1. These two sets of references can be disposed of by a common order. Income-tax References Nos. 84 to 89 of 1975 under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), at the instance of the Department raise the following questions :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding the the Income-tax Officer was not entitled to set off loss under the head 'Business' from the dividend income while computing the rebate under section 85A for the assessment years 1966-67 and 1967-68
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was not entitled to deduct from the gross dividend income the proportionate expenditure claimed to be allocable to the earning of dividend while calculating rebate under section 85A of the Income-tax Act, 1961, for the assessment years 1966-67 and 1967-68
3. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the rebate under section 85A of the Income-tax Act, 1961, was admissible to the assessed for the assessment years 1966-67 and 1967-68
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer was not entitled to deduct from the gross dividend income the proportionate expenditure claimed to be allocable for earning dividend income for the purpose of computing the relief under section 80M of the Income-tax Act, 1961 for the assessment year 1969-70
5. Whether the Tribunal was right in upholding the order of the Appellate Assistant Commissioner in the market of determining the market value of 93,930 shares of Delhi Cloth Mills Ltd. for purpose of determining capital gains for the assessment year 1969-70 ?'
2. The common question of law raised in I.T. Rs. Nos. 96 and 97 of 1975 at the instance of the assessed for the two assessment years 1966-67 and 1967-68 for the opinion of this court is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that proceedings under section 147(b) of the Income-tax Act, 1961, were validly initiated ?'
3. So far a question Nos. 1 and 2 at the instance of the Department are concerned, they are directly covered by the decision of the Supreme Court in the case of Cloth Traders Pvt. Ltd. v. Addl CIT : 118ITR243(SC) . Their Lordships held that the rebate on Income-tax under s. 85A is to be calculated by applying the average rate of tax to the 'income by way of dividends from an Indian company' which can only be the full amount of dividend received from an Indian company. The words 'income so included' do not refer to the quantum of the income included but only to the category of the income included, viz., 'income by way dividend from an Indian company'. In other words, no amount of expenditure was deductible or no business loss was to be set off from the gross amount of dividend by reference to which the relief under s. 85A was to be given. Questions Nos. 1 and 2 are answered against the Department.
4. So far as question No. 3 is concerned, we need not answer this question. The scheme of s. 85A was that the rebate would be given only in respect of tax in excess of 25% of the total liability. To the extent of 25%, the assessed was clearly liable and in respect of the liability it was undoubtedly entitled to rebate under s. 88, if it satisfies the conditions laid down in that section. That is the direction of the AAC and rightly upheld by the Tribunal. It would be up to the ITO to act in accordance with those directions.
5. By the Finance (No. 2) Act, 1980, s. 80A has been inserted in the Act, with retrospective effect from April 1, 1968. It is to this effect :
'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 assessed, 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.'
6. A plain reading of s. 80A shows that the question is to be answered in favor of the Department and against the assessed inasmuch as the computation of deduction under s. 80M has to be made in accordance with s. 80A.
7. The assessed sold the shares for Rs. 28,23,794. The assessed originally held 2,68,178 shares of D.C.M. on January 1, 1954. It acquired 78,876 right shares in December, 1963. It acquired 1,73,527 bonus shares in December, 1966. It further acquired 1,73,527 right shares in December, 1967. It is out of the total holding of 6,94,108 shares that the assessed sold 93,930 shares. It was not disputed before the income-tax authorities that the shares old were there same which were held by the assessed on or before January 1, 1954. The only question was as to what was the market price of the share as on January 1, 1954, which had to be taken into account while determining the assessed's capital gains. The AAC of Income-tax took the view following the law laid down by the Supreme Court in Shekhawati General Traders Ltd. v. ITO : 82ITR788(SC) and the Tribunal upheld the finding of the AAC. The Supreme Court held (p. 793) :
'Where the capital asset became the property of the assessed before the first day of January, 1954, the assessed has two options. It can decide whether it wishes to take the cost of the acquisition of the asset to it as the cost of acquisition for the purpose of section 48 or the fair market value of the asset on the first day of January, 1954. The word 'fair' appears to have been used to indicate that any artificially inflated value is not to be taken into account. In the present case, it is common ground that when the original assessment order was made, the fair market value of the shares in question had been duly determined and accepted as correct by the Income-tax Officer. Under no principle or authority can anything more be read into the provisions of section 55(2)(i) in the manner suggested by the Revenue based on the view expressed in the Dalmia Investment Co's case : 52ITR567(SC) . The High Court completely overlooked the fact the for the ascertainment of the fair market value of the shares in question of January 1, 1954, any event prior or subsequent to the said date was wholly extraneous and irrelevant and could not be taken into consideration. If the contention of the Revenue were to be accepted, the acquisition of bonus shares subsequent to January 1, 1954, will have to be taken into account which on the language of the statute it is not possible to do.'
8. The direction given by the AAC, and upheld by the Tribunal, was rightly given when he directed the ITO to accept the capital loss on sale of shares at Rs. 1,17,154 as returned by the assessed. For the ascertainment of the fair market value of the shares in question on January 1, 1954, any issue of bonus shares or right subsequent to that date was wholly extraneous and irrelevant and could not be taken into consideration. Question No. 5 is answered against the Department.
9. As regards the question at the instance of the assessed in I.T. Rs. Nos. 96 and 97 of 1975, in view of our answer to question Nos. 1 and 2 in I.T. Rs. Nos. 84 to 89 of 1975, the answering of the reference at the instance of the assessed would be purely academic as the reassessment proceedings could only be an exercise in futility. If the reassessment proceedings, assuming that they were validly initiated, are pursued further by the income-tax authorities, they would be liable to be quashed in view of the law laid down by the Supreme Court in Cloth Traders Pvt Ltd.'s case : 118ITR243(SC) We, thereforee, decline to answer that reference. On the facts and circumstances of the case, we make no order as to costs.