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TMI Blog2006 (4) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... ustification on the part of the Assessing Officer 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 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 of section 80M or treat dividend as earned in the course of the business. My learned Brother and Hon ble Vice President for his view has also relied upon the decision of Calcutta Bench of Income-tax App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Business are first to be considered. Only left out deduction can be considered under the head Other sources . Thus, the following propositions emerge: (i) That deduction u/s 80M is to be allowed on net dividend income computed as per provisions of sections 57 to 59 of the Income-tax Act. The deduction is not to be allowed on gross dividend receipt. (ii) That net dividend income is to be computed under the head Other sources after deduction of expenditure incurred for purposes of earning, making or realizing dividend income. (iii) The deduction to be allowed 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 u/s 80M of the Income-tax Act. (v) That where shares are acquired out of borrowed funds, on which dividend is received, deduction of interest paid can be allowed u/s 57, provided unloan was taken for making and earning dividend income. There is no question of deduction of any am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M as in the case of Mahavir Spinning Mills Ltd. [I.T. Appeal No. 26 (Chd.) of 1996] for assessment year 1991-92 vide para 2 of its order 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 Income-tax Act, 1961. Three appeals have been filed by the assessee for assessment years 1994-95, 1995-96 and 1997-98. The appeal of the assessee for assessment year 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 assessment year 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74 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. [1993] 203 ITR 857. Reliance was also placed on the following decisions in support of the contention:- (i) Usha Martin Industries Ltd. v. Dy. CIT [2003] 86 ITD 261 at page 273 (Cal.). (ii) East India Agencies (P.) Ltd. v. CIT [1991] 189 ITR 44 (Ker.). (iii) CIT v. Pfizer Corpn. [19931 202 ITR 115, 120 (Bom.). (iv) CIT v. Jai Hind Investment Industries (P.) Ltd. [1993] 202 ITR 316, 323 (Cal.). (v) CIT v. Mahendra Sobhagchand Shah [1993] 203 ITR 178 (Bom.). 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 [2005] 275 ITR 23 to support the contention that the proportionate management expenses are not to be deducted for the purposes of 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 assessment years 1990-91 to 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. [1979] 119 ITR 664 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 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-operative Supply & Marketing Federation [IT Appeal Nos. 681 to 683 (Chd.) of 2002] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Representative also stated in writing that the decision of the Madhya Pradesh High Court in the case of State Bank of Indore 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.'s case has not been considered. It was further contended that proportionate management expenses have got to be deducted under section 57 of the Income-tax Act, 1961. 10. In counter reply, the learned counsel for the assessee contended that the decision of Haryana State Co-operative Supply & Marketing Federation's case 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 assessment years 1990-91 to 1992-93 and order of the Tribunal in the case of Mah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 80AA reads as under:- "80AA. Computation of deduction under section 80M.- Where 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. 1-4-1998 in consequence of insertion of section 10(33) of the Income-tax Act, 1961 granting exemption in respect of dividend income. However, the said section was re-introduced from assessment year 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 1-4-2004 as the dividend income is now exempt in the hands of the shareholders. However, section 14A has been incorporated with retrospe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic 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-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtue 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' means the total amount of income referred to in section 5, computed in the manner laid down in this Act." 22. Section 14 of the Income-tax 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 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (x) and (24) 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 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:- " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation.-For the purposes of this sub-section, 'horse race' means a horse race upon which wagering or betting may be lawfully made." Section 59 read 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 A 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 latter 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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. It may be indirect. In the case of Seth R. Dalmia v. CIT [1977] 110 ITR 644, Their Lordships of Supreme Court at pages 652-53 have also held as under:- "In CIT v. H.H. Maharani Vijaykuverba Saheb of Morvi [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 income. We fully agree with the view taken by the Bombay High Court. In view of the direct decision of this Court in Eastern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine 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 other sources". In case of Company liquidation, the expenses incurred by a liquidator' such as sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from other sources. Section 58(iii) restricts the deduction on account of any salary 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 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1961 provides that profits and gains of business shall be computed in accordance with provisions of sections 30 to 43D of the Act. 38. The word "profits" is to be understood, said Lord Halsbury in Gresham Life Assce Soc. v. Styles 3 TC 185, 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 [1958] 34 ITR 10, Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86. In the case of Badridas Daga, 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 Income-tax Act, 1922, imposes a charge on the profits or gains of a business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness. But in our view, these principles are equally applicable to the income from any other source referred to in section 14 of the Act. It hardly needs to be emphasized that the intention of the Legislature to grant relief to the corporate assessees is in respect of the dividend income which is included in the gross total income out of the income which has suffered tax in the hands of the company. It will be useful to refer to the view of the Supreme Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 432 at page 57, "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 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om business, even though it fell for computation under another head." 45. Their Lordships in this case also laid down the following principles of law:- "It is a cordinal principle of law relating to income-tax that income-tax is a single charge on the total income of an assessee. For the purpose of 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 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 lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion was whether the income realised from the tenants of the shops and stalls was liable to be taxed as "business income" under section 10 of the Income-tax Act or as income from property under section 9 thereof. This Court held that the said income fell under the specific head mentioned in section 9 of the Act. This case also does not lay down that the income from the shops is not the income in the business. In CIT v. Express q Newspapers Ltd. this Court held that both section 26(2) and the proviso thereto dealt only with profits and gains of a business, 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 CIT v. Chugandas & Co. [1965] 55 ITR 17, 24, 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank was eligible for deduction under section 80P(2)(a)(i). 50. In the case of CIT v. Ramanathapuram Distt. Co-op. Central Bank Ltd. [2002] 255 ITR 423, Their Lordships of Supreme Court held that interest on securities, subsidies from the Government and dividend received by the assessee, co-operative society carrying on banking business, were business income of the assessee, and as such the assessee was entitled to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. Similar view has been taken by the Hon'ble Madras High Court in the case of CIT v. Ramanathapuram District Central Co-operative Bank Ltd. [1997] 224 ITR 226. 51. 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 gros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any loss on embezzlement is allowable as a deduction in computing the income from business notwithstanding the fact that there is no specific provision for allowance of deduction for such expenses. Therefore, if any expenditure claimed by the assessee as deduction in computing the gross total income is attributable to the earning of dividend income, the same shall have to be deducted from the gross dividend income notwithstanding the fact that the said deduction does not necessarily fall within sections 57 to 59 of the Act. In the case of any assessee carrying on business and making investment in shares unconnected with his business, the expenses incurred 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 such dividend income for the purpose of deduction under section 80M is supported by various Authorities, some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utta High Court has held that the special deduction under section 80M is allowable on the net dividend which is arrived at after taking into account actual expenditure incurred by the assessee in earning the dividend income and that (here was no scope for any estimate of expenditure being made and there was no scope 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." 58. Their Lordships of Kerala High Court in the case of East India Agencies (Pvt.) Ltd. v. CIT [1991] 189 ITR 44 have followed decision of Madras High Court in the course of South Arcot Electricity Distribution Co. Ltd. v. CIT [1974] 94 ITR 469 wherein it was observed as under:- "On a reference to the Madras High Court und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come and as computed in accordance with provisions of the Act in respect of which there is no dispute. 61. In order to find out what is the component of income included in the gross total income of the assessee out of the dividend income earned in the course of business or incidental to business activities, one will have to necessarily consider the deductions taken into account by the assessee in working out the net income from business determined after taking into account the gross dividend and other business receipts. Most of the expenditure such as salary, interest and other management expenses will fall under section 57. In such type of cases, we hardly need to emphasise that the receipts including dividend income is reduced by expenses incurred in the course of business to determine the net component of business income. The expenses being mixed in character cannot be identified in respect of one or the other source of receipts. It is in this type of cases that the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustrial Investment Trust Co. Ltd. [1968] 67 ITR 436 (Bom.)." 63. The Hon'ble Supreme Court in the case of CIT v. United General Trust Co. Ltd. [1993] 200 ITR 488 reversing the decision of the Bombay High Court held as under:- "Both counsel for the Revenue and the assessee are agreed that the only question which was sought to be raised by the Revenue, but which was not allowed by the High Court is concluded against the assessee and in favour of the Revenue by the decision of this Court in Distributors (Baroda)(P.) Ltd. v. Union of India [1985] 155 ITR 120. Indeed, the same result follows from section 80AA introduced by the Finance (No. 2) Act, 1980, with retrospective effect from April 1, 1968. For the above reason, the appeals are allowed. The application under section 256(2) of the Income-tax Act made by the Revenue shall be deemed to have been allowed, a reference made and answered in the manner indicated above. We may clarify that the assessment years concerned herein are 1970-71, 1971-72 and 1972-73." 64. As a result of the decision of the Supreme Court, the question of law sought by the Revenue as to whether the assessee would be entitled to deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the case of the assessee is covered by section 81(i)(d) only and the provisions of section 66 read with section 110 of the Act are not attracted is erroneous in law? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to rebate under section 81(i)(d) of the Act on the whole of the amount of profit of Rs. 89,976 without deduction of proportionate overhead expenses? 69. Their Lordships of the Supreme Court held that the rebate allowed to the assessee was in respect of the amount to be computed after deduction of proportionate overhead expenses. Since the reasoning given by the Hon'ble Supreme Court will be helpful in resolving the issue involved in this case, we reproduce the same as under:- "The appellant was a co-operative society engaged in the purchase of agricultural implements, seeds, livestock and other articles intended for agriculture for the purpose of supplying them to its members as well as to non-members. For the assessment years 1964-65, 1965-66 and 1966-67 the appellant cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ganlal Chhaganlal (P.) Ltd. [1999] 236 ITR 456, the Bombay High Court held that "deduction under section 80M of the Income-tax Act, 1961 has to be calculated with reference to the amount of dividend computed in accordance with provisions of the Act and forming part of the gross total income i.e. after deducting interest on monies borrowed for earning such income and not with reference to the full amount of dividend received by the assessee". In this case, the assessee was a Private Limited Company carrying on the business of manufacturing of the drums and barrels, dealing in shares and investing in shares. The controversy arose in regard to deduction of interest on money borrowed for purchasing of shares from the dividend income for the purposes calculating deduction under section 80M of the Income-tax Act, 1961. The assessee claimed deduction under section 80M on the gross dividend income on the ground that deduction on account of interest was permissible under section 36(1)(iii). The claim of the assessee was rejected by the Hon'ble High Court. 71. In the case of Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CIT [1998] 232 ITR 718 Their Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the net dividend i.e., after deduction of expenses relatable thereto under section 57 of the Income-tax Act, 1961. 75. It is, therefore, evident that in such cases where the dividend is earned in the course of business or its earning is incidental to the business carried on by the assessee, the indivisible expenses have got to be apportioned for determining the net component of income included in the total income. 76. This principle may be elaborated with reference to an example in assessee's own case. The receipts are profit on sale of shares, interest and dividend income. We may assume that the assessee had derived income from dividends only without there being any receipt on account of interest or profit on sale of shares. If we were to confine ourselves to determination of the income under sections 56 to 59, then the assessee would be deprived of various deductions claimed in the Profit & Loss Account. We have noted elsewhere in this order that the assessee's claim is that no expenditure of whatsoever nature has been incurred by the assessee for earning the dividend income. If this contention were to be accepted and the income computed under sections 56 to 59 then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries Ltd. that the component of net income is to be determined after taking into account all the deductions claimed is in our view applicable even in such cases where the net component of income is to be determined for the purpose of grant of deduction under section 80M. As pointed out earlier deduction is permissible out of the net component of dividend income included in the gross total income. It is also pertinent to mention that the decision of the Supreme Court in the case of Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 was superseded by insertion of section 14A with retrospect effect. It is therefore evident that the intention of the Legislature has never been to grant deduction or exemption in respect of dividend income in excess of net component of income included in gross total income. 78. Moreover, the contention advanced on behalf of the assessee that the decision of the Tribunal in the case of S.G. Investments & Industries Ltd. is inapplicable as it relates to exempted income, is of no consequences, insofar as the two decisions of the Hon'ble Supreme Court, one in the case of United General Trust Ltd. and another in the case of Sabarkantha Zi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in Punjab. The projects are jointly set up by the entrepreneur and PSIDC, i.e. the assessee. The assessee provides initial finance by buying equity. The following portion of the annual report for financial year 1996-97 will indicate the nature of the activities of the assessee:- "(3) Investments (a) The company's Investment, in pursuance of its objects to assist by way of equity participation for the advancement, promotion and development of industry in the state is meant to be held for long-term and as such are valued at cost. (b) The profit/loss on sale of shares is being accounted for in the year in which the share scripts alongwith the duly executed transfer deeds are actually delivered to the transferees irrespective of the time at which the consideration for the same has been received. (c) The corporation makes dis-investment of its shareholdings in joint/assisted sector projects and private sector projects as per the provisions contained in the financial collaboration agreements and buy-back undertakings respectively executed by the collaborators/Promoters with the corporation. (d) As per financial collaboration agreements the collaborators have to buy-b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Other Income 1,22,69,860 1,76,76,038 Total Rs. Expenditure 67,20,99,675 43,29,99,494 Employees remuneration & Welfare Exps. 1,96,03,327 1,88,88,427 Administrative & other exps. 1,77,80,867 1,77,71,433 Financial Expenses 60,27,46,979 36,53,92,860 Depreciation 26,27,889 25,76,852 64,27,59,062 40,46,29,572" 84. The assessee has secured loans from IDBI and from SIDBI used for its business on which interest has been paid. Deduction under section 80M has been claimed by the assessee on the gross dividend income for all the assessment years. 85. It is evident from the facts stated above that the source of dividend of the assessee is interlinked with the business activities of the assessee. It is in the light of these facts that one has to consider the decision of the Tribunal in assessee's own case for assessment years 1990-91 to 1992-93 where the issue was decided in favour of the revenue. The relevant portion of the order is reproduced hereunder:- "19. We have considered the rival submissions and have gone through the orders passed by the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals), relevant portion of which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the decision of the Supreme Court in the case of United General Trust (P.) Ltd. Besides, the income from dividend the assessee also has income from interest, income from sale of shares and other misc. income, the total income being Rs. 10,45,23,890 inclusive of gross dividend income of Rs. 2,21,77,240. Out of this gross income of Rs. 10,45,23,890, the assessee had claimed combined expenses of Rs. 6,88,13,469. In the absence of any data available on record, the first appellate authority was justified in holding that the expenses claimed in the Profit & Loss Account were deemed to have been claimed on a pro rata basis for earning the income from dividend. The contention of Shri M.L. Garg, the learned counsel that no commission or remuneration had been paid and no other expenditure had been incurred wholly and exclusively to earn the dividend income and, therefore, the gross income from dividend is also the net income, cannot be accepted because it is not supported by any documentary q evidence. Even the reliance by Shri Garg on the decision of the Calcutta High Court in the case of CIT v. United Collieries is not of much help to the assessee because in that judgment, it is speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding of fact has been recorded by the Tribunal that no expenditure has been incurred by the assessee for earning the dividend income. Moreover, the Bench has not noticed the earlier decision of the Tribunal in assessee's case and, therefore, the said decision is per incuriam. In assessee's case, the Tribunal has recorded a finding of fact for assessment years 1990-91 to 1992-93 to the effect that the entire expenses incurred by the assessee are also attributable to the earning of the dividend income as such is incidental to carrying on the business of the assessee. 88. Taking the totality of the facts and circumstances of this case into consideration, we hold that in computing the deduction under section 80M the proportionate expenses incurred by the assessee for earning the business income which includes receipts by way of dividend are to be proportionately deducted for arriving at the net dividend income. 89. Before parting with this issue, we would like to clarify that in this case, it may appear that there is a contradiction in the order insofar as profit derived on sale of shares has been held to be assessable under the head "Capital gains" and for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount which is Inadmissible as deduction under section 36(1)(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 income from dividend being income from other sources, the only deductions permissible to arrive at net income, are as specified in section 57. Deduction under section 36(1)(viii) which is admissible on total income as computed, is not an expenditure to deduce the net income. Assessment year 1995-96 2.(i) That the learned Commissioner of Income-tax (Appeals) 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 income from dividend being income from other sources, the only deductions permissible to arrive at net income, are as specified in section 57. Deduction under section 36(1)(viii) which is admissible on total income as computed, is not an expenditure to reduce the net income." 92. The abovementioned grounds of appeal relate to computation of deduction under section 80M after deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er allowed from such dividend income. The issue was decided in favour of the appellant in first appeal. The Commissioner of Income-tax (Appeals) following the order of the Income-tax Appellate Tribunal, Chandigarh Bench, in the case of Punjab Financial Corporation, held 'in consonance with the decision of the Income-tax Appellate 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, income from salary, house property, securities, business, capital gains and other sources after act off or loss'. Accordingly, the Assessing Officer (Asstt.) is directed to recompute the deduction on the basis of the order of the Income-tax Appellate Tribunal. However, at the time of giving effect to this order, applicability of provisions of sections 80AA which had been introduced through Direct Taxes Finance (Pb.) Act, 1980 was lost sight of. The deduction under sections 80K & 80M was allowed as originally determined, at the time of assessment, the deduction was allowed as claimed because deduction under section 36(d)(viii) claimed @ 40 per cent had D been denied. However, once deduction under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business expenditure. It is against the order of the Hon. Tribunal in earlier years wherein it was held that rent of guest house is an admissible business expenditure." Assessment year 1997-98 "1. The learned Commissioner of Income-tax (Appeals) 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. 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 Etcher Tractors Ltd. v. Dy. CIT [2003] 261 ITR (AT) 52 (Delhi). Respectfully following the aforementioned decision of the Special Bench, we uphold the disallowance and dismiss the common grounds of appeal raised by the assessee in this regard. 97. 1st ground of appeal in assessment year 1995-96 and 2nd ground of appeal in assessment year 1997-98 are common and are as under:- "Assessment year 1995-96 1. That the learned Commissioner of Income-tax (Appeals) was not justified in holding that an amount of Rs. 2 lakhs b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure, 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 out by the Assessing Officer." 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 assessment years 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 Assessing Officer has estimated the expenditure on higher rate than 50 per cent adopted by the Tribunal, the Commissioner of Income-tax (Appeals) 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 Assessing Officer to compute the deduction under section 80M by dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rival submissions and have also gone through the orders passed by the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals). The assessee corporation is a wholly owned Government company of the Punjab Government and is inter alia, engaged in the business of promoting and operating scheme for the industrial development of Punjab. In the course of its business activities, the assessee gets projects report and feasibility studies prepared by qualified persons and incur expenditure over them. Up to the assessment year 1989-90, such expenditure was claimed as revenue expenditure and was allowed as such by the Assessing Officer however, for the assessment year 1990-91, the Assessing Officer held it to be 'capital expenditure'. On appeal, the Commissioner of Income-tax (Appeals) 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 discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 Assessing Officer in relation to expenditure on preparation of project /feasibility reports up to assessment year 1989-90 which was to treat the expenditure as of revenue nature. Accordingly, the addition of Rs. 7,47,078 sustained by the Commissioner of Income-tax (Appeals) is directed to be deleted." 102. Another common issue involved in the appeals of the Revenue is relating to assessing the profit on sale of shares under the head "Capital gains". The Revenue has raised the ground of appeal in this regard in ground No. 2 in assessment year 1994-95, ground No. 2 in assessment year 1995-96 and ground No. 1 in assessment year 1996-97 and ground No. 1 in assessment year 1997-98. These grounds are reproduced hereunder for the sake of ready reference:- Assessment year 1994-95 "2. The learned Commissioner of Income-tax (Appeals) has further erred in deleting the addition of Rs. 28,88,58,740 made on account of sale of shares and directing the Assessing Officer to assess it under the head 'Capital gain' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment year 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 gains. 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 assessment year 1994-95 raised by the Revenue is as under:- "4. The learned Commissioner of Income-tax (Appeals) has also erred in directing the Assessing Officer to afford opportunity to the assessee to create further reserve for claiming deduction under section 36(1)(viii)." 105. This issue is also covered in favour of the assessee by the decision of the Tribunal in assessee's own case in Income-tax Appeal Nos.1319 & 1318/Chandi./87 and Income-tax Appeal No. 527/Chandi./99 for assessment years 1984-85, 1982-83 & 1983-84. Since the decision of the Commissioner of Income-tax (Appeals) is in conformity with the decision of the Tribunal in assessee's own case for earlier years, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly incurred for promotion of business and for attracting or inviting industrial participation from outside State and are incidental to the business of the appellant corpn. Accordingly, the impugned addition is ordered to be deleted and the appellant gets a relief of Rs. 7,77,594." 108. Considering the nature of the expenses and the business of the assessee, the Commissioner of Income-tax (Appeals) 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 Commissioner of Income-tax (Appeals) and, therefore, find no justification to interfere. The ground raised by the Revenue is accordingly dismissed. 109. Ground No. 3 in assessment year 1997-98 of the appeal of the Revenue is as under:- "3. Learned Commissioner of Income-tax (Appeals) has erred in deleting the disallowance of Rs. 82,168 made on account of expenditure under the head 'Udyog Sahayak Expenses'. Learned Commissioner of Income-tax (Appeals) has erred in holding this expenditure of revenue nature." 110. The relevant facts relating to this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Shahzada Nand & Sons v. CIT [1977] 108 ITR 358, the relevant portion of the order is reproduced as under:- "Commercial expediency must be tested in the context 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 fair-ness go to the employees." 114. The findings of facts recorded by the Commissioner of Income-tax (Appeals) 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 Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast year this issue was decided against the assessee and said matter is pending before the Hon'ble High Court. In some earlier years the issue was decided in favour of the assessee. In the light of decisions of different High Courts and the Appellate 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. 6. On consideration of proposed order of my Brother, I have no problem in agreeing with him in what is stated upto page 12 of the proposed order. On page 13 in para 23, my learned Brother has drawn legal inferences. I am unable to agree with the following general observations made at page 13 of the order. These are against the scheme of the Income-tax Act. For instance section 29 in case of business income. "It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in shares did not yield any income under the head "Income from other sources". 9. In my humble opinion, the law as per aforesaid decisions and section 57(iii) is clear that expenditure to be allowed for deduction under the head "Other sources" must be incurred for purposes of making or earning 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 page 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." 10. Again the learned Brother refers to decision of Vijaya Laxmi Sugar Mills Ltd.'s case 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 Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses incurred by the liquidator were to facilitate the earning of or at least for preserving the estate. In the abovesaid decision, the Supreme Court held that if any expenditure were incurred like commission for collection or such similar expenditure, it may be considered as spent solely for the purpose of earning that income, the position may be different." 12. Thereafter some more decisions are noted at the end of page 16 of the proposed order and reference is made to section 58 of Income-tax Act which admittedly has no application in the present case. The principle laid down in the case of Vijaya Laxmi Sugar Mills Ltd. or case of Seth R. Dalmia are correctly noted but thereafter in para 32, my learned Brother has observed as under: "32. It hardly need 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." 13. 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 purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above cases had principle in mind that tax has to be upon "income, profits and gains and not on gross receipt". In my considered opinion, no different proposition than one laid down by Their Lordships in the case of Vijaya Laxmi Sugar Mills Ltd. and Seth R. Dalmia was laid down by Privy Council in the above mentioned cases. 18. There is reference to certain cases allowing 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. 19. In para 36, there is reference to certain precedent relating to income assessable under the head "Profits and g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is business income, although required to be taken under the head "Other sources" for computation of income. If shares are held as a capital investment, the dividend cannot be treated as business income. There is no question of holding that dividend was acquired in the course of the business or it is related to business activity. The reason being that dividend is distributed or allowed on account of ownership or holding of shares. It is an income 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. 22. There is then discussion of heads of income and sources of income. Reference is made to classification of income under section 14 of the Income-tax Act and decisions of Supreme Court in the case of Brooke Bond & Co. Ltd. v. CIT [1986] 162 ITR 373 in case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, CIT v. Chug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otally different proposition to say that for determining net income included in the gross total income on account of dividend, it is necessary to trace the source of the dividend for purposes of section 80M of the Income-tax Act. I have not been able to find any legal justification for above view in the proposed order of my learned Brother. This I say with all the respect for my learned Brother. The other proposition "for computation of dividend income in accordance with the Act" one need not restrict for deduction 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 which is well-settled and based upon interpretation of section 57 of the Income-tax 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 considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordships after great discussion answered the question as under: "In the result, we are of opinion that the loss sustained by the appellant as a result of misappropriation by Chandratan is one which is incidental to the carrying on of his business, and that it should therefore be deducted in computing the profits under section 10(1) of the Act. In this view, the order of the lower-court must be set aside and the reference answered in the affirmative. The appellant will get his costs of this appeal and of the reference in the court below. Appeal allowed." It is clear from above that deduction has been allowed as loss incidental to the carrying of business under a specific provision relating to computation of profits and gains of business. 25. 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. [1964] 53 ITR 140, Their Lordships 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ail. However, he has quoted decision of Hon'ble Supreme Court in the case of Kunhayammed v. State of Kerala [2000] 245 ITR 360 to emphasize that even if decision of Supreme Court is short or non-speaking, it would have binding effect. 28. The decision of Supreme Court in the case of United General Trust Ltd. has been given on a concession, but without entering into any sort of controversy and without entertaining any doubt about the binding nature of the decision of the Hon'ble Supreme Court, one must see as to what is the proposition laid down by the Supreme Court which is binding under Article 141 of the Constitution. The question referred to the Hon'ble Court is reproduced in the decision of Hon'ble Bombay High Court and is as under: "Whether on the facts and in the circumstances of the case, and in law, the Appellate Tribunal was justified in applying the decision of the Bombay High Court in the case of New Great Insurance Co. Ltd. [1973] 90 ITR 348 to the assessment year in question without considering the effect of the amendment operative from 1-4-1968, and in thus holding that the assessee would be entitled to the deduction under section 80M on the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n peculiar facts of the case and on interpretation of section 80-I, sections 66 and 110 of Income-tax Act. Further the decision pertains to business income. There can be no dispute that where there is no prohibition under the Statute and accounts are mixed for business income, proportionate income can be taken and in the like manner expenditure can be allowed on proportionate basis as a deduction. However, this proposition is to be applied subject to language used in the statutory provision being considered. 30. My learned Brother and Hon'ble Vice President then referred to the decision of Calcutta Bench of ITAT in the case of Dy. CIT v. S.G. Investments & Industries Ltd. [2004] 89 ITD 44. The said decision is admittedly given with reference to section 14A and not with reference to section 80M of Income-tax 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. [1999] 236 ITR 456. 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 divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount used by the assessee for investing in shares to earn the dividend. We, therefore, remand the matter to the Commissioner to recompute that amount with reference to the figures found in the allowed for statistical purposes." 32. It is evident from above that deduction under section 57 is to be allowed on finding relationship between expenditure and income, an exercise revenue has to undertake before allowing deduction while computing dividend income. The deduction cannot be made on estimate or presumption basis. This is even demonstrated from the decision cited and relied upon in the order of my learned Brother. 33. Reference has also been made to Brooke Bond & Co. Ltd. v. CIT [1986] 162 ITR 373, wherein Their Lordships of the Supreme Court have observed as under:- "It is a cardinal principle of the law relating to income-tax that income-tax is a single charge on the total income of an assessee. For the purpose of 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities 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 to determine total income. (d) The statute permits specified deduction from gross receipts in order to compute the net income under each head. 34. Now I again revert to sections 80AA& 80M of Income-tax Act to consider the requirement of above section without reproducing them. It being suffice to mention that deduction of dividend under section 80M is allowed in the case of a domestic company in computing the total income of such domestic company-for an amount equal to so much of amount of income by way of dividend from another domestic company as does not exceed the amount of dividend distributed. Section 80AA providing for computation of deduction under section 80M contain 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." 35. In both the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision authorizes re-computation of dividend income for purposes of section 80M of the Act. 36. The effect and implication of restriction placed by statutory provisions was also considered by Their Lordships in the case of CIT v. Chugandas & Co. [1965] 55 ITR 17 (SC). In the case of Chugandas & Co., the assessee had carried interest on securities held as trading assets. The assessee claimed exemption on the interest earned under section 25(3) of Income-tax Act, 1922 which at the relevant time provided as under:- "25.(3) Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918 (VII of 1918), is discontinued, then, unless there has been a succession by virtue of which the provisions of sub-section (4) have been rendered applicable, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of 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 shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an obligation or claiming a right, the Legislature has in terms referred to such a head. For instance, by section 18(2) liability is imposed upon any person responsible for paying any income chargeable under the head 'Salaries' to deduct income-tax and super-tax on the amount payable. Similarly, under section 18(3) the person responsible for paying income-tax under the head "Interest on securities' is liable to deduct income-tax and super-tax at the prescribed rates on the amount 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 gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 85A of Income-tax Act. Thereafter, the Hon'ble Court proceeded to consider section 80M of Income-tax Act which is reproduced at page 132 of the report. The decision of Hon'ble Gujarat High Court in Addl. CIT v. Cloth Traders (P.) Ltd. [1974] 97 ITR 140 and of Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 were thoroughly analyzed. Their Lordships placed strong reliance on the decision of Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. Their Lordships held that above decision undoubtedly was on a different provision namely section 80E, but reasoning which prevailed with the Court in placing particular interpretation were equally applicable to interpretation of sub-section (1) of section 80M. The provision of section 80E(l) considered by Their Lordships is reproduced at page 138 of the report and is as under: "80E (1) Deduction in respect of profits and gains from specified industries in the case of certain companies,- (1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correct interpretation of subsection (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, subsection (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.'s case [1978] 113 ITR 84 and we must, therefore, dissent from the interpretation placed on sub-section (1) of section 80M by the decision in Cloth Traders' case." 42. It is clear from above that even when it was required that "Profits and gains of business be computed in accordance with provisions of the Act", it was held that, "Same will have to be computed in accordance with sections 30 to 43A which included section 32(2)" of the Act. Computation of profit in accordance with provision of the Act was read as the legislative mandate. Requirement is to look for "Key words" in the parenthetical clause. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made by the Income-tax Officer 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 Income-tax Officer 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 V 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 Income-tax Officer has to be taken as a reasonable estimate." 44. In the case of CIT v. United Collieries Ltd. [1993] 203 ITR 857 (Cal), Their Lordships considered the following question and observed as under: "'Whether, on the facts and in the circumstances of the case, deduction under section 80M should be allowed on the gross dividend income without deducting the allocation of expenses incurred in earning such dividend income?' In our view, only the actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure 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." 46. In the case of State Bank of Indore v. CIT [2005] 275 ITR 23, Their Lordships of MP High Court (Indore Bench), after considering decision of Hon'ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. held as under: "A careful perusal of section 80M as interpreted by the Supreme Court in Distributors' case [1985] 155 ITR 120 read with 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 (section 57) has to be taken into consideration. The question may still arise as to whether any notional expenditure can be taken into consideration for the purpose of deduction while calculating the income from dividend or only expenditure actually incurred by an assessee can be taken int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end 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 p consideration the actual expenditure incurred by the assessee while earning the dividend, but have only proceeded to take notional expenditure, the same cannot be 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) [1985] 155 ITR 120 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 holding that the expenditure at 10 paise per Rs. 100 of dividend income be taken for deduction under section 80M." 47. In the present case the assessee was hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend income and that claim of the assessee to the above effect was erroneous. Without material I see no justification on the part of the Assessing Officer to deduct proportionate expenses. 48. 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 of section 80M or treat dividend as earned in the course of the business. My learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed funds for acquiring shares, satisfy 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 Income-tax 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. 51. 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 sect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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