate part of jama should be allowed. In the case of Sachindia v. CIT 5 ITC 396, it was held that where a receiver is appointed by the Court of Estate yielding both agricultural and non-agricultural income, a proporti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a business taxable under Section 10(1). Profits and gains which are liable to be taxed under Section 10(1) are what are understood to be such under ordinary commercial principles. When a claim is made for a deduction for which there is no specific provision under Section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. (Emphasis, italicised in print, supplied) 39. In the case of CIT v. S.C. Kothari , their Lordships of Supreme Court held as under: The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and legitimate expenses of the business 40. In the case of CIT v. Seshasayee Paper & Boards Ltd. , the Madras High Court held that the charge of IT Act is not on gross receipts but on profits and gains properly so-called. Similar view was expressed by Madras High Court in the case of CIT v. Prasad Process (P) Ltd. . This view is further supported by the following decisions: (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the source of income by way of dividend. As pointed out earlier, in some cases the earning of dividend may be in the course of carrying on the business or may be incidental to the business. On the other hand, in some cases, the earning of dividend income may be unrelated to the activities of business of the assessee and may also not be incidental to business activities. 44. It has to be borne in mind that "Heads of income" and the "Source of income" are not the same. The Hon'ble Supreme Court in the case of CIT v. Chugandas & Co. and in the case of United Commercial Bank Ltd. v. CIT held that the heads of income are intended merely to indicate the classes of income and that the heads do not exhaustively delimit sources from which income arises and that business income is broken up under different heads only for the purpose of computation of the total income and that by that breaking up the income does not cease to be the income of the business, the different heads of the income being only the classification prescribed by the IT Act for computation of income. Madhya Pradesh High Court in the case of CIT v. Shrikishan Chandmal (1966) 60 ITR 303 (MP) at p, 306 held that the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht out the business connection between the securities of a bank and its business, thus; In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash easily realizable securities to meet any probable demand by the depositors.... In the present case the Tribunal held, on the evidence, and that was accepted by the High Court, that the assessee was investing its amounts in easily realizable securities and, therefore, the said securities were part of the trading assets of the assessee's banking business. The decision of this Court in United Commercial Bank Ltd. v. CIT does not lay down any different proposition. It held after an exhaustive review of the authorities, that under the scheme of the IT Act, 1922, the head of income, profits and gains enumerated in the different clauses of Section 6 were mutually exclusive, each specific head covering items of income arising from a parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nits of the UTI were common in nature and both toe businesses were intertwined and interlaced; and, therefore, the business in purchase and sale of units was an "eligible business" within the meaning of the definition of 'eligible business" in Section 32AB(2) and the assessee was entitled to deduction of 20 per cent of the profits from that business, though the income therefrom was declared by the assessee-company as 'Income from other sources'. The High Court, on a reference, accepted the finding and affirmed the decision of the Tribunal. On appeal to the Supreme Court. Held, affirming the decision of the High Court, that the business of the assessee-company of buying and selling of units was an 'eligible business' as contemplated under Section 32AB, and the income earned from its investment in the units of the UTI had to be included in computing the profits of 'eligible business' under Section 32AB. The fact that the income was shown under a different head of income did not deprive the assessee-company of the benefit under Section 32AB so long as the investment in the units was in the course of its 'eligible business'. Decision of the Kera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y business considerations (we will hereafter refer, to this category as category 'A'), In some cases, the earning of dividend may be in the course of business activities of the assessee or may be incidental to the business of the assessee (we will hereafter refer to this category as category 'B'). The computation of net income in the case of category 'A' cases and category 'B! cases will vary. 53. We first deal with category 'A' cases. The cases where the investments are made purely on consideration of long-term investments and not on any business considerations. In such cases, the source of dividend income is itself "Income from other sources" and the head of income is also "Income from other sources" 54. In category 'A' cases, the dividend income shall have to be computed by deducting from the gross dividend receipts the expenses specified under Section 57 and further adjustments if any made under Sections 58 and 59 of the Act, As has been explained earlier, deduction under Section 80M has got to be allowed out of the dividend income as computed under the provisions of the Act and included in the gross total income of the assessee. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of State Bank of Indore v. CIT (supra) held as under: Held, that, since in the instant case, the taxing authorities had not taken into consideration the actual expenditure incurred by the assessee while earning the dividend but had only proceeded to take notional expenditure, the same was not sustainable in law. The expenditure of 10 paise per Rs. 100 of dividend income was not deductible for purposes of Section 80M. 57. The Bombay High Court in the case of CIT v. Central Bank of India (supra) held as under: As held in numerous cases by the Court, Chapter VI-A constitutes a separate code dealing with deductions to be made in computing total income. Section 80M refers to special deduction in respect of inter-corporate dividends. As held by the Bombay High Court in the case of CIT v. Maganlal Chhaganlal (P) Ltd. , in order to compute deduction under Section 80M, one has to compute the amount of dividend in accordance with the Act after deducting interest on monies borrowed by earning such income. The print to be noted is that deductions contemplated by Section 80M referred to actual expenditure whereas, deductions contemplated by Section 20(1) are estimate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the claim. It was observed that no effort is necessary for receiving interest from fixed deposits and the compensation. It appears that, no material had been produced by the assessee to show that he was entitled to a larger allowance. In such situation, the Madras High Court held that the allocation made by the ITO has to be taken as a reasonable estimate. 59. It is, therefore, not difficult to appreciate that in such type of cases, i.e., category 'A' cases, the proportionate management expenses and other expenses unrelated to earning of dividend income are not to be deducted for calculation of deduction under Section 80M. We are, therefore, of the considered opinion that the net dividend income determined in accordance with provisions of Sections 56 to 59 is not to be reduced by proportionate profit and loss expenses/overheads unrelated to the earning of dividend income in category 'A' cases. We hold accordingly. 60. The above view, however, may not hold good in category 'B' cases. As pointed out earlier, category 'B' cases are such cases where dividend, is earned in the course of carrying on business or is incidental to the business activiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations: Tulzapurkar J. The question in respect of which rule has been obtained by the CIT thus: Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. to the assessment year in question without considering the effect of the amendment operative from 1st April, 1968, and in thus holding that the assessee would be entitled to the deduction under Section 80M on the gross dividend before deduction of the proportionate management expenses. In our view, the question as framed does not really arise out of the Tribunal's order since the only question which was agitated before the Tribunal was whether the deduction under Section 80M of the Act was to be computed with reference to the gross dividend income without deducting therefrom the proportionate management expenses and the Tribunal, relying on the decision of this Court in Sahu Brothers (Saurashtra)(P) Ltd. (?) and in the case of CIT v. New Great Insurance Co. Ltd. , held that the relief under Section 80M was to be computed with reference to the gross dividend income. It appears clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Kunhayammed and Ors. v. State of Kerala and Anr. The relevant portion of the decision is reproduced as under: Once special leave to appeal from an order has been granted by the Supreme Court the order impugned before the Supreme Court becomes an order appealed against. Any order passed thereafter by the Supreme Court would be an appellate order and would attract the applicability of the doctrine of merger. It would not make any difference whether the order is one of reversal or of modification or of dismissal affirming the order appealed against. It would not also make any difference if the order is a speaking or non-speaking one. (Emphasis, italicised in print, supplied) 67. Thus the decision of the Hon'ble Supreme Court that proportionate management expenses are to be deducted from the gross dividend is of binding nature notwithstanding the fact that the detailed reasoning is not contained m the decision of the Hon'ble Supreme Court. 68. The principle of apportionment of expenses proportionately in the case of indivisible expenses was again reiterated by the Hon'ble Supreme Court in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verage rate of income-tax on the amount on which no tax was payable. On appeal to the Supreme Court: Held, (i) affirming the decision of the High Court, that since Section 66 required the computation of the total income by including all income on which no income-tax was payable under Chapter VII, the income on which no income-tax was payable by a co-operative society under Section 81(i)(d) falling in Chapter VII had to be necessarily included in its total income. Section 110 was then attracted. Hence, when the income of the co-operative society on which no tax was payable was included in its total income, it became entitled to a deduction from the amount of income-tax chargeable on its total income. That meant that the co-operative society became entitled to deduction or exemption of income-tax payable by it only on the net amount of profits and gains, i.e., on the income of its business otherwise computable m accordance with the provisions of the IT Act, 1961, for the purpose of charging income-tax thereon and which was included in its total income, and not on the amount of its gross profits and gains of business on which no income-tax was payable. 70. In the case of CIT v. Mag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before computing the benefit under Section 80M. It is not possible to hold that an assessee has, by reason of being a dealer in shares, an option not available to other assessees also deriving income from dividends, to deduct the interest paid on the amount borrowed for investing in he shares for which dividend is earned as expenditure in relation to his business, and deduct the same under Section 36(1)(iii). The assessee, a dealer in shares, claimed deduction under Section 80M in respect of the gross amount of dividends received by it. The Tribunal upheld the claim of the assessee. On a reference: Held, that the relief under Section 80M could not be granted on the gross amount of dividend received by the assessee but on the gross amount as reduced by the amount of interest attributable to the money borrowed for the purpose of investment and the expenditure incurred in realising the dividend income. 74. In the case of CIT v. Industrial Finance Corporation of India (supra), their Lordships of the Delhi High Court held that deduction under Sections 80K and 80L have to be computed with reference to the net dividend, i.e., after deduction of expenses relatable thereto under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e net component of income which is included in the gross total income as it is only the net income which is included in the gross total income. Having held that the dividend income is incidental to the business activities of the assessee, there is no escape from the view that it is the net component of dividend income determined after deduction of proportionate expenses for determining the net component of dividend income which is included in the gross total income. 77. It may be pertinent to mention that the decision of the Calcutta Bench of the Tribunal in the case of Dy. CIT v. S.G. Investments & Industries Ltd. (supra) was sought to be distinguished on the ground that the said decision has been rendered with reference to provisions of Section 14A applicable in respect of income not. liable to tax. It was further contended that the said decision would not be applicable in respect of the income which is included in the gross total income out of which deduction is permissible. The principle laid down in the decision of the Tribunal in the case of S.G. Investments & Industries Ltd. (supra) that the component of net income is to be determined after taking into account all the deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry of the Special Bench decision on the main issue is thus as under: That for purposes of calculating deduction under Section 80M (i) Where the dividend received is on investments unrelated to the business of the assessee or is not incidental to the business activities of the assessee the gross dividend shall be reduced by specified deductions and the proportionate management/overhead expenses related to the business income of the assessee would not fall under Section 57(iii) of the Act and, therefore, not to be deducted. (ii) That where the dividend receipt is part of the business income of the assessee or is incidental to the business activities of the assessee, the indivisible expenses of business have got to be apportioned between the various receipts of business income including dividend and deduction under Section 80M calculated on net income accordingly. 81. On the basis of the above principles of law it will be relevant to ascertain the nature of the dividend income derived by the assessee. 82. As per the Industrial Policy of Punjab Government, the assessee corporation has been established to engage itself in setting up and promoting new industrial units in Punjab. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In promotion of projects being undertaken by the corporation, the expenses incurred on such projects during the implementation stages are charged to the Revenue of the year in which the payment are made and shown under the head 'Project Survey Expenses'. The recovery of such expenses of the respective projects (excepting the cases of abandoned projects where no recoveries are made) are credited to the head 'Receipts on account of projects matured' in the years of maturity of respective projects. The above policy has been adopted because promotion of projects is a major activity of the corporation. Recovery, if any, made in the subsequent years on account of abandoned projects is credited to the miscellaneous income in the year of actual receipt. 83. It will also be relevant to refer to the source of income of the assessee and the nature of expenditure claimed against such income. We, for the sake of convenience, refer to the statement of income for the financial year 1996-97: Income 1996-97 1995-96 Profit from sale of investment 145555035 35812583 Income from interest 403149177 300092535 Dividend on investment 111125603 79418338 Other income 12269860 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Supreme Court in the case of CIT v. United General Trust Ltd. (supra) after referring to the decision in the case of Distributors (Baroda) (P) Ltd. (supra) as well as the fact of introduction of Section 80AA by the Finance (No. 2) Act, 1980 with retrospective effect from 1st April, 1968, overruled the judgment of the Bombay High Court; in the case of CIT v. United General Trust (P) Ltd. . The position which emerges after the decision of the Hon'ble Supreme Court in the case of United General Trust (P) Ltd. referred to supra in that, proportionate management expenses have to be deducted from the gross dividend for purposes of relief admissible under Section 80M. In the case of the assessee, from the statement annexed along with the return, it is seen that the income from dividend shows in the profit and loss account is a figure of Rs. 2,21,77,240 which is the gross dividend without considering any expenditure incurred for earning of the said income. The assessee has claimed deduction under Section 80M with respect to this gross dividend income which is not in accordance with law in view of the decision of the Supreme Court in the case of United General Trust (P) Ltd. (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its earlier order or reference for asst. yrs. 1990-91 to 1992-93 but no appeal or reference for the aforementioned assessment years has been filed against the said order to the High Court. 87. It is evident from the order of the Tribunal in assessee's own case that the decision of the Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra) has been relied upon by the Tribunal for arriving at the decision. The another Bench of the Tribunal in the case of Mahavir Spinning Mills Ltd. have referred to the decision of the Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra) and pointed out that the said decision has got to be seen in the context in which it was rendered. The Bench has further recorded a finding of fact that no expenses had been incurred by the assessee to earn dividend income and, therefore, deduction under Section 80M was, permissible on the gross dividend income. The decision of the Tribunal in the case of Mahavir Spinning Mills Ltd. (supra) is inapplicable to the facts of this case insofar as in that case a finding of fact has been recorded by the Tribunal that no expenditure has been incurred by the assessee for earning t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has purchased shares and such shares not having been treated as stock-in-trade, the profit on the sale of such shares, in our view, is bound to be assessed under the head "Capital gains". This finding, in our humble view, does not contradict our finding that the dividend earned by the assessee is in the course of carrying on of its business. We have expressed the view that whereas purchase of shares is a capital investment in the course of business, the dividend has been realized in the course of exploitation of the capital asset of the assessee, namely, the investment in shares. We are, therefore, of the view that there is no contradiction in the order, 90. We now proceed to consider the grounds of appeal raised by the assessee as well as by the Revenue in cross-appeals. 91. Ground No. 1 in asst. yr. 1994-95 and ground No. 2 in asst. yr. 1995-96 in assessee's appeal are as under: Asst. yr. 1994-95 1. (i) That the learned CIT(A) was not justified in holding that the amount which is admissible as deduction under Section 36(i)(viii) is to be deducted from the dividend income to arrive at the net dividend income for purpose of deduction under Section 80M. (ii) That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther sources and further deduction under Section 80M is admissible with reference to the dividend income before allowing deduction under Section 36(l)(viii) of the II' Act; in this regard, reference was made to the assessment records. It appears that the issue whether deduction under Section 36(1)(viii) of the IT Act was admissible from the dividend income came up for consideration in this year for the first time. At the time of framing the assessment the AO held that dividend income was income from other sources, therefore, deduction under Section 36(1)(viii) was not admissible with respect of this income, Therefore, dividend income was excluded for the purpose of allowing deduction under Section 36(1)(viii) and deduction under Section 80K and 80M of the IT Act was thereafter allowed from such dividend income. The issue was decided in favour of the appellant in first appeal. The CIT(A) following the order of the Tribunal, Chandigarh Bench, in the case of Punjab Financial Corporation, held "in consonance with the decision of the Tribunal, cited supra, I am of the opinion that gross total income means the sum total of income computed under various heads of income, for example, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Tribunal in assessee's own cases for asst. yrs. 1990-91 to 1992-93 (supra), we uphold the orders of the Revenue authorities in this regard and dismiss the grounds of appeal raised by the assessee. 95. Second ground of appeal in asst. yr. 1994-95 and ground No. 1 in asst. yr. 1997-98 in assessee' appeal are common and are as under: Asst yr. 1994-95 2. That the learned CIT(A) was further (sic-not) justified in upholding the disallowance of rent of Rs. 3 lacs of guest house expenditure as business expenditure. It is against the order of the Hon'ble Tribunal in earlier years wherein it was held that rent of guest house is an admissible business expenditure. Asst. yr. 1997-98 1. The learned CIT(A) was not justified in upholding the disallowance of guest house rent amounting to Rs. 2,27,700. The issue stands decided by the Hon'ble Tribunal in favour of the assessee in earlier year. 96. The abovementioned grounds relate to the disallowance of guest house rent, etc. The parties agreed before us that the issue is covered in favour of the Revenue by the decision of the Special Bench in the case of Eicher Tiactors Ltd. v. Dy. CIT . Respectfully following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80M of the Act after deducting expenditure, if any, incurred by the assessee and the administrative expenses estimated of Rs. 3 lakhs as against expenses @ 95.24 per cent of the earnings worked put by the AO. 99. We have elaborately discussed that deduction under Section 80M is permissible to the assessee in respect of the net income and since in this case the dividend earned by the assessee is in the course of the business, the expenses incurred for the purpose of business income have got to be apportioned between the business receipts including dividend proportionately. In asst. yrs. 1990-91 to 1992-93 the Tribunal has considered 50 per cent of the gross dividend income as expenses attributable to the earning of the dividend income. Whereas the AO has estimated the expenditure on higher rate than 50 per cent adopted by the Tribunal, the CIT(A) has resorted to ad hoc estimation. We taking into account the totality of the facts and circumstances of this case consider the estimate made by the Tribunal at 50 per cent of the gross dividend as reasonable. We accordingly direct the AO to compute the deduction under Section 80M by deducting 50 per cent of the gross dividend on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersons and incur expenditure over them. Upto the asst. yr. 1989-90, such expenditure was claimed as revenue expenditure and was allowed as such by the AO however, for the asst. yr. 1990-91, the AO held it to be "capital expenditure". On appeal, the CIT(A) treated the expenditure of revenue nature but held that the assessee ought to have shown the value of unsold project reports/feasibility study reports as stock-in-trade to arrive at the correct profits. The learned first appellate authority before whom the decision of the Karnataka High Court referred to supra was cited, observed that the full facts of the case were not discussed in the judgment cited and there was no discussion as to part of the closing stock of the assessee corporation or not. The question which we have to decide is as to whether the expenditure amounting to Rs. 8,34,427 incurred by the assessee in the assessment under consideration is a revenue expenditure or a capital expenditure. The learned first appellate authority has held it to be revenue expenditure and that decision is in accordance with the ratio of the decision of the Karnataka High Court referred to supra. However, the learned first appellate authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the ground of appeal in this regard in ground No. 2 in asst. yr. 1994-95 ground No. 2 in asst. yr. 1995-96 and ground No. 1 in asst. yr. 1996-97 and ground No. 1 in asst. yr. 1997-98. These grounds are reproduced hereunder for the sake of ready reference: Asst. yr. 1994-95 2. The learned CIT(A) has further erred in deleting the addition of Rs. 28,88,58,740 made on account of sale of shares and directing the AO to assess it under the head 'Capital gain'. Asst. yr. 1995-96 2. The CIT(A) has erred in deleting the addition of Rs. 12,10,97,295 rightly made by AO by treating the profit on sale of shares as business income. Asst. yr. 1996-97 1. On the facts and circumstances of the case, the learned CIT(A) in appeal No. 538/P/1998-99 has erred in deleting the addition of Rs. 3,52,52,583 made on account of business income from sale of shares, by holding that the income arising on the sale of shares is to be assessed under the head 'Capital gains' and not business income. Asst. yr. 1997-98 1. On the facts and circumstances of the case, the learned CIT(A), Chandigarh in appeal No. 427/P/1999-2000 has erred in deleting the addition of Rs. 14,55,55,035 which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CIT(A) is in conformity with the decision of the Tribunal in assessee's own case for earlier years, we find no justification to interfere. 106. Ground No. 3 in asst. yr. 1996-97 of the appeal of the Revenue is as under: 3. Learned CIT(A) erred in deleting the disallowance of Rs. 7,77,594 made on account of expenditure under the head 'Business promotion expenses'. 107. The AO had treated the expenditure as capital expenditure. The CIT(A) has given details of the expenditure in para 4.3 of his order as under: 4.3 The submissions made by the appellant have been considered carefully and I have also gone through the details of the expenses which are as under: (i) Conference on Chandigarh Gateway to golden opportunities of business in Punjab headed by Chief Minister of Punjab. 73,217.00 (ii) Meeting of Senior Executives of Financial Institutions along with Chief Minister and DCMD to promote the industry m Punjab 69,03.08 (iii) Meeting of Company and other Officers with Ambassadors of Latin American Countries to Promote Trade and Co-operation between their countries and The State of Punjab 5,258.00 (iv) Air ticket of CM and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sahayak" for providing assistance/guidance to entrepreneurs for setting up of industries in the State of Punjab. During the year total expenditure on running the cell amounted to Rs. 4,93,010. The assessee had to contribute 30 per cent which works out to Rs. 82,168. The AO treated this expenditure as of capital nature. The CIT(A) considering the facts that one of the objective of the corporation was to industrialise the State of Punjab and that the expenditure had been incurred by the assessee for furtherance of business and for industrialization of the State held the expenditure as of revenue nature. The CIT(A) has also relied upon the decision of the Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. v. CIT and that of the Bombay High Court in the case of CIT v. Sales Magnesite (P) Ltd. to arrive at the conclusion. 111. In our considered view, there is no infirmity in the order of the CIT(A) insofar as the expenditure has been incurred by the assessee for furtherance of its objective of industrialization of the State of Punjab. The AO had wrongly treated this expenditure of capital nature. We accordingly decline to interfere. 112. Ground No. 4. in the appeal of the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose an order on behalf of the Bench. The said order was accordingly proposed. I had reservation on the view taken in the proposed order and felt need to have further discussion with other Hon'ble Members of this Bench. The discussion was only possible during my camps at Chandigarh. It emerged in the course of discussion that my Brother Shri M.A. Bakshi, the Hon'ble Vice President had strong views about his approach in the case. But all the same, he agreed to consider my points of view. Accordingly, I had prepared a written note for consideration of the learned Members of the Bench. The said note was duly discussed and after discussion, it was thought appropriate by the Bench to allow further hearing to the parties as considerable time had elapsed between the last hearing of case and disposal of the matter. 2. Accordingly, a fresh hearing was granted to the parties on 6th March, 2006 and certain doubts were got clarified from learned representatives of the parties. The matter was again discussed. However, no consensus could be reached and accordingly my brother Shri Bakshi, the Hon'ble Vice President has sent a signed proposed order for consideration of other Members. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 57 and as per Clause (iii) of said section, any expenditure laid out or expended wholly and exclusively for purposes of making or earning of income is deductible. He, thereafter quotes from the decision of the Hon'ble Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. v. CIT and emphasized that as per the above decision, connection between expenditure and earning of income need not be direct and it may be indirect. My Brother further quotes," but expenditure must have been incurred for purpose of that income and, there should be some nexus between expenditure and the earning of income." It is further quoted that expenditure in the said case was not held to be deductible under Section 57 as interest had accrued sui generis and expenses were not incurred with the object or for purpose of earning the income and were not deductible. The learned Vice President thereafter quotes the following from decision of Hon'ble Supreme Count in the case of Seth R. Dalmia v. CIT as under: ...deduction which is permissible under Sub-section (2) of Section 12 is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of winding up of company, had claimed certain expenditure against interest income. The deduction was allowed with the following observations: Held, that the expenditure was incurred in the performance of his duties by the official liquidator and the nature of the expenditure clearly showed that the expenditure was incurred to protect and preserve the assets. The finding of the Tribunal in the instant case was that the expenditure was incurred to maintain the infrastructure for earning or making interest income and without incurring expenditure, it would not have been possible to earn income by way of interest. The finding of the Tribunal clearly showed that there was a nexus between the expenditure and the interest income earned and that finding regarding the nexus was a finding of fact. The Tribunal was correct in holding that the entire expenditure incurred by the assessee was deductible under the provisions of Section 57(iii). In the above case, their Lordships of Hon'ble Madras High Court distinguished decision of Hon'ble Supreme Court in Vijaya Laxmi Sugar Mills Ltd. (supra) by observing that in the case before them, expenses were found to be incurred to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice President has referred to the cases of Probhat Chandra Barua v. Emperor 5 TTC 1 and CIT v. Raja Sri Sri Kalyani Prasad Deo (1945) 13 ITR 17 (Bom). In the first case of Probhat Chandra Barua (supra), their Lordships of Privy Council observed as under: At p. 240 his Lordship observed: "Their Lordships were unable to ascertain upon what footing the appellant had been assessed in respect of the income derived from his zemindari, i.e., whether on the gross income or after some allowance had been made in respect of the jama assessed and paid upon the lands. Their Lordships are of opinion that, in assessing the appellant to income-tax in respect of the income derived from the zamindari, his income, profits and gains from that source should be computed after making proper allowance in respect of the jama assessed and paid. The assessee is sought to be assessed in respect of the non-agricultural income derived from the coal fields which are situated within his zamindari. The assessee is, therefore, entitled to claim a deduction for the jama which should be ascertained as paid by him for the lands in his zemindari which produced him the royalties, otherwise the tax would not be upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine the net component of dividends included in the gross total income on which deduction under Section 80M is permissible to the assessee. There can be no dispute on above proposition as similar observations have been made in the decision of Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors. . 16.1 further agree with the proposition that dividend although assessable under the head, "Income from other sources" may nevertheless be treated as "business income". But I can agree with my learned Brother to the above extent only. I am unable to share my learned Brother's views that for purposes of computation of deduction under Section 80M, it is necessary to trace out the source of income of dividend. I am not sure with reference to which decision or statutory provisions, above observations have been made. I am also further unable to agree that in some cases, the earning of dividend may be in the course of carrying on the business or may be incidental to business. 17. In my humble opinion, shares may be held by an assessee as a capital investment or as stock-in-trade. Nature of holding of shares in the hands of an assessee is materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it is assessable under the head 'Income from other sources'. (iii) That computation of dividend income in accordance with Act does not restrict the scope of computation to Sections 56 to 59 of the Act. That the real component of dividend income included m the gross total income shall have to be computed in accordance with the Act and established principles of accounting. (iv) The nature of dividend income may vary from case to case. In some cases, the dividend earned by the assessee may be on investments made in the domestic company(s) de hors any business considerations (we will hereafter refer to this category as category 'A'). In some cases, the earning of dividend may be in the course of business activities of the assessee or may be incidental to the business of the assessee (we will hereafter refer to this category as category 'B'). The computation of net income m the case of category 'A ' cases and category 'B' cases will vary. 20. After careful consideration, I accept principle (i) above but am unable to subscribe to the principles (ii) to (iv) laid down by my learned Brother, the Hon'ble Vice President. None of the cited au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot challenge above legal proposition and, therefore, I do not make any further comments on view expressed by my learned Brother in 'A' category cases. It has been observed that as per decision of Supreme Court in the case of Badridas Daga v. CIT , expenditure on embezzlement were allowed in computing income from business notwithstanding the fact that there is no specific provision for allowance of deduction of such expenses. On the basis of above and other authorities, my learned Brother has concluded that expenditure even while computing income from other sources can be allowed although not specified in Sections 57 to 59 of the IT Act and above expenses can also be taken into account while computing deduction under Section 80M of the IT Act. I am unable to subscribe to the above view. 22. In the case of Badridas Daga (supra), the question of law referred to the Court was as under: Whether the said sum of Rs. 2,02,442-13-9 being part of the amount embezzled by the assessee's munim is allowable as a deduction under the Indian IT Act either under Section 10(1) or under the general principles of determining the profit and loss of the assessee or Section 10(2)(xv)? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other expenses can be deducted either under Section 57 or otherwise my learned Brother has referred to and relied upon the decision of Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. . My learned Brother has also reproduced decision of Bombay High Court in the above case holding that question as framed was not arising out of the order of the Tribunal. Since only question which was considered by the Tribunal was whether deduction under Section 80M of the IT Act was to be computed with reference to gross dividend income without deducting therefrom the proportionate management expenses. The Tribunal relying upon decision of Bombay High Court held that relief was to be allowed with reference to gross dividend income. My Brother has held that question was answered in favour of the Revenue and said decision relating to deduction of proportionate management expenses is binding upon any authority working under its jurisdiction. He has also observed that question of deduction of proportionate expenses was not considered by the Supreme Court in detail. However, he has quoted decision of Hon'ble Supreme Court in the case of Kunhayammed and Ors. v. State of Kerala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as reversed. As per the settled law, the said question of deduction of proportionate expenses was required to be decided by the Tribunal on taking up the matter after receiving answer to the question referred to the Court. As the question was not considered and decided by the Tribunal, the question of answering said question or laying down any legal proposition relating to same did not arise. At any rate, the Bench of apex Court has not laid down any proposition beyond what was laid by Constitutional Bench in the case of Distributors (Baroda) (P) Ltd. (supra). A reference to aforesaid decision would be made a little later. 27. My learned Brother has also drawn support from the decision of Hon'ble Supreme Court in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT for the proposition that expenses can be apportioned in case of claim of indivisible expenses. In the aforesaid case, the Supreme Court has followed the case of Distributors (Baroda) (P) Ltd. (supra). Further the decision has been given on peculiar facts of the case and on interpretation of Section 80-I, Sections 66 and 110 of IT Act. Further the decision pertains to business income. There can be no disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as reduced by the amount of interest attributable to the money borrowed for the purpose of investment and the expenditure incurred in realizing the dividend income. There can be no dispute on the proposition that expenditure incurred in realizing dividend income are deducted. If shares on which dividend is received are purchased with borrowed funds, then interest paid can be deducted while computing dividend income under Section 57 of the IT Act and deduction under Section 80M is to be allowed accordingly. But the pertinent question is to find nexus between expenditure and income. In the above referred to case, their Lordship ultimately observed as under: Counsel for the assessee points out that from the order of the AO and of the CIT, it is not clear as to whether the amount of interest deducted was the whole of the amount paid as interest by the assessee or only the portion relatable to the amount used by the assessee for investing in shares to earn the dividend. We, therefore, remand the matter to the CIT to recompute that amount with reference to the figures found in the assessment proceedings. (Underlined, italicised in print, to emphasise) 30. It is evident from abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court pointed out that business income was broken up under different heads only for the purpose of computation of the total income, and that by such break-up the income did not cease to be the income of the business. This principle was followed by this Court in CIT v. Chugandas & Co. commercial considerations may properly describe the source differently. For instance, a banking concern may hold securities in the course of its business. The securities constitute its trading assets and income from them would, in the commercial sense, be regarded as business income. (Underlined, italicised in print, to emphasise) From the above it is clear, (a) that dividend income can be business income although computed under the head "Other sources". (b) For determining nature of dividend income, the nature of holding of shares is to be seen. If income is from securities, it has to be seen whether securities are held in the course of the business and are its trading assets. Income from securities in a commercial sense can be regarded as "business income". A banking concern may hold securities in the course of its business. (c) Net income under each head should be computed and clubbed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with object or purpose of earning the income. The head of the income may not be conclusive and dividend income, although computed under the head "Other sources" can be treated as "business income" for certain specified sections where there is no restriction or condition and word "business" is to be taken as taken under common parlance. But whereas in the provision under consideration there is restriction or conditions are attached for allowing deduction, the deduction can be allowed only if conditions are satisfied. For purpose of Section 80M the deduction has to be out of "dividend income computed in accordance with provisions of this Act." There is no question of considering anything else but dividend income under the head "Other sources", (and) not under the head "Business". No provision authorizes re-computation of dividend income for purposes of Section 80M of the Act. 34. The effect and implication of restriction placed by statutory provisions was also considered by their Lordship in the case of CIT v. Chugandas & Co. (supra). In the case of CIT v. Chugandas & Co. (supra) the assessee had earned interest on securities held as trading assets. The assessee claimed exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner or his successor-in-interest qua the business, will be entitled to get the benefit of the exemption under it if the business is discontinued. The section in terms refers to tax charged on any business, i.e., tax charged on any person in respect of income earned by carrying on the business. Undoubtedly, it is not all income earned by a person who conducted any business, which is exempt under Sub-section (3) of Section 25; non-business income will certainly not qualify for the privilege. But there is no reason to restrict the condition of the applicability of the exemption only to income on which the tax was payable under the head "Profits and gains of business, profession or vocation." The legislature has made no such express reservation and there is no warrant for reading into Sub-section (3) such a restricted meaning. Sub-section (3) it may be noticed does not refer to chargeability of income to tax under a particular head as a condition of obtaining the benefit of the exemption. Diverse other provisions of the Act lend strong support to that view. Where the legislature intended to refer to a specific head of taxation under Section 6 of the Act as a condition for imposing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that above amendment could not be introduced with, retrospective effect in the light of decision of Hon'ble Supreme Court in the case of Cloth Traders (P) Ltd. v. Addl. CIT . Their Lordship rejected above contention and held that provisions of Section 80AA were merely declaratory of the law as it always was and it was further held that an erroneous view was taken by the Supreme Court in the case of Cloth Traders (P) Ltd. (supra). 36. In reaching above conclusion, their Lordship set out the history of legislation preceding enactment of Section 80M. Their Lordships considered various decisions on Section 99 of the IT Act as also on Section 85A of IT Act. Thereafter, the Hon'ble Court proceeded to consider Section 80M of IT Act which is reproduced at p. 132 of the report. The decision of Hon'ble Gujarat High Court in Addl CIT v. Cloth Traders (P) Ltd. and of Supreme Court (supra) were thoroughly analyzed. Their Lordship placed strong reliance on the decision of Supreme Court in the case of Cambay Electric Supply Co. Ltd. v. CIT . Their Lordship held that above decision undoubtedly was on a different provision namely Section 80E, but reasoning which prevailed with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before arriving at the figure that will become exigible to the deduction of 8 per cent contemplated by Section 80E(1). It will thus be seen that, according to this decision, the words "such profits and gains" in the latter part of Sub-section (1) of Section 80E were referable to the quantum of the profits and gains attributable to the specified business included in the total income as referred to in the earlier part of the provision. If this decision lays down the correct interpretation of Sub-section (1) of Section 80E, the same interpretation must also govern the language of Sub-section (1) of Section 80M. Structurally, there is hardly any difference between Section 80E, Sub-section (1), and Section 80M, Sub-section (1), and the reasoning which appealed to the Court in the interpretation of Sub-section (1) of Section 80E must apply equally in the interpretation of Sub-section (1) of Section 80M. We find ourselves wholly in agreement with the view taken by this Court in Cambay Electric Supply Co. Ltd. v. CIT and we must, therefore, dissent from the interpretation placed on Sub-section(1) of Section 80M by the decision in Cloth Traders' case (supra). (Underlined by me, ital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying on any business during the relevant assessment years, it was held that the deductions claimed by the assessee were not expenditure incurred solely for the purpose of earning interest income and that those expenses are so remote that they have no connection with the earning of the interest. Incidentally, the question of the estimate of the expenditure made by the ITO for the purpose of earning income had also come up for consideration before the Madras High Court. It was contended that the allocation should have been with reference to the total expenditure and not with reference to the actual income earned in that year. The ITO had estimated the expenses at 10 per cent of the receipts and disallowed the balance of the claim. It was observed that no effort is necessary for receiving interest from fixed deposits and the compensation. It appears that no material had been produced by the assessee to show that he was entitled to a larger allowance. In such situation, the Madras High Court held that the allocation made by the ITO has to be taken as a reasonable estimate. 39. In the case of CIT v. United Collieries Ltd. (supra), their Lordship considered the following question an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ope for allocation of notional expenditure unless the facts of a particular case so warranted. In our view, Section 20(1) contains a rule of proportionality of expenses and interest and that rule is based on estimation of expenditure whereas, Section 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend unless the facts of a particular case warrant otherwise. Therefore, we answer the latter question in favour of the assessee-bank and against the Department. 41. In the case of State Bank of Indore v. CIT (supra), their Lordship of Madhya Pradesh High Court (Indore Bench) after considering decision of Hon'ble Supreme Court in the case of Distributors (Baroda)(supra) held as under: A careful perusal of Section 80M as interpreted by the Supreme Court in Distributors (Baroda) (P) Ltd. v. Union of India and Ors. r/w Section 57 would only suggest that while giving benefit under Section 80M, the gross income of dividend cannot be taken into account but an income calculated after making deduction as per the provisions of the Act (s. 57) has to be taken into consideration. The question may still ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxing authorities or the assessee, as the case may be, is able to prove or show that a particular amount was actually incurred by the assessee in earning dividend income, then certainly to the extent the amount actually incurred has got to be deducted from the gross dividend income and then the same is to be taken into consideration under Section 80M. Since, in this case, the taxing authorities have not taken into consideration, the actual expenditure incurred by the assessee while earning the dividend, but have only proceeded to take notional expenditure, the same cannot he held to be sustainable into law. We cannot countenance such view. In our opinion, it is not in accordance with the view even taken by the Supreme Court in the case of Distributors (Baroda)'s case (supra) and the view taken by the Calcutta High Court in the cases referred supra. Such view, thus needs to be overruled. In view of the foregoing discussion, we answer the question referred to us in favour of the assessee and against the Revenue. In other words, we answer the question by holding that the Tribunal was not right in confirming the order of the lower authorities and was further not right in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. No material is available on record to show that assessee actually incurred expenses for earning dividend income and that claim of the assessee to the above effect was erroneous. Without material I see no justification on the part of the AO to deduct proportionate expenses. 43. The Hon'ble Vice President has laid down the proposition that where dividend income is earned in the course of business or where earning is incidental to the business carried on by the assessee, expenses have got to be apportioned for determining the net component of income included in the total income. In para 76 of the proposed order, a finding has been recorded that assessee did incur expenses for earning business income and dividend. Expenditure incurred for earning such income are mixed and, therefore, all expenses are to be taken into account for determining net income which is chargeable to tax notwithstanding the fact that such expenditure is not covered under Sections 57 to 59 of the Act. With utmost respect and for reasons given above, I am unable to agree to the above view. In my opinion, there is no legal justification to brand dividend income in these cases as business income for purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r acquiring shares, satisfies the conditions of Section 36(1)(iii), it is to be taken and allowed deduction while computing business income. Secondly, as noted earlier, expression, "for purposes of business" is wider than the scope of expression, "for purposes of earning profit". It is, therefore, imperative that all permissible deduction under the head "Business" are first to be considered. Only left out deduction can be considered under the head "Other sources". However, if on the basis of material, a finding can be recorded that shares were acquired with borrowed funds, with main object of earning dividend, then interest paid on borrowed funds is to be deducted under Section 57 of the IT Act. It is not possible to lay down any rule of universal application. The question has to be determined with reference to facts and circumstances of the case. But facts of a given case are required to be considered in the light of above principles. 46. In the light of above discussion, the following propositions emerge: (i) That deduction under Section 80M is to be allowed on net dividend income computed as per provisions of Sections 57 to 59 of the IT Act. The deduction is not to be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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