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Commissioner of Income-tax Vs. M. Varadarajan - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 21 of 1976
Judge
Reported in[1979]119ITR150(AP)
ActsIncome Tax Act, 1961 - Sections 57 and 80K
AppellantCommissioner of Income-tax
RespondentM. Varadarajan
Appellant AdvocateP. Ramarao, Adv.
Respondent AdvocateP.R. Ramachandra Rao, Adv.
Excerpt:
.....of investment in business. - - we are clearly of the opinion that the dividend component of total income is the gross figure of the dividend received by the assessee and not the net dividend which he received after deducting the expenditure contemplated by section 57(iii). section 57(iii) does not take away the benefit which section 80k confers on an assessee. [1975]99itr243(mad) that the principle of that decision that the relief under section 99(1)(iv) would be available on the gross dividend income and not on the net dividend income would apply to the case before them as well, in view of the language in section 99(1)(iv) and section 80k being similar, and hence there was no question of any excessive relief having been granted and, accordingly, the proposal for reassessment was..........directors' sitting fees and dividends on the shares. for the assessment year 1968-69, the total income was computed by the ito at rs. 57,880 and for the assessment year 1969-70 at rs. 62,510. the ito allowed deductions of rs. 10,610 for the assessment year 1968-69 and rs. 11,106 for the assessment year 1969-70 under section 80k of the i.t. act while computing the total income. the addl. cit issued under section 263 of the act a notice to the assessee for revising the order of assessment. the assessee contested the proposed action contending that all that section 80k lays down is that the gross total income from dividends is entitled to the relief mentioned in the section and, therefore, he was entitled to deduction under section 80k in respect of the amounts received by him as.....
Judgment:

Obul Reddi, C.J.

1. The facts leading up to this reference are these ; The assessee is an individual deriving income from salary and other sources, viz., annuities, directors' sitting fees and dividends on the shares. For the assessment year 1968-69, the total income was computed by the ITO at Rs. 57,880 and for the assessment year 1969-70 at Rs. 62,510. The ITO allowed deductions of Rs. 10,610 for the assessment year 1968-69 and Rs. 11,106 for the assessment year 1969-70 under Section 80K of the I.T. Act while computing the total income. The Addl. CIT issued under Section 263 of the Act a notice to the assessee for revising the order of assessment. The assessee contested the proposed action contending that all that Section 80K lays down is that the gross total income from dividends is entitled to the relief mentioned in the section and, therefore, he was entitled to deduction under Section 80K in respect of the amounts received by him as dividends. Rejecting that contention, the Addl. CIT directed the ITO to modify the assessments in respect of the two assessment years by withdrawing the deductions allowed under Section 80K of the Act and revise the tax demand for the two years accordingly. The assessee then preferred an appeal before the Income-tax Appellate Tribunal and the Tribunal allowed the appeal holding that ' Section 80K applies when the gross total income includes any income by way of dividends.' At the instance of the Addl. CIT the following question has been referred under Section 256(1) of the Act, by the Tribunal for our decision :

' Whether, on the facts and in the circumstances of the case, the assessee is entitled to relief under Section 80K of the Income-tax Act, 1961, for the assessment years 1968-69 and 1969-70 '

2. Mr. Ramarao, the learned counsel appearing for the revenue, contended that the assessee is not entitled to the benefit of Section 80K, as there would be no dividend income when the income chargeable under the head ' Income from other sources ' is computed alter giving Mm deduction in respect of the interest paid on amounts borrowed for the purpose of investment.

3. To appreciate the question involved in this reference, it is necessary to refer to a few relevant provisions. Under Section 2(24), ' income ' includes dividend. Section 2(45) defines ' total income ' to mean the total amount of income referred to in Section 5 computed in the manner laid down in the Act. Section 5 lays down the ambit of total income. Total income includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person, or accrues or arises or is deemed to accrue or arise to him in India during such year, or accrues or arises to him outside India during such year. For the purpose of inclusion in the total income of an assessee, any dividend declared by a company or distributed or paid by it within the meaning of Sub-clause (a) or Sub-clause (b) or Sub-clause (c) or Sub-clause (d) or Sub-clause (e) of Clause (22) of Section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. Section 56 deals with income from other sources. Dividends come under the head ' Income from other sources ' under Section 56(2)(i). Section 57 deals with deductions. This section, to the extent relevant, may be read:

' 57. The income chargeable under the head ' Income from other sources ' shall be computed after making the following deductions, namely;--......

(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 :

Provided that nothing contained in Clause (i) or Clause (iii) shall apply in computing the income by way of dividends in the case of an assessee, being a foreign company.

Explanation.--For the purposes of this section and Section 58, foreign company ' shall have the same meaning as in Section 80B.'

4. The only other provisions to be noticed are those which deal with deductions to be made in computing the income occurring in Chap. VI-A. Section 80A prescribes the procedure in computing the total income. Section 80A, to the extent relevant, reads :

80A. (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in Sections 80C to 80VV.

(2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee.'

5. ' Gross total income ' is defined in Section 80B to mean the total income computed in accordance with the provisions of the Act, before making any deduction under Chapter VI-A or under Section 280-O. The relevant section under which deduction is claimed and which calls for interpretation by us is Section 80K which is in these terms;

' 80K. Where the gross total income of an assessee, being-

(a) the owner of any share or shares in a company, or

(b) a person who is chargeable to tax under this Act on the income by way of dividends on any share or shares in a company owned by any other person,

includes any income by way of dividends paid or deemed to have been paid by the company in respect of such share or shares, there shall, subject to any rules that may be made by the Board in this behalf, be allowed, in computing his total income, a deduction from such income by way of dividends of an amount equal to such part thereof as is attributable to the profits and gains derived by the company from an industrial undertaking or ship or the business of a hotel, on which no tax is payable by the company under this Act for any assessment year commencing prior to the 1st day of April, 1968, or in respect of which the company is entitled to a deduction under Section 80J for the assessment year commencing on the 1st day of April, 1968, or for any subsequent assessment year :

Provided that no deduction under this section shall be allowed in respect of any income by way of dividends which is attributable to the profits and gains derived by the company from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant or plants after the 31st day of March, 1976, or from a ship which is first brought into use after that date or from the business of a hotel which starts functioning after that date.'

6. Mr. P. R. Ramachandra Rao appearing for the assessee contends that relief under Section 80K is available to the assessee on the gross dividend income and not on the net dividend income. In other words, his case is that the deduction allowed in respect of the interest paid on borrowings for the purpose of investment should not be made from the gross dividend income for purposes of giving relief under Section 80K, We are inclined to agree with the contention of Mr, Ramachandra Rao. Under Section 56, it would be incumbent upon the assessee to show income from other sources, that is to say, dividends in this case, in the return submitted by him and the income from the dividends would form part of the total income. That is because ' dividend ' is expressly included in the definition of ' income '. The dividends declared are taxable under Section 56 under the head ' Income from other sources '. Section 80K provides for deduction in respect of dividends attributable to profits and gains from new industrial undertakings or ships or hotel business. The assessee in this case had borrowed moneys and invested in a new industrial undertaking known as ' Poly Mould Industries' by purchasing shares. Section 57 and Section 80K are mutually exclusive. The assessee is entitled to deduction under Section 80K in addition to deductions under Section 57. Section 57(iii) operates in a different field altogether. Under that provision, while computing the income under the head 'revenue expenditure ', deduction has to be allowed in respect of expenditure incurred solely for the purpose of earning such income, provided that that expenditure is not in the nature of capital expenditure or personal expenses of the assessee. The moneys were borrowed by the assessee exclusively for the purpose of investment in business and on the borrowings, he has paid interest as declared by him in the returns. The assessee was, therefore, entitled to deductions under Clause (iii) of Section 57 in respect of the interest paid by him on the borrowings for the purpose of investment in the business of M/s. Poly Mould Industries, Madras. Section 80K does not contemplate any expenditure for the purpose of earning income. Section 80K only deals with dividend income attributable to profits and gains from new industrial undertakings. As may be seen from the marginal note of Section 80K, the intention of Parliament in enacting Chap. VI-A is manifest. The marginal note reads ' Deduction in respect of dividends attributable to profits and gains from new industrial undertakings or ships or hotel business '. The legislature wanted new industrial undertakings to come into existence and to attract capital for new ventures, whether it be shipping industry or hotel business or any other industrial undertaking, this concession has been given. That seems to be the principal object in introducing Chap. VI-A. Sections 80H, 80J, 80K, 80M, 80MM, 80N and 80-O further illustrate the intention of Parliament in allowing deductions in respect of certain incomes. There is nothing in Section 57 which indicates that the gross dividend income referred to in Section 80K should be deducted from the deduction allowed in respect of the interest paid by the assessee on his borrowings for the purpose of investment in business and relief granted to him only in respect of the balance.

7. The learned counsel for the revenue sought to place reliance upon a decision of the Gujarat High Court in Addl. CIT v. Cloth Traders (P.) Ltd. : [1974]97ITR140(Guj) . In that case, the Gujarat High Court, construing the scope of Section 80M read with Section 57(iii), opined (see headnote) :

' Dividend income falls under the sixth head of income in Section 14, namely, ' Income from other sources '. If dividend income is to be included under ' Income from other sources ' then as provided by Section 57(iii) any expenditure which is laid out wholly and exclusively for the purpose of earning that income should first be deducted before arriving at the figure of total income. It is, therefore, evident that the dividend component of total income is not the gross figure of dividend received by the assessee but the net dividend which is received after deducting the expenditure contemplated by Section 57(iii). Therefore, when the second part of Section 85A (now Section 80M) refers to ' income so included ' in the computation of total income of the concerned assessee it contemplates not the gross dividend income but only the net dividend income, and the average rate of tax which is to be deducted under Section 85A (now Section 80M) should be on the net income of dividends received by the assessee. '

8. We are not inclined to endorse the construction placed by the Gujarat High Court on Section 57(iii) in view of the construction placed by us on the said provision that it operates in a different field. We are clearly of the opinion that the dividend component of total income is the gross figure of the dividend received by the assessee and not the net dividend which he received after deducting the expenditure contemplated by Section 57(iii). Section 57(iii) does not take away the benefit which Section 80K confers on an assessee. The view taken by us is in consonance and in conformity with the decisions referred to hereunder.

9. In CIT v. South Indian Bank Ltd. : [1966]59ITR763(SC) the Supreme Court, dealing with a notification of the Central Government issued under Section 60A of the 1922 Act, which provided that no income-tax shall be payable by an assessee on the interest receivable on certain income-tax free loans issued by the former Governments of Travancore and Cochin, provided that such interest was received within the territories of the State of Travancore-Cochin and was not brought into any other part of the taxable terrritories, held that the notification was a self-contained one giving a total exemption from income-tax. There was no scope for controlling the provisions of the notification with reference to Section 8 of the I.T. Act. 'Interest receivable ' was an unambiguous expression ; it could only mean the amount of interest calculated in accordance with the terms of the securities ; it could not mean interest receivable minus the amount spent in receiving the same. This decision goes to show that dividends received in respect of which deduction is allowable under Section 80K could only mean dividend amount received and it could not mean dividend amount received minus the interest paid on the borrowings for purposes of investment which fetched the dividends.

10. The Bombay High Court in CIT v. Industrial Investment Trust Co. Ltd. : [1968]67ITR436(Bom) was dealing with a notification issued by the Governor-General in council exempting from super-tax ' so much of the income of any investment trust company as is derived from dividends paid by any other company which has paid or will pay super-tax in respect of the profits out of which such dividends are paid '. The Bombay High Court, relying upon the decision in CIT v. South Indian Bank Ltd. : [1966]59ITR763(SC) , observed that there was no warrant to construe the word ' income ' in the notification as total income nor to qualify the dividend income specified in the said notification as the dividend income computed under Section 12 of the Act. In that view, the Bombay High Court granted exemption to the assessee from super-tax on the whole of the dividend income without deducting therefrom the proportionate expenses attributable to the same.

11. The Calcutta High Court in CIT v. Darbhanga Marketing Co. Ltd. : [1971]80ITR72(Cal) was construing the scope of Section 99 of the I.T. Act, 1961, which deals with incomes not chargeable to super-tax. In so construing, the Calcutta High Court followed the decision in CIT. v. South Indian Bank Ltd. : [1966]59ITR763(SC) and observed :

' The expression ' which are included in his total income' in Sub-section (1) of Section 99 and ' incomes forming part of total income' in the heading are descriptive of the items included in the computation of the total income and not indicative of the quantum of the amounts included under the different items in the compution of total income. Such a construction of these expressions would be in harmony with the obvious meaning of the expression ' dividend received '. Any other construction would result in an anomaly. The construction we have reached is in consonance with the scheme of the section and from one point of view with the purpose behind it. It is true from another point of view for it amounts to excessive relief to an assessee. But that is a matter of legislative policy. In view of the language used we are not concerned with the same. We are further of the opinion that the ratio of the decision of the Supreme court in the case of Commissioner of Income-tax v. South Indian Bank Ltd. : [1966]59ITR763(SC) supports the above view we are taking.'

12. The case of Madras Auto Service v. 1TO : [1975]101ITR589(Mad) is somewhat nearer to the facts of the present case. That was a case where the assessment of the assessee for 1966-67 was sought to be reopened by the ITO on the ground that by reason of the deduction of the entire interest paid on borrowings from the business profits, excessive relief had been granted to the assessee. The officer proposed to arrive at the net dividend on which alone he held the assessee to be entitled to the relief under Sections 80K and 80M. That led to the assessee filing a writ petition and the Madras High Court held, following an earlier decision of the court in CIT v. Madras Motor and General Insurance Co. Ltd. : [1975]99ITR243(Mad) that the principle of that decision that the relief under Section 99(1)(iv) would be available on the gross dividend income and not on the net dividend income would apply to the case before them as well, in view of the language in Section 99(1)(iv) and Section 80K being similar, and hence there was no question of any excessive relief having been granted and, accordingly, the proposal for reassessment was not valid.

13. In CIT v. Central Bank of India Ltd. : [1976]103ITR196(Bom) the Bombay High Court, dealing with the question of relief in respect of dividends attributable to agricultural income, held that the relief contemplated under Section 56A and under Section 49B is available in relation to the whole of the dividends without reducing the same by interest and administrative expenses. The ratio of this decision would equally apply to the dividends under Section 80K.

14. For the foregoing reasons, the question referred to us in answered in the affirmative and against the revenue with costs. Advocate's fee Rs. 250.


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