1. All these appeals are by the revenue. IT Appeal No. 702 (Hyd.) of 1983 arises out of proceedings under Section 154 of the Income-tax Act, 1961 ('the Act') and relates to the assessment year 1977-78. IT Appeal No. 703 (Hyd.) of 1983 arises out of the assessment proceedings for the assessment year 1977-78. IT Appeal No. 704 (Hyd.) of 1983 relates to the assessment year 1978-79. IT Appeal No. 70S (Hyd.) of 1983 relates to the assessment year 1979-80. The last two arise out of regular proceedings. We first take up for consideration a common issue which is involved in the appeal arising out of proceedings under Section 154 for the assessment year 1977-78 as well as in the appeals for the assessment years 1978-79 and 1979-80.
2. In the assessment year 1977-78, subsequent to the completion of the original assessment on 28-1-1980, an amendment was made by the Finance (No. 2) Act, 1980, by introduction, with retrospective effect from 1-4-1968. of a new provision, Section 80AA of the Act, which reads as under: 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.
The ITO came to the conclusion that since the amendment was not in existence when he framed the original assessment, a mistake apparent from record had crept in, relief under Section 80M of the Act was allowed with reference to gross dividends and not with reference to net dividend income. He, accordingly, proposed to make a rectification and the assessee's contention was that there was no mistake and the amendments made were ultra vires of the Act. The ITO held that he could not go into the vires of the amendment. He next considered the contention of the assessee that at the maximum, the expenses incurred for earning the dividends would not exceed Rs. 3,000 and such amount alone could be excluded in working out the relief under the provisions of Section 80M. He did not accept this plea observing as under: It. was claimed that the investment in the shares by the corporation is made from its moneys by way of share capital and reserves, that, therefore, no portion of interest expenditure is attributable to the earning of the dividend incomes and that only paltry realisation expenses as above of Rs. 3,000 may be deducted. I do not think that there is much force in the assessee's contention. The preliminary objective of the corporation is not to invest in shares. In fact as per Section 25(f) of the State Financial Corporation Act, the corporation can retain as part of its assets, any stocks, shares, bonds, etc., which it may have to take in fulfilment of its underwriting liabilities so, however, that it disposes of its stocks, shares, bonds, etc., so acquired as early as practicable but in no case the stock shares, bonds, etc., so acquired shall be retained beyond a period of 7 years from the date of such acquisition except with the perior permission of the Reserve Bank of India. It is admitted in the course of hearing that the relationship between the corporation and the company whose shares were acquired by the corporation was mainly that of lender and borrower and that the investment in shares is being made sparingly only in cases where the borrower company is not able to contribute and invest its shares of funds in the ventures. It is no doubt true chat under Section 25(1da) of SFC Act, the corporation may subscribe to the stocks, shares and bonds, etc., from out of the funds representing the capital subscribed in accordance with the provisions of Section 4A (Spl. Class of shares). It is not the assessee's case that the investment in shares in question is out of this capital. I, therefore, consiedr that the investment in shares is not for earning dividends as such but only as a part of normal business of lending moneys. It, therefore, follows that the burden of interest payments as well as administrative charges, etc., will have to be borne pro rata by all the receipts both of the banking business as well as from shares.
Thereafter, the ITO worked out the relief on a proportionate basis, i.e., the gross dividend for the year was Rs. 5,28,783, deduction under Section 80K of the Act was Rs. 49,475, giving a balance of Rs. 4,79,308. The gross expenses excluding certain provisions came to Rs. 2.04 crores. The income was Rs. 3 02 crores. The expenditure attributable to earning income was worked out in the proportion of 2.04/3.02 with reference to the income of Rs. 4.79 lakhs. This gave a figure of Rs. 3.23 lakhs. Deducting the same, the net dividend was arrived at Rs. 1.55 lakhs and 60 per cent thereof, i.e., Rs 93,435 alone, was allowed as a deduction. On a similar basis, the ITO worked out the admissible deduction under Section 80M for the assessment years 1978-79 and 1979-80. The gross dividend for 1978-79 was Rs. 1.82 lakhs, deduction under Section 80K Rs. 49,241, giving a balance of Rs. 1.33 lakhs and with reference to the ratio of expenses to income, the expenditure arrived at for earning the income was Rs. 88,031. Deducting this, net dividend came to Rs. 45,249 on which 60 per cent relief was Rs. 27,149. For the assessment year 1979-80, after deduction under Section 80K of Rs. 43,666, the dividend income came to Rs. 1,92,714.
The proportionate expenses worked out marginally more than this and, therefore, according to the ITO, no relief was due under Section 80M.3. The assessee appealed. For the assessment year, 1977-78 in the proceedings under Section 154, the Commissioner stated he was following the reasoning given by him in deciding the appeal for the assessment year 1978-79. The Commissioner referred to the fact that according to the ITO, the investment in shares was not for earning dividends but was only part of the normal business of lending moneys and that, therefore, the interest payment as well as administrative charges had to be borne pro rata by the business of banking as well as for earning dividends, The Commissioner then adverted to the decision of the Gujarat High Court in the case of CIT v. Cotton Fabrics Ltd.  131 ITR 99 which was relied on by the counsel who submitted that in spite of the retrospective amendment of Section 80M, relief originally granted could not be reduced. The Commissioner held that computation of dividend income had to be made with reference to the provisions of Section 56 of the Act under the head 'Income from other sources'. He then referred to the contention of the assessee that the investment in shares was only to the tune of Rs. 59.86 lakhs at the maximum and the assessee had purchased the shares out of current funds and no overdraft facilities were utilised for this purpose. According to the Commissioner, the question of making any apportionment of interest paid towards expenditure, therefore, did not arise, Even if interest payments had to be considered, the Commissioner observed, having regard to the ratio of the decision of the Gujarat High Court in the case of Cotton Fabrics Ltd. (supra), the interest income was fully deductible under Section 36 of the Act from the business income and there was no warrant for apportioning any expenditure for deduction from the gross dividends under Section 80M. In any event, expenses had to be incurred and, according to the Commissioner, there was no relationship between incurring of the expenditure and earning of the dividend income and, therefore, he held on the facts that relief under Section 80M had to be processed with reference to the gross dividends received.
4. The revenue is in appeal and the learned departmental representative submitted that whatever expenditure was incurred for earning dividends had to be excluded in terms of Section 80AA before granting relief under Section 80M. When separate accounts were not maintained of the expenditure incurred, the learned departmental representative submitted, apportionment could not be ruled out. He, therefore, pleaded for the orders of the ITO being upheld.5. The learned counsel for the assessee first; of all submitted that there was no jurisdiction to invoke the provisions of Section 154 for the assessment year 1977-78, In any event, he submitted relying on the Gujarat High Court's decision in Cotton Fabrics Ltd.'s case (supra) that the entire expenditure was incurred for earning business income alone. He relied on the relevant provisions of the State Financial Corporation Act, 1951, under which the assessee was constituted, and in particular the provisions of Section 25 and Section 28 which related to the kinds of businesses which the corporation could transact, etc. As an alternative he submitted that the expenditure incurred for earning dividends could not be placed at any figure higher than Rs, 3,000 which had been adverted to by the assessee before the ITO. He also filed a letter from, the corporation stating that at the most a junior clerk would have to spend only about 10 hours in a year in connection with earning the dividend income.
6. We have considered the rival submissions. While ihe ITO made the assessment, the retrospective amendment was not in existence. The amendment was introduced by the Finance (No. 2) Act, 1980 with retrospective effect from 1-4-1968. When the retrospective amendment came into force, it was clear that on the dote the ITO made the assessment, there was a mistake apparent from the records since the provisions of the amendment were not applied which, it is deemed, he should have been bound to apply. [See in this regard the ratio of the judgment of the Supreme Court in S.A.L. Narayan Row v. Ishwarlal Bhogwandas  57 ITU 149]. Therefore, invocation of the provisions of Section 1.54 was in order.
7. We have gone into the facts and at our instance details were Hied to show that as on 31-3-1977 the assesses held shares in 17 companies alone of the value of Rs. 2.85 lakhs. As on 31-3-1.978 and 31-3-1979, the shares held were in 20 companies of the aggregate value of Rs. 59.86 lakhs and Rs. 60.16 lakhs, respectively. Dividends of Rs. 5.28 lakhs were received as on 31-3-1977 from just three companies as also on 31-3--1978. On 31-3-1979, it was received from four companies. The cases which have a bearing in deciding the present issue would be the decisions of the Supreme Court in United Commercial Bank Ltd. v. CIT  32 ITR 688, CIT v. Cocanada Radhaswami Bank Ltd.  57 ITR 306 and the decision of the Gujarat High Court in Cotton Fabrics Ltd.'s case (supra). If assets are held as assets of a business, the judgments of the Supreme Court referred to are authority for the proposition that the income would be business income. But, those judgments are also authority for the proposition that for the purposes of computation of income from such assets, the computation would have to be made wilder the speciic head of income enumerated under Section 6 of the Indian Income-tax Act, 1922, corresponding to Section 14 of the Act. The observations of the Gujarat High Court only reiterated the aforesaid proposition. Thus, as far as dividend income is concerned, even when it arises out of the shares held as business assets and the ITO in the present case has given a finding that the shares are business assets, computation has to be made with reference to the provisions of Sections 56 to 58 of the Act. Under the provisions of Section 56(2)(i), dividend income has to be computed under the head 'Income from other sources'.
Under the provisions of Section 57(i), deduction has to be made of any reasonable sum paid by way of commission or by way of remuneration to a banker for the purpose of realising such dividend as also other expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. In the present case, it was categorically stated that the bank has realised the dividends without collecting any charges. We have referred to the number of companies in which the assessee held shares which at the maximum was only 20. The dividends received were only from, of course, 3 or 4 companies. But, for making the purchases of shares and attending to correspondence in connection with the shares of 20 companies, we consider the total time spent by the staff and officers would not be very much. The salary, etc., attributable to such persons alone would be expenditure incurred wholly and exclusively for the purpose of earning dividend income. We are of the view that an amount of Rs. 3,000 estimated by the assessee in each assessment year would be in order. As far as other expenditure is concerned, that related to the business and the question of excluding any portion thereof under the provisions of Section 57(iii), therefore, cannot arise. Such expenditure would be deductible in arriving at the business income and, therefore, the question of apportioning any portion thereof for deduction in arriving at the net dividend income does not arise. We would, therefore, direct that in each of the years, an amount of Rs. 3,000 be excluded from the gross dividend income for arriving at the figure of income by way of dividends 'computed in accordance with the provisions of the Act' within the meaning of Section 80AA. The ITO would rework the relief due under Section 80M. To the aforesaid extent, the decision of the Commissioner (Appeals) would stand modified in each of the assessment years.
8 and 9. [These paras are not reproduced here as they involve minor issues],