Madras H.C : Deduction under s. 80M should be allowed on the gross amount of dividend of Rs. 9,54,744 and not on the net dividend after deduction of interest paid on the capital borrowed for investments ?

High Court Of Madras

CIT vs. V. Ramakrishna & Sons

Section 80M

Asst. Year 1972-73

Ratnam & Bakthavatsalam, JJ.

Tax Case No. 1107 of 1979

8th February, 1989

Counsel Appeared

N.V. Balasubramaniam, for the Assessee

RATNAM J. :

At the instance of the Revenue, under s. 256 (2) of the IT Act, 1961 (hereinafter referred to as “the Act”), the following question of law has been referred to this Court for its opinion :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that deduction under s. 80M should be allowed on the gross amount of dividend of Rs. 9,54,744 and not on the net dividend after deduction of interest paid on the capital borrowed for investments ? “

The assessee is a private limited company and for the assessment year 1972-73, a return was filed disclosing an income of Rs. 2,52,345. While doing so, the assessee debited Rs. 1,48,442 being the interest paid by it on monies borrowed to the profit and loss account. The ITO held that inasmuch as borrowed funds had been utilised by the assessee in making investments, the interest attributable to such borrowed funds was to be deducted from the income chargeable under the head ” Other sources ” and could not be deducted in computing the business income. Accordingly, he deducted Rs. 94,864 from Rs. 9,54,774 being the income chargeable under the head “Other sources” and computed the net income under that head at Rs. 8,59,910. Regarding the deduction allowable under s. 80M of the Act, he was of the view that only 60 per cent of the net dividend income could be allowed and not 60 per cent on the gross dividend of Rs. 9,54,774, as claimed by the assessee.

Accordingly, he computed the deduction allowable under s. 80M of the Act at Rs. 5,15,946 and determined the total taxable income at Rs. 3,33,448. Aggrieved by this, the assessee preferred an appeal to the AAC contending that the entirety of the interest paid should have been deducted from the business income and that 60per cent of the gross dividend income should have been deducted under s. 80M of the Act. The Appellate Asstt. CIT accepted the claim of the assessee that 60per cent of the gross dividend income should have been deducted and in view of that he did not proceed to consider the question whether the entirety of the interest payment should have been deducted from the business income. On appeal by the Revenue before the Tribunal it was contended that only 60 per cent of the net dividend income should be allowed under s. 80M of the Act, but the Tribunal, purporting to follow the decision of this Court in Madras Auto Service vs. ITO (1975) 101 ITR 589, held that the expression “dividend” used in s. 99(1)(iv) of the Act could not be considered as net dividend and that the stand taken by the Department that only 60per cent of the net dividend should be allowed as deduction cannot be countenanced and further that under s. 80M of the Act, the deduction has to be computed with reference to the gross dividend and not the net dividend. That is how the matter has come up before us on the question of law set out earlier. Though the assessee had been served in this reference, it has not appeared either through counsel or any other representative and learned counsel for the Revenue placed before us all the relevant materials.

Learned counsel for the Revenue contended that only the net dividend should have been considered for allowance as a deduction under section 80M of the Act and that the Tribunal erred in holding that such allowance ought to be on the basis of the gross dividend. Reliance was also placed by learned counsel on the decision in Distributors (Baroda) P. Ltd. vs. Union of India (1985) 155 ITR 120 (SC).

We have carefully considered the submission made by learned counsel for the Revenue and we are of the view that his contention is well founded. In Distributors (Baroda) P. Ltd. vs. Union of India (supra), the Supreme Court had occasion to go into the question of the interpretation of s. 80M of the Act, though in the context of its constitutional validity as well. Referring to the opening words of s. 80M of the Act, the Supreme Court pointed out that those words describe the condition which must be fulfilled in order to attract the applicability of the provision contained in sub-s. (1) of s. 80M of the Act and that condition is that the gross total income of the assessee must include income by way of dividends from a domestic company and in accordance with the provisions of the Act, i. e., after deducting interest on monies borrowed for earning such income. It was also further pointed out that the full amount of dividend received by the assessee would not be included in the gross total income, but would only be the amount of dividend as computed in accordance with the provisions of the Act and if that be so, the deduction required to be allowed under s. 80M of the Act is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the asessee. In view of this clear pronouncement of the Supreme Court, we are of the view that the conclusion arrived at by the Tribunal is erroneous and cannot be sustained.

We may also point out that the assessee had, before the AAC, claimed that the entirety of the interest paid should have been deducted from the business income. But the AAC did not consider this plea as noticed earlier. The Tribunal also had not considered the question whether the whole amount should be allowed under “Business”. A consideration of that question would be necessary before the assessee can avail itself of the benefit of s. 80M of the Act. Since this aspect had not been dealt with by the Tribunal in the course of its order, we are of the view that the matter has to be again looked into y the Tribunal for working out the relief that may be available to the assessee. We, therefore, answer the question referred to us in the negative and in favour of the Revenue.

There will be, however, no order as to costs.

[Citation : 179 ITR 638]

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