Madhya Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in confirming the order of lower authorities and holding that expenditure at 10 paise per Rs. 100 of the dividend income be taken for deduction under s. 80M ?

High Court Of Madhya Pradesh : Indore Bench

State Bank Of Indore vs. CIT

Section 80M

Asst. Year 1985-86, 1986-87

A.M. Sapre & Ashok Kumar Tiwari, JJ.

MA No. 1755 of 2004 & IT Ref. 21 of 1999

11th October, 2004

Counsel Appeared

R.T. Thanewala, for the Applicant : R.L. Jain with Ku. Mandlik, for the Respondent

ORDER

A.M. Sapre, J. :

This is a reference made under s. 256(1) of the IT Act at the instance of assessee by the Tribunal by their order, dt. 2nd July, 1998, passed in RA Nos. 161 and 162/Ind/1997 which arise out of an order passed by the Tribunal, dt. 5th Aug., 1997 in ITA Nos. 210 & 211/Ind/1992 to this Court for answering the following question of law :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in confirming the order of lower authorities and holding that expenditure at 10 paise per Rs. 100 of the dividend income be taken for deduction under s. 80M ?”

Facts insofar as they are relevant for answering the aforesaid question need to be taken note of from the statement of case drawn by the Tribunal while referring the question to this Court.

The issue relates to asst. yrs. 1985-86 and 1986-87. The assessee is a bank and is declared to be a company for the purpose of IT Act by the Central Board of Direct Taxes (CBDT). The assessee also, in addition to their banking business derives income from dividend, i.e., income from other sources as defined under s. 56 of the Act.

For the assessment year in question, the assessee claimed deduction under s. 80M at the rate of 60 per cent of gross dividend income earned by them. The question, therefore, arose before the taxing authorities as to the mode and manner in which such deduction is to be allowed on the income earned by way of dividend by an assessee. In other words, the question arose as to what should be the principle that can be applied for claiming deduction under s. 80M which deals with income earned by way of dividend.

The claim of the assessee was rejected by AO by his order dt. 20th Feb., 1989 (Annex. A-1). In the opinion of AO, the deduction has to be allowed after deducting interest payable by an assessee on an investment and also after taking into account the proportionate expenditure incurred for earning dividend income. The assessee felt aggrieved, filed an appeal before CIT(A). The CIT(A) by his order dt. 13th Feb., 1992 (Annex. B-2) partly allowed the appeal. He held that no part of interest paid by an assessee should be reduced from the gross amount of dividend earned by an assessee. So far as expenditure was concerned, the CIT(A) held that deduction on account of collection should be restricted to 10 paise per Rs. 100 of the dividend income. In other words, in the opinion of CIT(A), the AO should take 10 paise per Rs. 100 as an expenditure incurred and accordingly, calculate

the deduction under s. 80M. The assessee felt aggrieved of this finding relating to expenditure, filed further appeal to Tribunal (ITAT). By order dt. 5th Aug., 1997 (Annex. C) the Tribunal upheld the finding and dismissed the appeal. The assessee, therefore, prayed for making a reference to this Court under s. 256(1) of the Act on the question proposed. The Tribunal by order dt. 2nd July, 1998, passed in RA Nos. 161/162/Ind/1997 acceded to the request made by an assessee and accordingly, made the reference to this Court to answer the question, referred supra. Heard Shri R.T. Thanewala, learned counsel for the assessee, and Shri R.L. Jain with Ku. Mandlik, learned counsel for the Revenue.

Learned counsel for the assessee contended that view taken by AO, CIT(A) and lastly by Tribunal on the question referred, does not appear to be correct. According to learned counsel, at best what may be taken into consideration is the actual expenditure, if any, incurred by an assessee while earning dividend but not any notional expenditure by way of apportionment. In other words, the submission is that so long as it is not proved as a fact that a particular amount is actually spent by way of expenditure in earning dividend, the same cannot be taken into consideration on hypothetical/notional basis. According to him, in the case in hand, a sum of 10 paise is taken as a notional expenditure for every Rs. 100 for purpose of deduction. This, according to learned counsel, is neither legal nor proper. It was further contended that such course adopted by AO is neither recognised by s. 80M nor by s. 57(1) ibid so as to make it an acceptable deduction from the gross income of dividend earned by an assessee. Learned counsel further contended that assessee being a bank does not, as a fact, incur any expenditure either at the time of earning or while depositing in their account or has, in fact, incurred any expenditure as such in the assessment year in question and hence, the AO ought not have taken 10 paise as an expenditure said to have been incurred for earning Rs. 100 by way of dividend and then deduct the same out of Rs. 100 for computing the total income under s. 80M. Learned counsel placed reliance on the decisions reported in CIT vs. National & Grindlays Bank (1993) 109 CTR (Cal) 264 : (1993) 202 ITR 559 (Cal), CIT vs. Enemour Investment (1994) 72 Taxman 370 (Cal) and CIT vs. United Collieries Ltd. (1993) 203 ITR 857 (Cal). In reply, learned counsel for the Revenue placed reliance on the decision reported in the case of Distributors (Baroda) (P) Ltd. vs. Union of India AIR 1985 SC 1585 : (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) and contended that issue sought to be urged by an assessee and referred by Tribunal to this Court is covered in favour of Revenue by this decision, i.e., Distributors’ case and hence, the question referred has to be answered against the assessee and in favour of Revenue.

Having heard learned counsel for the parties and having perused record of the case, we are inclined to answer the question referred to this Court in favour of assessee and against the Revenue. It is necessary, at the outset, to take note of law laid down by Supreme Court in the case of Distributors (Baroda) (supra). It is in this case, their Lordships examined the legislative history and true scope of s. 80M. Indeed, the scope of s. 80M was first examined by Gujarat High Court in the case of Addl. CIT vs. Cloth Traders (P) Ltd. (1974) 97 ITR 140 (Guj). In this case, Gujarat High Court held that the deduction permissible under s. 80M is liable to be calculated with reference to the dividend income computed in accordance with the provisions of the Act and not with reference to the full amount of dividends received by an assessee. Since, the view taken by Gujarat High Court was against the assessee and hence, the matter was taken to Supreme Court at their (assessee) instance in appeal. The Supreme Court overruled the view taken by Gujarat High Court [Cloth Traders (P) Ltd. vs. CIT (1979) 10 CTR (SC) 393 : AIR 1979 SC 1691] and held that the deduction required to be allowed under s. 80M must be calculated “with reference to the full amount of dividend received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, i.e., after making deductions provided under the Act.” It is this view of Supreme Court rendered in what is known as Cloth Traders’ case (supra) that led the Parliament to enact a new s. 80AA with its retrospective operation. Obviously, s. 80AA was enacted to overcome the interpretation made by Supreme Court of s. 80M. It is this introduction of s. 80AA which gave rise to another round of litigation on the scope and ambit of s. 80M r/w s. 80AA ibid in the case of Distributors (Baroda) (P) Ltd. (supra). It is in this case, questions arose as to (1) whether law laid down by Supreme Court in the case of Cloth Traders (supra) is correct, or it needs to be overruled ? (ii) Whether s. 80AA is ultra vires to the provisions of Constitution and thus can be declared unconstitutional? And lastly, whether s. 80M requires to be reinterpreted ? It is essentially these three questions which were examined by the Supreme Court in this case. Their Lordships, after examining the entire issues, held that their earlier view, taken in the case of Cloth Traders (supra), does not lay down correct law and hence, need to be overruled. It was further held that in view of their decision that Cloth Traders deserves to be overruled, it is not now necessary to examine the constitutional validity of s. 80AA inasmuch as the same is in the nature of explaining the correct interpretation of s. 80M and hence, declaratory in nature. Lastly, while re-interpreting s. 80M, their Lordships held that : “While enacting s. 80M, the legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company ?” So, the law laid down by Supreme Court, in the case of Distributors (Baroda) (supra), is that income derived by way of dividends has to be computed in accordance with the provisions of the Act for the purpose of granting benefit under s. 80M. Sec. 56 of the Act deals with the income from other sources which includes income from dividend, i.e., s. 56(1)(i). Whereas, s. 57 deals with deduction sub-s. (1) provides as to how and in what manner, the deduction in the case of dividends or interest on securities is to be made. Careful perusal of s. 80M as interpreted by Supreme Court in Distributors’ case (supra) r/w s. 57 would only suggest that while giving benefit under s. 80M, the gross income of dividend cannot be taken into account but an income calculated after making deduction as per the provisions of the Act (s. 57) has to be taken into consideration.

The question may still 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 into consideration while calculating the deduction claimed under s. 80M. In our considered opinion, there lies a distinction between 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 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 circumstance, this question had come up for consideration thrice before Calcutta High Court. These cases are—CIT vs. National and Grindlays Bank Ltd. (supra), CIT vs. United Collieries Ltd. (supra) and lastly CIT vs. Enemour Investment Ltd. (supra). In all the three cases, their Lordships of Calcutta High Court have taken a consistent view that we have taken. It has been held that : “In our view, only the actual expenditure incurred by the assessee in earning the dividend income is liable to 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 notional expenditure as has been done in the instant case.”

In our opinion, the view that we have taken is not in conflict with the decision of Supreme Court in Distributors (Baroda) (P) Ltd. case (supra). Indeed, we may make it clear that, in case if the taxing authorities or assessee, as the case may be, is able to prove or show that a particular amount was actually incurred by an assessee in earning dividend income, then certainly to the extent the amount actually incurred has got to be deducted from gross dividend income and then the same is to be taken into consideration under s. 80M. Since, in this case, the taxing authorities have not taken into consideration the actual expenditure incurred by an assessee while earning the dividend, but has only proceeded to take notional expenditure, the same cannot be held to be sustainable in law.

We cannot countenance with such view. In our opinion, it is not in accordance with the view even taken by Supreme Court in the case of Distributor’s (Baroda) case (supra) and the view taken by Calcutta High Court in the cases referred supra. Such view, thus needs to be overruled.

In view of foregoing discussion, we answer the question referred to us in favour of assessee and against the Revenue. In other words, we answer the question by holding that Tribunal was not right in confirming the order of lower authorities and was further not right in holding that expenditure at 10 paise per Rs. 100 of dividend income be taken for deduction under s. 80M. No costs.

[Citation : 275 ITR 23]

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