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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 ..... s incidental income received by the assessee on account of holding of a capital investment. It cannot have a character different from the character of shares in the hands of the assessee. Shares were not trading assets. Therefore, dividend receipts could only be assessed under the head Other sources . Out of dividend receipts only expenditure referred to in Section 57 could be deducted, i.e., any sum expended wholly and exclusively for the purpose of making or earning such income (dividend). Thus, I am inclined to hold that there is no justification on the part of the AO in making a proportionate deduction of expenses. The AO has not placed any material on record to controvert or reject the contention of the assessee that no expenditure was incurred for earning dividend income. 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. The Hon ble Vice President has laid down the proposition that where dividend income is earned in the course of business or where earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head Business and see what are the deductions permissible under the said head. If interest paid on borrowed funds for 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 u/s 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. Hence, the following propositions emerge: (i) That deduction under Section 80M is to be allowed on net dividend income computed as per provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms stated above. X X X X Extracts X X X X X X X X Extracts X X X X ..... asst. yrs. 1990-91 to 1992-93 the Tribunal has taken a wrong view in holding that proportionate expenses debited to the P & L a/c are to be deducted for the purposes of computation of deduction under Section 80M. The assessee has taken the matter to the High Court and the same is pending adjudication. Relying upon the decision of the Bombay High Court in the case of CIT v. Central Bank of India , it was contended that deduction contemplated by Section 80M refers to the actual expenditure and, therefore, the rule of proportionality of expenses and interest cannot be imported into the computation of deduction under Section 80M. Reliance was also placed on the decision of the Calcutta Bench of the Tribunal in the case of Shaw Wallace & Co. Ltd. v. Dy. CIT (2001) 71 TTJ (Cal) 478: (2002) 80 ITD 156 (Cal) at p. 174 para 19 of the order in support of the contention. Shri Garg also placed reliance on the decision of the Calcutta High Court in the case of CIT v. United Collieries Ltd. . 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive effect to support his contention that intention of the legislature is evident from the incorporation of the said section. According to the learned Departmental Representative Section 14A debars deduction in respect of any expenditure which has been incurred towards the earning of income which is not liable to tax. It was contended by the learned Departmental Representative that same analogy is applicable in respect of the income out of which deduction is permissible under Chapter VI-A of the IT Act, 1961. 6. Relying upon the decision of the Supreme Court in the case of CIT v. United General Trust Ltd., it was contended that the issue is covered by the said decision of the Supreme Court in favour of the Revenue. It was pointed out that the Hon'ble Supreme Court has overruled the decision of the Bombay High Court in the case of CIT v. United General Trust (P) Ltd. to the contrary. It was claimed that in this case, reference was deemed to have been made and the question 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computing the amount of dividend on which exemption under Section 10(33) is to be allowed. 9. It was accordingly contended that there is no reason for taking a different view than the view expressed earlier by the Chandigarh Bench of the Tribunal in assessee's own case wherein the decision of the Supreme Court in the case of United General Trust Ltd. (supra) has been relied upon to arrive at the decision. The learned Departmental Representative also stated in writing that the decision of the Madhya Pradesh High Court in the case of State Bank of Indore (supra) cited on behalf of the assessee is distinguishable on facts and in any case the decision of the Supreme Court in United General Trust Ltd. (supra) has not been considered. It was further contended that proportionate management expenses have got to be deducted under Section 57 of the IT Act, 1961 10. In counter-reply, the learned Counsel for the assessee contended that the decision of Haryana State Co-operative Supply & 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, in respect of the amount of dividend distributed by the domestic company, has been allowed under Sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year. Explanation: For the purposes of this section, the expression 'due date' means the date for furnishing the return of income under Sub-section (1) of Section 139. 14. Section 80AA reads as under: Section 80AA. Computation of deduction under Section 80MWhere any deduction is required to be allowed under Section 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross 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 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , viz., 'where the gross total income of an assessee...includes any income by way of dividends from a domestic company' describe the condition which must be fulfilled in order to attract the applicability of the provision contained in Section 80M, The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company. 'Gross total income' is defined in Section 80B, Clause (v), to mean 'total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or Section 280-O'. Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross 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-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax shrill be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions including provisions for the levy of additional income-tax of, this Act in respect of the total income of the previous year of every person. Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under Sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of the Act. 21. Section 2(45) defines "total income" as under: Total income' mans the total amount of income referred to in Section 5, computed in the manner laid down in this Act. 22. Section 14 of the IT Act, 1961 provides for classification of income chargeable to tax. It 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or remuneration to a banker or any other person for the purpose of realizing such dividend (or interest) on behalf of the assessee. (ia) the case of income of the nature referred to in Sub-clause (x) of Clause (24) of Section 2 which is chargeable to income-tax under the head 'Income from other sources', deductions, so far as may be, in accordance with the provisions of Clause (va) of Sub-section (1) of Section 36; (ii) in the case of income of the nature referred to in Clauses (ii) and (iii) of Sub-section (2) of Section 56, deductions, so far as may be, in accordance with the provisions of Sub-clause (ii) of Clause (a) and Clause (c) of Section 30, Section 31 and Sub-sections (1) and (2) of Section 32 and subject to the provisions of Section 38. (iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or (fifteen) thousand rupees, whichever is less. Explanation: For the purposes of this 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 expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting the income of an assessee, being the owner of horses maintained by him for running in horse races, from the activity of owning and maintaining such horses. Explanation: For the purposes of this sub-section, 'horse race' means a horse race upon which wagering or betting may be lawfully made. Section 59 reads as under: (1) The provisions of Sub-section (1) of Section 41 shall apply, so far as may in computing the income of an assessee under the head 'Profits and gains of business or profession'. 23. A plain reading of the aforementioned provisions of the Act clearly indicates that income-tax is chargeable on the gross total income as computed in accordance with the provisions of the Act. The procedure for determination of income from business as well as income from other sources is provided under the statute. It may be pertinent to mention that certain deductions which may not be provided specifically under various provisions of the Act, can also be deducted in computing the net income 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the nature of capital expenditure. (iii) It should not be in the nature of personal expenses of the assessee [Section 58(1)(a)(i)]. (iv) It should be incurred in the accounting year and not in any prior or subsequent year. 25. It may be stated, even at the cost of repetition, that the connection between the expenditure and earning of income need not to be direct as held by the Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. (supra). It may be indirect. In the case of Seth R. Dalmia v. CIT , their Lordships of Supreme Court at pp. 652-653 have also held as under: In CIT v. H.H. Maharani Shri Vijaykuveiba Saheb of Mom and Ors. (1975) 100 ITR 67 (Bom), a Division Bench of the Bombay High Court held that the 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 tax and the dominant purpose of the expenditure incurred must be to earn income. It was further held that the connection between the 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to be determined on the facts and in the circumstances of each case. There will be no difficulty to determine the issue in such cases where the assessee has a single source of income such as income from other sources. In such cases, the tests laid down by various High Courts and Hon'ble Supreme Court will enable the determination of the issue without any difficulty. There would also not be much difficulty in such cases where the assessee derives income from various sources but the income derived from other sources is unconnected with the business activities of the assessee. The difficulty arises in such cases where the assessee has income from various sources and the expenditure is combined expenditure taken into account in the computation of net income as per the books of account maintained by the assessee. 28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources. 29. It has to be borne in mind that no deduction would be permissible in respect of such establishment expenses which are unconnected with the earning of income assessable under the head "Income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lary if it is paid outside India without deduction of tax. On the basis of the aforementioned decisions and the relevant provisions of the Act, it is not difficult to appreciate that in computing the income from other sources the expenses such as salary, interest, commission, brokerage laid out or expended wholly and exclusively for the purpose of making or earning the income shall have to be deducted in computation of the income for the purpose of inclusion in the gross total income. 32. It hardly needs to be emphasized that the tax is on "income" and certain expenditure even if it does not fall within the specified deductions would be deductible in computing the net income. 33. The concept of income is well understood not to be the gross receipts but only the net income properly so-called and, therefore, such deductions may be made as are necessary to ascertain the true income. In order to determine the net income derived by the assessee which forms the basis for taxation, it is necessary to take into account the gross receipts which are reduced by the outgoings. Under various heads of income, certain deductions are regulated under the Act and as such at times it is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 188 (HL) in its natural and proper sense in a sense which no commercial man would misunderstand. The said principle was approved by the Privy Council in Pondicherry Rly. Co. Ltd. v. CIT 5 ITC 363 and by the Supreme Court in the case of Badridas Daga v. CIT , Calcutta Co. Ltd. v. CIT and CIT v. Bai Shirinbai K. Kooka . In the case of Badridas Daga v. CIT (supra), their Lordships of the Supreme Court held that profits should be computed after deducting the losses and expenditure incurred for the purpose of the business, profession or vocation, though such losses and expenses may not be expressly allowed under Sections 30 to 43 unless the losses and expenses are expressly or by necessary implication disallowed by the Act. The relevant portion of the judgment is reproduced as under: While Section 10(1) of the Indian IT Act, 1922. imposes a charge on the profits or gains of a business, it does not provide how these profits are to be computed. Section 10(2) enumerates various items which are admissible as deduction but they are not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under Section 10(1). Profits and gains which are liable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the Supreme Court in the case of Escorts Ltd v. Union of India , "we think all misconceptions will vanish and all the provisions will fall into place if we bear in mind a fundamental though unwritten, axiom that no legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed". It would be unreasonable to presume that the legislature intended to give relief to the assessee under Section 80M in excess of the tax that would otherwise be chargeable on dividend income in the hands of the recipient of such income. It is, therefore, in our view, necessary to determine the net component of dividends included in the gross total income on which deduction under Section 80M is permissible to the assessee. 43. Therefore, in order to determine the issue relating to the computation of deduction under Section 80M, it is necessary to trace out the source of income of dividend in the case of any assessee. The mere fact that the dividend income is to be computed under the head "Income from other sources" may not be decisive about the source of income by way of dividend. As pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the nature or the class of such income, for the deductions permissible under the law in computing the income under each head bear a particular relevance to the nature of the income. The statute operates on the principle that it is the net income under each head which should be considered as a component of the total income. The statute permits specified deduction from gross receipts in order to compute the net income. The net income under the different heads is then pooled together to constitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and of unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, i.e., the quantum of income which is assessed to tax. (Emphasis, italicised in print, supplied) 46. In the case of CIT v. Cocanada Radhaswami Bank Ltd. , their Lordships of Supreme Court expressing similar view held as under: Some of the decisions cited at the Bar may conveniently be referred to at this stage. The Judicial Committee in Punjab Co-operative Bank Ltd. v. CIT has clearly brought out the business connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profession or vocation and they did not provide for the assessment of income under any other head, e.g., 'capital gains'. 47. The decision of the Supreme Court in United Commercial Bank Ltd. (supra), is also relevant. In this case, it was held as under: The heads described in Section 6 and further elaborated for the purpose of computation of income in Sections 7 to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of income; the heads do not exhaustively delimit sources from which income arises. This is made clear in that business income is broken up under different heads only for the purpose of computation of the total income; by that break-up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Indian IT Act for computation of income. 48. In the case of Apollo Tyres Ltd. v. CIT, it was held as under: The Tribunal had found as a fact on material on record that the investment by the assessee-company in units of the UTI was in the course of its business and its business of manufacture and sale of tyres and the business of purchase and sale of units of the UTI we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On the basis of the above view, we hold that the source of dividend income in some cases may be from business notwithstanding the fact that it has got to be computed under the head "Income from other sources". 52. On the analysis of above decisions, following principles of law emerge: (i) That deduction under Section 80M is permissible on the net dividend income computed in accordance with the provisions of the Act and included in the gross total income. (ii) That for determination of net dividend income included in the gross total income, it is necessary to trace the "Source of dividend income" notwithstanding the fact that 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 in 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 dom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by him for the purposes of other business cannot be attributed to the earning of dividend income. Therefore, there is no justification for apportionment of expenses incurred by the assessee for the purposes of business between receipts of business and dividend received on investment unconnected with the business of the assessee. This view that the proportionate management expenses are not to be deducted in computation of the such dividend income for the purpose of deduction under Section 80M is supported by various authorities, some of which may be mentioned hereunder to complete the record as it is not necessary to elaborately refer to such cases in support of this view: (vi) CIT v. Central Bank of India (supra), (vii) Shaw Wallace & Co. Ltd. v. Dy. CIT (supra), (viii) CIT v. United Collieries Ltd. (supra), (ix) State Bank oflndore v. CIT (supra), (x) Usha Martin Industries Ltd. v. Dy. CIT (supra), (xi) East India Agencies (P) Ltd. v. CIT (supra), (xii) CIT v. Pfizer Corporation (supra), (xiii) CIT v. Jai Hind Investment Industries (P) Ltd. (supra), (xiv) CIT v. Mahendra Sobhagchand Shah (supra). 55. Reference may also be usefully made to some of the other dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erala High Court in the case of East India Agencies (P) Ltd. v. CIT (supra) have followed decision of Madras High Court in the case of South Arcot Electricity Distribution Co. Ltd. v. CIT wherein it was observed as under: On a reference to the Madras High Court under Section 256(1) of the IT Act, 1961, it was held that the income assessed was the "interest income" and the expenditure allowed was not incurred solely for the purpose of making or earning the interest income. After pointing out that the assessee was not 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 expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle of proportionality is applicable. The principle of apportionment of proportionate expenses for computation of deduction under Section 80M has been approved by the Supreme Court in the case of CIT v. United General Trust Ltd. (supra). In this case, Hon'ble Supreme Court had reversed the decision of the Bombay High Court. It would, therefore, be useful to refer to the decision of the Bombay High Court in the case of CIT v. United General Trust (P) Ltd. (supra) which has been reversed by the Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra). In this case, the following question of law was raised by the Revenue before the Bombay High Court: 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? (Emphasis, italicised in pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court, the question of law sought by the Revenue as to whether the assessee would be entitled to deduction under Section 80M on the gross dividend before deduction of the proportionate management expenses, was answered in favour of the Revenue. Their Lordships of the Supreme Court have referred to its own decision in the case of CIT v. United General Trust Ltd. (supra) and the provisions of Section 80AA introduced by the Finance (No. 2) Act, 1980 w.e.f. 1st April, 1968 to support the answer in favour of the Revenue. The Hon'ble Supreme Court having answered the question raised by the Revenue in favour of the Revenue, its esteemed opinion is binding upon any authorities working under its jurisdiction. 65. Admittedly, the issue relating to reduction of proportionate management expenses from the gross dividend was not considered by the Hon'ble Supreme Court in detail. In such circumstances what is the effect of the decision of the Supreme Court when it does not contain reasons as to how proportionate management expenses are to be deduced for computation of dividend income included in the gross total income. 66. In our view, the effect of the decision of the Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of supplying them to its members as well as to non-members. For the asst. yrs. 1964-65, 1965-66 and 1966-67 the appellant claimed exemption from income-tax under Section 81(i)(d) of the IT Act, 1961, on the gross profits and gains of the business with its members. But the ITO granted relief only on the net amount as was includible in the computation of its total income under Section 110, since the income exempted under Section 81(i)(d) was to be included in its total income as required by Section 66. For the first two years, the Tribunal accepted the claim of the appellant but for the third year the Tribunal rejected the claim and upheld the ITO's order. On reference, the High Court held, rejecting the claim of the appellant, that the only way of working out the scheme of the provisions of Section 81(i)(d) in the light of Sections 66 and 110 was first to calculate to total income and the income-tax thereon, secondly, to ascertain the net profits in respect of the activities on which income-tax was not payable by setting off against the gross profits the proportionate amount of expenditure and then to determine the profits and gains from the taxable activities and thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Ltd. v. CIT (supra), their Lordships of the Himachal Pradesh High Court held that proportionate expenses were to be deducted from computation of income qualifying for deduction under Section 80P(2)(a)(iii) of the Act. 72. In the case of Shekhavati General Traders Ltd. v. CIT (supra), their Lordships of Rajasthan High Court held that relief in respect of dividends received from a domestic company was available only with respect to net amount of dividend after deducting proportionate expenses. 73. In the case of CIT v. Chemical Holdings Ltd. (supra), their Lordships of Madras High Court held as under: The computation insofar as dividends are concerned is to be made under Section 57. Section 57, Clause (i), requires that in the case of dividends or interest on securities any reasonable sum paid by way of commission or remuneration of a banker or any other person for the purposes of realizing the dividend, interest on behalf of the assessee should be deducted. Where moneys are borrowed for investment in shares, to the extent the interest charged is capable of being regarded as expenditure laid out or expended wholly and exclusively for the purpose of making or earning dividend i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee would be liable to tax without any other deduction for the expenses incurred However, it is not so insofar as it is well established principle of law that the tax is on real income. The assessee in fact, has incurred expenses for earning the business income If the receipts of the business are by way of dividends, the expenditure incurred by the assessee in earning such income by way of carrying on the business activities shall have to be taken into account for determining the net income which is chargeable to tax notwithstanding the fact that such expenditure is not covered under Sections 57 to 59 of the Act. In this case, the interest and dividend receipts of the assessee are from activities of the business of the assessee. In earning the business income, the assessee has incurred indivisible expenditure between the receipts, which shall have to be taken into account, for the purpose of determination of the net income chargeable to tax. It is, therefore, evident from the above example that in computation of the net income which is included in the gross total income, all the provisions of the Act have got to be kept in mind and not merely provisions of Sections 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and another in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT (supra) relate to deductions/rebate out of the income included in the gross total income. The decisions cited on behalf of the assessee have been considered by us. Most of the decisions relate to the dividend earned on pure investments unrelated to business of the assessee. Some of the High Court decisions may appear contrary to the decisions of the Supreme Court referred to above. In none of the decisions cited before us, the aforesaid decisions of the Supreme Court have been considered. We hardly need to mention that if there is a conflict between the decision of the High Court and that of the Supreme Court, the decision of the Supreme Court will prevail. We accordingly, with utmost respect to the decisions of the High Courts referred to above follow the principle laid down by the Hon'ble Supreme Court (supra). 79. We, therefore, hold that in category 'B' cases, i.e., the cases where income by way of dividend is part of the business income or is incidental to the business income, the expenses incurred shall be apportioned between the gross dividend and other receipts of business proportionat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collaboration agreements the collaborators have to buy back the shares at the end of specified period at the highest market price quoted on recognized stock exchange(s) or the book value along with the simple interest at the lending rate at which the financial institutions/banks have provided long-term finance to the company, whichever is higher. However, the terms of standard Financial Collaboration Agreement have been amended w.e.f 18th Oct., 1996 which provide for buy back of the Corporation's investments at the highest price quoted on the stock exchanges 3 months prior to the date of option or with interest at the rate of which the corporation provides term loans to the loanees, compounded half-yearly, whichever is higher,. Hence no provision for depreciation in the value of investment has been made as per the guidelines provided in terms of IDBI Circular dt. 26th April, 1994, 23rd June, 1994 and 8th May, 1996 and 19th Feb., 1997, (e) The market value of shares in case of quoted shares is calculated on the basis of shares last quoted in a recognized stock exchange on or before 31st March as the case may be. However, in case of shares which are not quoted in stock exchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to bring the whole controversy into close focus. Earlier deduction admissible in the inter-corporate dividend was to be calculated with respect to the gross amount of dividend received by a domestic company from an Indian company and not with respect to the dividend income as computed in accordance with the provisions of the Act, i.e., after making deduction provided under the Act as per the decision of the Hon'ble Supreme Court in the case of Cloth Traders (P) Ltd. v. Addl. CIT . In order to get over the difficulty caused by the decision in the case of Cloth Traders (P) Ltd. (supra), the Finance (No. 2) Act 1980 inserted of new section being Section 80AA to provide that deduction under Section 80M in respect of inter-corporate dividend will be calculated with respect to the dividend income as computed in accordance with the provisions of the IT Act (before making any deduction in Chapter VI-A) and not with respect to gross amount of such dividend. This provision was introduced with retrospective effect from 1st April, 1968. The decision in the case of Cloth Traders (P) Ltd. (supra) was subsequently overruled by the Hon'ble Supreme Court in the case of Distributors (Baroda) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction under Section 80M is allowable only on the net dividend after taking into account the expenditure, if any, incurred for the purpose of earning such dividend. The contention of the learned Counsel for the assessee that in the case of the assessee corporation, gross dividend income was the net dividend income, cannot be accepted on its fact value because it cannot be presumed that no expenditure whatsoever was incurred, for the purpose of earning a huge dividend income of ₹ 2,21,77,240. In the present case, admittedly in the profit and loss account, the assessee had claimed an expenditure of ₹ 6,88,13,469 against the total income of ₹ 10,45,23,890. This comes to about 60 per cent of the total income. In this view of the matter, we are of the opinion that the learned first appellate authority was justified in estimating the net dividend income at 50 per cent of the gross dividend income as per the guidelines of the Hon'ble Supreme Court in the case of United General Trust Ltd. Accordingly, we uphold the order of the learned CIT(A) in this regard and dismiss the ground taken by the assessee. 86. For asst. yr. 1996-97, the Chandigarh Bench of the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n BOM, the dividend income earned by the assessee has been held to be incidental to the carrying on the activities of business by the assessee. It is, however, not so. The assessee has made investment in the course of business by purchasing shares of the companies promoted by it. The investment in purchase of shares though for the purpose of business, is a capital investment as the assessee is not dealing in shares. Therefore, when the shares are held for more than the specified period, the profit derived on sale of such shares has been held to be assessable under the head "Capital gains". However, the dividend earned on investment made in the course of business, has been held to be from the source of business as the yield of investment would be on revenue account and not necessarily on capital account. This observation may be elaborated with an example. We may take a case where the assessee purchases vehicles from a party and provides the same to the seller of the vehicles for use on payment of lease rent. The investment in vehicles would be capital investment but the lease rent for the exploitation of the vehicle would be a revenue receipt. As and when vehicles are sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionment of expenses and further reducing the same by deduction claimed and allowed to the assessee under Section 36(i)(viii). The CIT(A) has upheld the view of the AO that the net dividend computed has got to be further reduced by deduction allowed under Section 36(i)(viii) for the purpose of computation of the amount on each deduction under Section 80M is to be calculated. 93. It has been agreed by the parties before us that the issue is covered in favour of the Revenue by the decision of the Tribunal in assessee's own cases in ITA Nos. 1333/Chd/1994, 944 and 1591/Chd/1995 for asst. yrs. 1990-91 to 1992-93 (supra). The operative portion of the order in para 15.5 is reproduced hereunder: Thus, as per combined reading of Sections 80AA and 80M of the IT Act, the deduction under Section 80M would be admissible with reference to the amount of dividend income computed after allowing deduction under Section 36(1)(viii) of the IT Act. The counsel of the appellant has made reference to the decision of the Tribunal in the case of the appellant itself for the asst. yr. 1980-81 and subsequent assessment years to support the contention that deduction under Section 36(1)(viii) is admiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct irrespective of the fact that the deduction under Section 36(1)(viii) @ 40 per cent is being allowed from the said dividend income. By claiming deduction under Section 36(1)(viii) from the dividend income and again claiming deduction under Section 80M of the IT Act with reference to the dividend income before deducting allowance under Section 36(1)(viii) @ 60 per cent, the appellant is in fact claiming 100 per cent exemption in respect of dividend income which is not permissible under any provisions of the IT Act. From the discussion and reference to the assessment record, it is evident that the finding of the Tribunal is regarding allowing deduction under Section 36(1)(viii) of the IT Act out of dividend income also irrespective of the fact that it is being assessed as income under the head 'Other sources'. This finding stands accepted by the AO as the claim under Section 36(1)(viii) of the IT Act has been allowed and there is no dispute regarding this issue. In this view of the matter, the first ground of appeal is rejected and it is held that the deduction under Section 80M of the IT Act is admissible only with reference to the net dividend income after deducting allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal relate to computation of deduction under Section 80M. The CIT(A) has estimated the expenses attributable to the earning of dividend income at ₹ 2 lacs for asst. yr. 1995-96 and ₹ 3 lacs for asst. yr. 1997-98. There are cross grounds of appeal raised by the Revenue in regard to computation of deduction under Section 80M. Such grounds are ground No. 2 in asst. yr. 1994-95, ground No. 3 in asst. yr. 1995-96 and ground No. 5 in asst. yr. 1997-98. For asst, yr. 1996-97, the Revenue has raised the issue in ground No. 5. These grounds of appeal are reproduced hereunder for the sake of ready reference: Asst. yr. 1994-95 3. The learned CIT(A) has also erred in allowing relief out of the addition made by the AO by restricting the claim under Section 80M to ₹ 1,12,10,100 against ₹ 2,66,90,728 claimed by the assessee. Asst. yr. 1995-96 3. The learned CIT(A) has further erred in directing the AO to allow the deduction under Section 80M. Asst. yr. 1996-97 5. Learned CIT(A) has erred in directing AO to allow the deduction under Section 80M of the Act after deducting expenditure, if any, incurred by the assessee under Section 57 of the Act and the admini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleting the addition of ₹ 5,22,435 made on account of project survey expenses, by holding the same in the nature of revenue expenditure. Asst. yr. 1997-98 2. Learned CIT(A) has erred in deleting the addition of ₹ 1,73,273 made on account of Project Survey expenses being capital expenditure. Learned CIT(A) has erred in holding the same in the nature of revenue expenditure. 101. The AO had treated these expenses as of capital nature. The CIT(A) decided the issue in favour of the assessee. Parties have agreed before us that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case for asst. yrs. 1990-91 to 1992-93 (supra). The issue has been dealt in para Nos. 5 and 6 of the order. Since the facts are identical, we adopt the reasoning given by the Tribunal in the aforementioned decisions to uphold the order of the CIT(A) in this regard: 5. We have considered the rival submissions and have also gone through the orders passed by the AO as well as the learned CIT(A). The assessee corporation is a wholly owned Government company of the Punjab Government and is inter alia, engaged in the business of promoting and operatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka High Court in the case of Kamataka State Industrial & Investment Development Corporation (supra) and as such the Departmental authorities ought to have allowed the entire expenditure debited under this head as a revenue expenditure. 6. Before parting with the matter, we may mention that even if the contention of the first appellate authority that the expenditure on the preparation of project/feasibility reports resulted into stock-in-trade, then the adjustment has to be given for the cost of the reports which were available with the assessee corporation as on 1st April, 1989 about which no date is available and whatever is the valuation of the closing stock debited will have to be taken as the opening stock of the subsequent assessment year. Since the assessment is a wholly owned company of the Punjab Government and the rate of tax is almost the same is the case of a company, there is hardly any purpose in disturbing the treatment being claimed and allowed by the AO in relation to expenditure on preparation of project/feasibility reports upto asst. yr. 1989-90 which was to treat the expenditure as of revenue nature Accordingly, the addition of ₹ 7,47,078 sustained by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the production in the projects reaches upto a certain level where after the projects become self-sufficient, it disinvests those holdings in that project by selling it to the other promoter with a view to realize funds for investments in other projects. Thus basically the investment in shares of companies which were jointly promoted by the assessee along with other industrial undertakings is in the nature of an investment and any profit/gain earned by the assessee on the realization of such an investment is liable to tax under the head 'Capital gains' and this position has all along been accepted even by the Departmental authorities upto the asst. yr. 1989-90. Accordingly, we hold that the profit and gain realized by the assessee on account of disinvestment of shares is liable to tax as capital gams. As such the assessee is entitled to deduction under Section 48(2). Grounds raised by the Revenue are accordingly dismissed. 104. Ground No. 4 in asst. yr. 1994-95 raised by the Revenue is as under: 4. The learned CIT(A) has also erred in directing the AO to afford opportunity to the assessee to create further reserve for claiming deduction under Section 36(1)(viii). 105 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing all assistance to PSIDC's stall, 3,098.00 (xiii) Chief Secretary meeting with officers of Industries Deptt. and foreign delegates. 9,020.00 7,77,594.00 On going through these expenses, it is seen that these expenses have been basically incurred for promotion of business and for attracting or inviting industrial participation from outside State and are incidental to the business of the appellant corporation. Accordingly, the impugned addition is ordered to be deleted and the appellant gets a relief of ₹ 7,77,594. 108. Considering the nature of the expenses and the business of the assessee, the CIT(A) has held that the expenditure has been incurred for promotion of the business of the assessee and for attracting/inviting industrial participation from outside the State. We are in agreement with the finding of the CIT(A) and, therefore, find no justification to interfere. The ground raised by the Revenue is accordingly dismissed. 109. Ground No. 3 in asst. yr. 1997-98 of the appeal of the Revenue is as under: 3. Learned CIT(A) has erred in deleting the disallowance of ₹ 82,168 made on account of expenditure under the head "Udyog Sahayak Expenses" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of current socio-economic thinking-commercial expediency must be judged not in the light of the 19th Century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc. a part of it should in all fairness go to the employees. 114. The findings of facts recorded by the CIT(A) have not been controverted before us much less rebutted by any evidence. Since the expenditure has been incurred by the assessee purely on commercial consideration, the CIT(A) was justified in deleting the addition. We accordingly, decline to interfere. 115. In the result, the appeals of the Revenue as well as appeals of the assessee are partly allowed. Vimal Gandhi, 10-04-2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of different High Courts and the Tribunals and other important circumstances, a Special Bench was constituted to hear the matter. 5. The facts of the case are noted in the proposed order of my learned Brother and I deem it unnecessary to reproduce them in detail. Relevant statutory provisions and case law have also been noted and cited in detail. I would have to make a brief reference to what my learned Brother has observed in the proposed order and also record my reasons for not agreeing with him. This is an unpleasant duty I will have to perform. On consideration of proposed order of my Brother, I have no problem in agreeing with him in what is stated upto p. 12 of the proposed order. On p. 13 in para 23, my learned Brother has drawn legal inferences. I am unable to agree with the following general observations made at p. 13 of the order. These are against the scheme of the IT Act. For instance Section 29 in case of business income. It may be pertinent to mention that certain deductions which may not be provided specifically under various provisions of the Act can also be deducted in computing the net income from a particular source, if deduction of such expenditure is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such income. It should be incurred with object or purpose of earning income. There should be nexus between expenditure and income although such nexus may not be a direct one. There can possibly be no exception to this well settled law. Thereafter at p. 16, the Hon'ble Vice President has posed the following question: 28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources. 7. Again the learned Brother refers to decision of Vijaya Laxmi Sugar Mills Ltd. (supra) where expenses incurred by Liquidator on salary and other expenses were not allowed out of income earned by way of interest, for the reasons that these expenses had no connection with receipt. The learned Vice President, thereafter refers to decision of Hon'ble Madras High Court in the case of CIT v. Official Liquidator Pilot Pen Co. (P) Ltd. (2002) 253 ITR 533 (Mad), wherein the question was whether security charges in respect of land and building could be set off against "other income" (there was no income from the said source of land and factory on which expenditure were incurred). Their Lordshi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eafter some more decisions are noted at the end of p. 16 of the proposed order and reference is made to Section 58 of IT Act which admittedly has no application in the present case. The principle laid down in the case of Vijaya Laxmi Sugar Mills (supra) or case of Seth R. Dalmia (supra) are correctly noted but thereafter in para 32, my learned Brother has observed as under: 32. It hardly; needs to be emphasized that the tax is on "income" and certain expenditure even if it does not fall within the specified deductions would be deductible in computing the net income. 9. With greatest respect, I do not see any nexus between the legal inference drawn and cases quoted and referred to above. The decisions of Supreme Court and Madras High Court have reiterated a settled proposition that for purposes of deduction under the head "Other sources"; expenses must have nexus to the earning of income and should have been spent with the object of making or earning such income. The discussion on above lines leaves no scope to draw a general inference that expenditure, even if it is not specified in the statute, would be deductible for computing income. In my humble opinion t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng establishment expenses to the assessee to keep alive the earning of income assessable under "other sources". Establishment expenses incurred for purposes of earning income from other sources were allowed as they had necessary nexus with earning of income. This is the proposition laid down by all the decisions referred to above and there can be no problem in agreeing with the above proposition. In all these cases, expenditure were allowed under the head "Other sources" as expenses were incurred for purposes of earning or making income assessed under the head "Other sources". Expenses were allowed in above cases under a specific provision of the statute. 15. In para 36, there is reference to certain precedents relating to income assessable under the head "Profits and gains of business" and as to what is the procedure laid down for the determination of business income. In the following para, reference is made to large number of decisions including decisions of Supreme Court in the case of CIT v. S.C. Kothari and to case of Godhra Electricity Co. Ltd. v. CIT , the case of Escorts Ltd. v. Union of India and the proposition laid down in the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is incidental to the holding. It is "sui generis". No separate efforts need be made to earn dividend income apart from efforts to acquire shares. Therefore, only nature of shareholding in the hands of assessee is required to be determined to find out nature of dividend income. At any rate, in my humble view, this issue is not very material for resolving the controversy involved before us. 18. There is then discussion of heads of income and sources of income. Reference is made to classification of income under Section 14 of the IT Act and decisions of Supreme Court in the case of Brook Bond & Co. Ltd. v. CIT, in case of CIT v. Cocanada Radhaswami Bank Ltd. , United Commercial Bank Ltd. v. CIT , CIT v. Chugandas & Co. and Apollo Tyres Ltd. v. CIT . I have already agreed that dividend income in certain circumstances can be taken as business income although for computation, it is assessed under the head "Other sources", But this will depend upon facts and circumstances of the case and statutory provisions under consideration. 19. After analysis of different cases, the following propositions are laid down by my learned Brother, the Hon'ble Vice President: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Sections 56 to 59 of the Act, also does not follow from any decision. In fact I find that my learned Brother has himself emphasized that it is necessary to establish nexus between expenditure and earning and making of income. The expenditure must be incurred for purposes of earning income. The aforesaid proposition is well settled and based upon interpretation of Section 57 of the IT Act I find, it difficult to accept that computation of dividend income is not to be restricted to Sections 56 to 59 of the Act, The nature of dividend income vary from case to case depending upon nature of holding as discussed above and not on any other consideration. 21. My learned Brother has referred to cases in categories 'A' and 'Br. My learned Brother, Hon'ble Vice President has put in category 'A' cases where proportionate management expenses are not to be deducted while computing deduction under Section 80M of the IT Act. According to him, the view is supported by the following decisions: (i) CIT v. Central Bank of India ; (ii) Shaw Wallace & Co. Ltd. v. Dy. CIT (2001) 71 TTJ (Cal) 478: (2002) 80 ITD 156 (Cal); (iii) CIT v. United Collieries Ltd. ; (iv) State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business. 23. In fact principle relating to deduction under the head "Business" cannot be universally applied to deduction permissible under the head "Other sources". In the case of CIT v. Malayalam Plantations Ltd. , their Lordship of Supreme Court held that expression "for purposes of business" is wider in scope than the expression "for purposes of earning profit". It was held that the expression "for the purpose of business" may take in not only the day-to-day running of the business, but also the rationalization of its administration and modernization of its machinery. It may include measures for the preservation of the business and for the protection of its assets. It was further held that the purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. 24. My learned Brother has then put certain cases in category 'B' where according to him dividend is earned in the course of carrying on business or is incidental to business activities of the assessee. Divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts 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? As already stated the Tribunal held that deduction under Section 80M was to be allowed on gross dividend in line with the decision of Hon'ble Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. . The aforesaid decision was challenged by the Revenue on the ground that above view could not be taken in the light of amendment in the Act made w.e.f 1st April, 1968. The Hon'ble High Court answered the question against the Revenue but that view was contrary to the decision of Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (supra) and also contrary to the amendment made by Finance (No. 2) Act, 1998 with retrospective effect from 1st April, 1968. It is so held by the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. There is then reference to the decision of the Hon'ble Bombay High Court in the case of CIT v. Maganlal Chhaganlal (P) Ltd. . In the said case, the Court held that assessee was entitled to deduction under Section 80M on gross dividend whereas Revenue's contention was that interest paid on money borrowed for purchase of shares on which dividend was allowed, was required to be deducted. Their Lordship of Bombay High Court following the decision of Supreme Court in the case of Distributors (Baroda) (P) Ltd. (supra) answered the reference in favour of the Revenue. While doing so, their Lordship allowed deduction of interest out of the total income as "interest was paid on money borrowed for earning such income". Thus deduction of interest was allowed in terms of Section 57 of the IT Act. 29. The decision of Himachal Pradesh High Court in the case of Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CIT , and of Delhi High Court in the case of CIT v. Industrial Finance Corporation of India referred to by my learned Brother and Hon'ble Vice President are on Sections 80P, 80K and 80L of the IT Act. The language and purpose of above sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation, the statute recognizes different classes of income which it classifies under different heads of income. For each head of income, the statute has provided the mode of computing the quantum of such income. The mode of computation varies with the nature of the class of such income, for the deductions permissible under the law in computing the income under each head bear a particular relevance to the nature of the income. The statute operates on the principle that it is the net income under each head, which should be considered as a component of the total income. The statute permits specified deductions from gross receipts in order to compute the net income. The net income under the different heads is then pooled together to constitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and of unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, the quantum of income, which is assessed to tax. Ordinarily, when income pertains to a certain head, the source of such income is peculiar to that head, but it is not unusua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng for computation of deduction under Section 80M contains these words, "the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act". 33. In both the relevant sections, the deduction is allowed of an amount equal to so much of an amount of dividend as computed in accordance with provisions of this Act and included in the total income. The controversy raised will lose its sheen if due importance is attached to the words "dividend income" computed in accordance with provisions of this Act. It is computed dividend income on which deduction is allowed and, therefore, there is no question of considering dividend as business income. The dividend indisputably is assessable under the head "Other sources" and deductions are permissible out of dividend income as per provisions of Sections 57 to 59 of the IT Act. In most of the cases cited and considered above, question arose with reference to deduction permissible under Section 57(iii) of the IT Act which provides that deduction of any expenditure not being in the nature of capital expenditure laid out or exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such discontinuance, and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period. Where any such claim is made, an assessment shall be made on the basis of the income, profits and gains of the said period, and if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference. The AO did not allow exemption to the assessee under the above provision as according to him interest on securities was liable to be assessed to tax under the head "Interest on securities" (Section 8) and not under the head "Business" (Section 10) of the IT Act. When the matter was carried to the Hon'ble Bombay High Court, one of the learned Judges (Tendolkar, J.) was of the opinion that the income of the business was to be computed under Section 10 and such income alone could be admitted to the exemption under Section 25(3). However the majority of the Court held that all income earned from business qualified for the exemption. Their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest payable. Section 24 enables set off in respect of loss sustained under any of the heads mentioned in Section 6 against income, profits and gains from any other head in that year. These are some of the provisions in which reference is made to specific heads of taxation. But the exemption under Section 25(3) is general; it is not restricted to income chargeable under Section 10 of the Act. (Underlined by me, italicised in print, to emphasise) It is evident from above as to the relevance of the head under which a particular income is computed for charging to income-tax. Whether particular section imposes a condition of chargeability under a particular head to allow benefit of exemption depends upon the language and text of the section. Their Lordship in the case of Chugandas & Co. (supra) has given illustrations of several sections where the legislature has specified a particular head of income as a condition for claiming exemption. If there is no restriction of the nature discussed above then business profit and gain can be taken on a commercial basis irrespective of head under which the income has been computed. But this proposition is not of universal application as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent thereof in computing the total income of the company. The sub-section required "computation of business income in accordance with provision of the Act" included in the "total income". Thereafter three steps required to be taken, for computing deduction under Section 80E(1), are stated by the Court. As noted earlier, the deduction was to be allowed on profits and gains computed in accordance with provisions of the Act and included in the total income. Their Lordship observed as under: As indicated earlier, Sub-section (1) contemplates three steps being taken for computing the special deduction permissible thereunder and arriving at the net income exigible to tax and the first two steps read together contain the legislative mandate as to how the total incomeof which the profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to look for "key words" in the parenthetical clause. It must, therefore, be clear from above that when section talk of computation of dividend income in accordance with provisions of the Act, "the dividend income" has to be computed as per provision of Sections 56 to 59 of the IT Act, No other provision is relevant having regard to authoritative pronouncement of Supreme Court in Distributors (Baroda)'s case (supra). Sufficiently strong language has been used by employing words like "legislative mandate" "key words in parenthetical clause" to rule out application of commercial principles in interpreting Section 80M. It is not possible to ignore restrictions imposed on applicability of deduction and in particular ignore the words, "dividend income computed in accordance with provisions of this Act". The section does not say "business income". Therefore, there is no question of referring to any of the provisions relating to deduction under the head "Profits and gains of business". The decisions of Hon'ble Supreme Court and High Courts referred to above requiring application of commercial principle and holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be deducted from the gross dividend income. There is no scope for any estimate of expenditure being made and no notional expenditure can be allocated also for the purpose of earning income unless the facts of a particular case warrant such allocation. In that view of the matter, we are of the view that only the actual expenses should be taken into account, in reducing the dividend income and not any notional expenditure as has been done in the instant case. We, therefore, decline to answer the question. The Tribunal will find out the expenditure, if any, actually incurred in earning the dividend and, to that extent, the dividend income should be reduced and relief under Section 80M should be allowed on that. 40. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween what we call notional expenditure and actual expenditure. If it is proved to be a case of actual expenditure incurred by an assessee while earning/depositing the dividend, then certainly the amount actually incurred by way of expenditure has got to be deducted in accordance with the procedure prescribed under the Act. But when there is nothing on record to show that any expenditure is incurred by an assessee while earning/depositing the dividend, then it is difficult for us to hold that some hypothetical and/or notional expenditure can be made a basis for deduction. In other words, we have not been able to notice any provision which may entitle the taxing authorities to work out by way of expenditure any notional figure for the purpose of s, 80M though, in fact, it has not been so incurred by an assessee while encashing the dividend. In somewhat similar circumstances, this question had come up for consideration thrice before the Calcutta High Court. These cases areCIT v. National & Grindlays Bank Ltd. , CIT v. United Collieries Ltd. and lastly CIT v. Enemour Investments Ltd. (1994) 72 Taxman 370 (Cal). In all the three cases, their Lordships of the Calcutta High Court have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is connection is not sufficient to make dividend incomebusiness income. Shares were held by the assessee as a capital investment. Dividend received by the assessee-company can under no circumstances be held to be business income. It is incidental income received by the assessee on account of holding of a capital investment. It cannot have a character different from the character of shares in the hands of the assessee. Shares were not trading assets. Therefore, dividend receipts could only be assessed under the head "Other sources". Out of dividend receipts only expenditure referred to in Section 57 could be deducted, i.e., any sum expended wholly and exclusively for the purpose of making or earning such income (dividend). In this case, I see no reason to take a view different from one taken by Madhya Pradesh High Court in the case of State Bank of Indore (supra) or by Bombay High Court in the case of Central Bank of India (supra). To the same effect are the decisions of other High Courts referred to in above paras. Different Benches of the Tribunal have also held that actual expenditure incurred by the assessee for earning dividend are to be taken into consideration. Refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, having regard to provision of Section 14A of the IT Act and in my humble view has no application to the facts and circumstances of the case. 44. The ultimate conclusion of my learned Brother and Hon'ble Vice President is reflected in para 28 which is as below: 28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources. The question is ultimately answered in the affirmative. With utmost respect, I am unable to subscribe to the view taken in the above para. I have recorded above my reasons for not agreeing with the view taken by my learned Brother, the Hon'ble Vice President. The issue is not res Integra and is fully covered in favour of assessee, as per direct decisions of various High Courts and of Supreme Court including Distributors (Baroda) (supra). 45. One controversy left is as to how deduction under Section 80M is to be computed where interest on borrowed funds is paid by the assessee, a dealer in shares and when accounts for all sources are mixed. In my considered opinion, all expenses incurred for earning, making or realizing dividend income are to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed out of dividend income are as per specified provision of the statute. These cannot be allowed on general commercial considerations. (iv) That actual expenditure incurred are to be taken into consideration. There is no question of taking expenditure on estimate or presumption basis while computing dividend income or while allowing deduction under Section 80M of the IT Act. (v) That where shares are acquired out of borrowed funds, on which dividend is received, deduction of interest paid can be allowed under Section 57, provided loan was taken for making and earning dividend income. There is no question of deduction of any amount paid as interest, to which provisions of Section 36(1)(iii) are applicable, while computing deduction under Section 80M of the IT Act. 47. In the light of above propositions, I am unable to agree with the order of the Tribunal for asst. yrs. 1990-91 to 1992-93 in the case of the assessee. There is no material to hold that assessee spent any amount on earning or making or realizing any dividend. There is further no evidence to show that borrowed funds were utilized for acquiring shares on which dividend was paid to the assessee. No evidence of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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