1. The assessee is a company. The proceedings relate to its assessment for the assessment year 1979-80. There are as many as three grounds of appeal in the appeal memorandum. The first ground is that deduction under Section 80M of the Income-tax Act, 1961 ('the Act'), should have been allowed on the gross dividend income of Rs. 1,19,018 and not on the alleged net dividend income of Rs. 85,128. By means of the second and the third grounds, it is contended that payment of interest in the case of an investment company like the assessee, is a normal business expenditure. It is required to be allowed against the business income and not against the dividend income. Observing that the assessee-company had itself computed the net dividend income after deducting the interest paid from the gross dividend in the past, the ITO had computed the assessee's net dividend income at Rs. 85,128 and allowed deduction under Section 80M on the said amount.
2. It was reiterated before the Commissioner (Appeals) that for the purpose of computing the deduction under Section 80M, the interest payment could not be adjusted against the gross dividend income to arrive at the figure of net dividend income. It was urged that the retrospective operation of Section 80 A A of the Act, having been stayed by a number of High Courts, the ITO was not justified in allowing the deduction under Section 80M on the alleged net income by way of dividend by placing reliance on the provisions of Section 80AA.The Commissioner (Appeals) has considered the assessee's contentions in paragraph Nos. 4 and 5 of his order. For reasons given therein, he has agreed with the ITO and held that the assessee is entitled to the deduction under Section 80M on the net dividend of Rs. 85,128.
3. It is submitted before us by Shri G.B. Doshi, the learned counsel for the assessee, that the assessee, being an investment company, carries on investment business or, to say the least, it carries on a vocation and that even though the dividend income is assessable as 'income from other sources' because of the specific provisions of the Act, the interest is allowable as a deduction against the assessee's business income. In support of his claim, the counsel has placed reliance on the Gujarat High Court decisions in the cases of CIT v.Cotton Fabrics Ltd.  131 ITR 99 and Addl. CIT v. Laxmi Agent (P.) Ltd.  125 ITR 227. It is stated that the Bombay High Court has also taken the same view in its decision in the case of CIT v.Industrial Investment Trust Co. Ltd. [19681 67 ITR 436. Indirect support, it may be stated, is also drawn by the assessee's counsel from the observations of the Calcutta High Court in the case of Bengal & Assam Investors Ltd. v. CIT  46 ITR 655, which is stated to have been confirmed by the Supreme Court in Bengal & Assam Investors Ltd. v.CIT  59 ITR 547. Further, according to the counsel, Section 28 of the Act covers a case of not only business but also profession.
Profession is defined in Section 2(36) of the Act and it includes vocation. Accordingly, it is urged that even if the assessee is taken to have carried on vocation and not business, such interest paid by it, for the purpose of making investment, will have to be allowed as a deduction under Section 36(l)(iii) of the Act itself.
4. The departmental representative has, on the other hand, strongly relied on the order of the Commissioner (Appeals). It is submitted that if the arguments advanced on behalf of the assessee are accepted, the provisions of Section 80AA will become otiose. The cases relied upon, according to the departmental representative, are distinguishable. In all those cases, the assessees are stated to have been carrying on business as dealers in shares. In the case before us, there is no such finding. The assessee has purchased shares of one company merely to earn dividend income. It does not deal in shares. Dividend income is evidently assessable as 'income from other sources'. For the purpose of computing the assessee's income under Section 56 of the Act, deductions contemplated under Section 57 of the Act have got to be allowed.
According to him, there cannot, possibly, be any dispute that the 'income from other sources' cannot be computed without allowing the expenses contemplated in Section 57 incurred for the purpose of making or earning such income.
5. In reply, Shri Doshi stated that the provisions of Section 80AA do not become otiose if his interpretation is accepted. According to him, the section will continue to have application in the case of an investor, whose other activities are absolutely unconnected with the investment business. The interest paid in such cases for the purchase of shares, dividend of which is. to be assessed, will have to be allowed under Section 57.
6. Having heard the parties and after going through the facts on record, we find that with a view to earn the dividend income the assessee purchased shares of a particular company. There is no dispute that the assessee is not a dealer in these shares and, in any event, there has been no dealings in shares of this company or any other company during the previous year or in earlier years. Besides, the assessee has utilised its surplus funds in earning interest. Here again, the transactions are with three, four parties only. Thus, the assessee cannot be said to be carrying on even money-lending business.
The borrowings are, certainly, for the purpose of purchasing the shares with a view to earn dividend from the shares. Having regard to the above circumstances, we have no difficulty in holding that the interest paid on the borrowings utilised in purchasing the shares is allowable as a deduction from the gross dividend income under Section 57.
However, as stated earlier, Shri Doshi, the learned counsel for the assessee, has, placing reliance on the above decisions, contended that the interest paid is an outgoing against the business income and that it cannot be attributed or treated as an outgoing against the dividend income.
7. We have carefully gone through the decisions relied upon. So far as the Gujarat High Court's decision in the case of Cotton Fabrics Ltd. (supra) is concerned, we find that the assessee was a dealer in shares.
The borrowings were utilised in the business of dealing in shares. The question arose whether the whole or a part of interest on such borrowings was allowable against the income assessable as dividend under the head 'Income from other sources'. It was held that the borrowings were for the purpose of share dealing business and, therefore, the interest was allowable as deduction against the share dealing business. The facts in the other Gujarat High Court's decision in the case of Laxmi Agent (P.) Ltd. (supra) are not much different.
The assessee was carrying on managing agency business, business of dealing in shares and 'income from other sources', that is, dividend.
Primarily, the interest was paid on the borrowings, which were utilised in acquiring shares which the assessee held as dealer in shares even though a good number of shares were of the managed company. It was held, and rightly so, that the interest paid was allowable under Section 36(l)(iii) against business of share dealing and cannot be adjusted against dividend income. The observations of their Lordships at page 238, when read in the context of facts of that case, do not help the assessee at all. The facts in the Bombay High Court's decision in the case of Industrial Investment Trust Co. Ltd. (supra) are not different. There again, their Lordships have held that, on general principles, if the expenses are allowable as business expenses, they should be deducted from the income of the business which is liable to tax. The circumstances that the business activity has produced income, a part of which is liable to tax and a part of which is free from tax, will not permit the allocation of the expenses between these two parts of the income and allow only that part which is attributable to the earning of the taxable income. We do not think this decision has any application in the case before us.
8. Reliance, it may be stated, was also placed on the observations in the penultimate paragraph of the Calcutta High Court's decision in the case of Bengal & Assam Investors Ltd. (supra) and the observations are : It cannot be suggested in this case that the assessee investment company had no business of any kind. It certainly had one but when it held shares on which dividends were received tax has to be computed under Section 12 and the assessee cannot say that this being its main activity the income received was its 'business income' under Section 10.
We are not able to appreciate as to how this observation helps the assessee's case. It only says that though an investment company can be said to have some kind of business when it held shares on which dividends were received, income is to be computed under Section 12 and not under Section 10 of the Indian Income-tax Act, 1922 ('the 1922 Act'). Moreover, the Calcutta High Court decision was subject-matter of appeal before the Supreme Court in Bengal & Assam Investors Ltd.'s case (supra). The below-mentioned observations of the Supreme Court are clear as to their contents : For a dividend on shares to be assessed under Section 10 of the Indian Income-tax Act, 1922, the assessee, be it an individual or a company or any other entity, must carry on business in respect of shares, that is to say, the assessee must deal in those shares. An individual, who merely invests in shares for the purpose of earning dividend, does not carry on a business. The only way he can come under Section 10 is by converting the shares into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares.
If a company merely acquires and holds shares with the object of receiving dividends, it does not carry on business within Section 9. The ratio decidendi of all these decisions appears to be that if an assessee carries on business, the income of which is assessable under the head 'Profits and gains of business or profession', i.e., under Section 28 and if the expenditure is incurred in connection therewith or for the purpose thereof including interest on borrowings raised for the purpose of the business, the expenditure is allowable as a deduction against the income under the head 'Profits and gains of business or profession'. No portion of the expenditure can be disallowed as an outgoing against the income from business on the ground that a part of the income produced in the course of the business is not taxable or is taxable not under the head 'Profits and gains of business or profession' but under some other head. In such cases, the income found assessable under other heads or income found not taxable, is treated as incidental and in the course of the business actually carried on. An investor in shares whose sole purpose is to earn dividend income may be carrying on some kind of business or vocation in the commercial sense. However, as laid down by the Supreme Court in Bengal & Assam Investors Ltd.'s case (supra), a mere investor does not carry on business, income of which is assessable under Section 28 i.e., under the head 'Profits and gains of business or profession'. To say that the interest paid on the borrowings in such cases is an outgoing against a non-existent business from income-tax point of view, is a proposition too good to be accepted.
10. In the circumstances, we do not agree with the counsel for the assessee that the interest payment should not be adjusted against the dividend income for the purpose of allowing deduction under Section 80M.