1. The assessee is a limited company. The previous year of the assessee ended on 31-10-1974. The assessee was having income from dividend. The gross income from dividend was disclosed at Rs. 1,47,864. The ITO deducted Rs. 35,768 for expenses towards audit fees, general charges, interest, loan and establishment charges debited to profit and loss account. The balance amount worked out to Rs. 1,12,096. The ITO allowed deduction @60 per cent of Rs. 1,12,096 under Section 80M at Rs. 67,257.
The total income after deduction came to Rs. 44,839 which was rounded off to Rs. 44,840. The computation of the ITO is given below :Gross Dividend Rs. 1,47,864Less : Expenses towards audit fees, general profit and loss account Rs. 35,768 Rs. 1,12,096Less : @60 per cent on above under Section 80M Rs. 67,257 ---------- 2. The assessee came in appeal before the Commissioner (Appeals) and urged that the ITO should have allowed deduction under Section 80M of the Income-tax Act, 1961 ('the Act'), on the gross dividend of Rs. 1,47,864. The Commissioner (Appeals) accepted the argument of the assessee following the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT  118 ITR 243 and, accordingly, directed the ITO to work out the deduction on the gross dividend of the assessee.
That, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in law and in fact in holding that deduction under Section 80M should be on gross dividend and not on net dividend.
Shri Bajoria, the learned departmental representative, referred to Section 80AA and stated that the section was introduced by the Finance (No. 2) Act, 1980, with retrospective effect from 1-4-1968. Under the circumstances, deduction under Section 80M cannot be allowed on the gross dividend of the assessee. Shri Bajoria stated that the ITO had determined the income from dividend after deducting the various expenses which were allowable under Section 57 (iii) of the Act and, therefore, the deduction under Section 80M was rightly allowed by the ITO on the net dividend.
4. Sri Guha, the assessee's counsel, filed a note in which it was stated that even after the new Section 80AA was inserted with effect from 1-4-1968, the assessee could be allowed, in the present case, deduction on the gross dividend income. It was indicated by Sri Guha that the provisions relating to dividend income are Sections 8, 2(22), 194, 198, 199, 203, 56(2)(i) and 57(0 of the Act. After referring to the decisions in CIT v. Raghunandan Prasad Moody  115 ITR 519 (SC), CIT v. Cotton Fabrics Ltd.  131 ITR 99 (Guj.), CIT.Bagyalakshmi & Co.  55 ITR 660 (SC), CIT v. Lahore Electric Supply Co. Ltd.  60 ITR 1 (SC) and Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad  25 ITR 449 (SC) he stated that the income from dividend can be computed under Section 56 after allowing deduction as enumerated under Section 57(i) The assessee did not claim any collection charges and, therefore, the gross as well as net dividend of the assessee after the computation was the same. He specifically stated that Section 57(iii) applies to all other income chargeable to income-tax under the head 'Income from other sources'. It is a general provision not applicable to dividend income as such.
Deduction under Section 57(iii) has to be allowed even when there is no positive income chargeable to tax. He, therefore, stated, on the basis of his argument as well as on the basis of the note, that the finding of the Commissioner (Appeals) even after the introduction of Section 80AA with effect from 1-4-1968 was correct.
5. The department disputes the direction of the Commissioner (Appeals) regarding deduction allowed by him under Section 80M. A new Section 80AA was introduced by the Finance (No. 2) Act, 1980, with retrospective effect from 1-4-1968. Section 80AA shall be quoted later on. The Supreme Court pronounced a judgment in the case of Cloth Traders (supra). The decision of the Supreme Court was also in respect of Section 80M. The Supreme Court indicated that the deduction under Section 80M should be made with reference to gross income from dividend. The Hon'ble Finance Minister introduced the Finance (No. 2) Bill, 1980 and the paragraphs 77 to 84 of the Memorandum explained the object of Section 80AA [see  123 ITR (St.) 166]. Section 80AA and Section 57(0 and (iii) are quoted below : 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 dividend's 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." 57. Deductions.-The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely :- (i) in the case of dividends, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend on behalf of the assessee ;(ii) ** ** ** (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.
The assessee is entitled for deduction in respect of inter-corporate dividends under Section 80M. The assessee, in the present case, was entitled for deduction at 60 per cent of dividend income. The assessee's source of income during the year under appeal is only from dividend. How the income from dividend had been determined by the ITO had been given above. The ITO after deducting the office and other expenses allowed 60 per cent deduction under Section 80M which was held to be incorrect by the Commissioner (Appeals) and the Commissioner (Appeals), following the decision of the Supreme Court in the case of Cloth Traders (supra), allowed deduction at 60 per cent on the gross dividend income. Section 80AA, quoted above, was newly introduced by the Finance (No. 2) Act, 1980, with retrospective effect from 1-4-1968.
The department has challenged the finding of the Commissioner (Appeals) on the ground that deduction allowed by the Commissioner (Appeals) is not in accordance with the provisions of Section 80AA. The case of the department is that deduction allowed for general expenses and others from the gross dividend is under the provisions of the Act as indicated in Section 80AA and, therefore, the Commissioner (Appeals) should have allowed deduction under Section 80M with reference to net income from dividend. The assessee by argument as well as by a written note had pleaded that the deduction from dividend income is available only under Section 57(i) and the deduction under Section 57 (iii) is of general nature.
6. The note of the assessee containing several judicial pronouncements was looked into and it was found that income from other sources which includes income from dividend is assessable under Section 56 of the Act. The deduction for income from other source is available in Section 57. It is true that Section 51(i) speaks of collection charges which could be deducted from gross dividend but it does not mean that other deductions under Section 57(iii) are not available so far as income from dividend is concerned. The assessee has given some example in the note. The assessee has also cited the decision in Cotton Fabrics' case (supra). The above decision is distinguishable on facts. The assessee in the present case had only income from dividend whereas in that case the assessee was a dealer in shares and he had also income from dividend. Under the above circumstances, the case of the assessee is not comparable with that case. Similar is the position with the other cases which are distinguishable on facts.
7. Deductions indicated in Section 57 (iii) are also available in respect of dividend income. This point is settled by the decision of the Supreme Court in Raghuncmdan Prasad (supra) which has also been cited by the assessee's counsel. The Supreme Court has stated as follows : The expenditure to be deductible under Section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. The argument of the revenue was that unless the expenditure sought to be deducted resulted in the making or earning of income, it could not be said to be laid out or expended for the purpose of making or earning such income. The making or earning of income, said the revenue, was a sine qua non to the admissibility of the expenditure under Section 51(iii) and, therefore, if in a particular assessment year there was no income, the expenditure would not be deductible under that section. The revenue relied strongly on the language of Section 37(1) and, contrasting the phraseology employed in Section 57(iii) with that in Section 37(1) pointed out that the Legislature had deliberately used words of narrower import in granting the deduction under Section 57 (iii).
Section 37(1) provided for deduction of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession in computing the income chargeable under the head 'Profits and gains of business or profession'. The language used in Section 37(1) was 'laid out or expended-for the purpose of...making or earning such income' as set out in Section 51(iii). The words in Section 57(iii) being narrower, contended the revenue they cannot be given the same wide meaning as the words in Section 37(1) and hence no deduction of expenditure could be claimed under Section 57 (iii) unless it was productive of income in the assessment year in question. This contention of the revenue undoubtedly found favour with the High Court but we do not think we can accept it. Our reasons for saying so are as follows : What Section 51(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of Section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of Section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income.
The plain natural construction of the language of Section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this court in Eastern Investments Ltd. v. CIT  20 ITR 1, 4 (SC), where interpreting the corresponding provision in Section 12(2) of the Indian Income-tax Act, 1922 which was ipsissima verba in the same terms as Section 57(iii), Bose J., speaking on behalf of the court, observed : It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned.
It is indeed difficult to see how, after this observation of the court, there can be any scope for controversy in regard to the interpretation of Section 57(iii)." (pp. 521-22) The assessee's argument that deduction in Section 57(iii) is not available against dividend income is proved to be wrong by the decision of the Supreme Court in Raghunandan Prasad Moody (supra). All the expenditure laid out or expended wholly and exclusively for the purpose of making or earning income is allowable under Section 57(iii). Similar allowance as in the case of the assessee has been made in CIT v. Rampur Timber & Turnery Co. Ltd.  129 ITR 58 (All.).
8. This is further clear from the speech of the Finance Minister in Clauses 77 to 84 of the Finance (No. 2) Bill, 1980. The wordings of Section 57(iii) had been quoted in the last sentences of paragraph 77 indicating that such expenses were available while computing the income from dividend. It has been consciously kept in mind that when the statute is clear, the speech of the Finance Minister or Memorandum explaining the provisions should not be taken into consideration. The reference of the Memorandum in Clause 77 had been made to strengthen the conclusion arrived at earlier. The learned authors Kanga and Palkhivala in The Law and Practice of Income-tax, Vol. 1, 7th Edition, stated as follows: The expenditure must be incurred for the purpose of earning the income. It si not further necessary that 'the purpose' should have been fruitful and income should in fact have been earned in the accounting year as a result of that expenditure. Interest on moneys borrowed to purchase shares should be allowed as a deduction even if the shares have yielded no dividend in the relevant accounting year and even if there is no income at all under the head 'Other sources'. Similarly, interest on delayed payment of call money in respect of partly paid shares is deductible.(p. 578) From the commentary of the learned authors, it is clear that deduction under Section 57(iii) is in respect of income which is assessable under the head 'Income from other sources' and the income from dividend is not excluded and, therefore, if Section 80AA, which had been amended retrospectively with effect from 1-4-1968, is taken into consideration, the direction given by the Commissioner (Appeals) is not correct.
Consequently, the finding of the Commissioner (Appeals) is reversed and the deduction allowed by the ITO under Section 80M is maintained.