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Commissioner of Income-tax, Gujarat-iv Vs. Cotton Fabrics Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 24 of 1976
Judge
Reported in(1981)23CTR(Guj)247; [1981]131ITR99(Guj)
ActsIncome Tax Act, 1961 - Sections 36(1), 56, 57, 80AA, 80M and 85A
AppellantCommissioner of Income-tax, Gujarat-iv
RespondentCotton Fabrics Ltd.
Appellant Advocate N.U. Raval, Adv.
Respondent Advocate K.C. Patel, Adv.
Cases Referred(P) Ltd. v. Addl
Excerpt:
direct taxation - interest - sections 36 (1), 56, 57, 80aa, 80m and 85a of income tax act, 1961 - whether in computing assessee's income under head 'profits and gains' interest paid by assessee on money borrowed on overdraft and employed in business of dealing in shares has to be set off in toto or part thereof should be apportioned to income as dividend under head 'other sources' - interest paid on money borrowed on overdraft which was employed in business of dealing in shares has to be deducted in toto in arriving at profits or loss under head 'profits and gains'. - .....to rs. 37,961 as the amount of interest attributable to and liable to be set off against such dividend income out of the total interest paid by the assessee on loans obtained or moneys borrowed for the purpose of the assessee's business. the amount of loss determined by it under the head 'profits and gains of business' was accordingly reduced by the sum of rs. 37,691 which was apportioned against the dividend income. against this order the ito, the assessee carried the matter in appeal to the aac and it was contended before the aac that the ito had erred in bifurcating the interest payment between the shares, the entire interest paid on overdraft and other loans accounts should be deducted in computing the income or loss under the head 'profits and gains of business' and there was.....
Judgment:

Divan, C.J.

1. In this case, at the instance of the revenue, the following two questions are referred to this High Court for its opinion:

(1) Whether, on the facts and in the circumstances of the case, the tribunal was in right in law in holding that the entire amount to interest paid by the assessee on money borrowed on overdraft and employed in the business of dealing in shares has to be deducted in arriving at the profits or loss under the head 'Profits and gains of business' or a part thereof should be apportioned and allowed against the income assessable as dividend under the head 'Other Sources'

(2) Whether the relief under section 80M is to be granted on the gross amount of dividend received by the assessee or on the net amount as reduced by the interest attributable thereof ?'

2. The facts leading to this reference are as follows: We are concerned with the assessment year 1969-70. The assessee is apprivate limited company and carries on business as a dealer in shares. In the relevant previous year in connection with the assessment year 1969-70. the ITO separately computed income from dividends chargeable under the head 'Other sources' and set off against the same interest amounting to Rs. 37,961 as the amount of interest attributable to and liable to be set off against such dividend income out of the total interest paid by the assessee on loans obtained or moneys borrowed for the purpose of the assessee's business. the amount of loss determined by it under the head 'Profits and gains of business' was accordingly reduced by the sum of Rs. 37,691 which was apportioned against the dividend income. Against this order the ITO, the assessee carried the matter in appeal to the AAC and it was contended before the AAC that the ITO had erred in bifurcating the interest payment between the shares, the entire interest paid on overdraft and other loans accounts should be deducted in computing the income or loss under the head 'Profits and gains of business' and there was no justification in apportioning any part thereof to be attributed and set off against the dividend income. The AAC accepted this contention and as a result thereof the loss determined the ITO was reduced by Rs. 37,691. IT was also contended before the AAC that while considering the deduction admissible under s. 80M of the I T Act, the ITO should have taken into consideration the amount of gross dividend whereas he has considered the amount of net dividend for deduction of interest, etc., for the purpose of such deduction. this contention was upheld by the AAc. Against the decision of the AAC, the revenue went in appeal to the tribunal and the tribunal upheld the order of the AAC as in its view the decision of the Gujarat High Court in Addl. CIT v. cloth traders (p) Ltd. : [1974]97ITR140(Guj) was applicable. the Tribunal considered that the dispute really was whether in computing the assessee's income under the head 'Profits and gains' the interest claimed had to be set off in toto or a part thereof should be apportioned to the income as dividend under the head 'Other sources', and. ultimately, the tribunal having dismissed the appeal of the revenue on these two points, at the instance of the revenue the two questions hereinabove set out have been referred to us for our opinion.

3. Under s. 80M deduction in respect of certain inter-corporate dividends had been provided for. the section provides:

'Where the gross total income of an assessee, being a company, includes any income by way of dividends from a domestic company, there shall, in accordance with a subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to - ...'

4. We are not concerned with the rate of relief which is to be granted.

5. In Addl. CIT v. Cloth Traders (P) Ltd : [1974]97ITR140(Guj) , a division Bench of this High Court held that the dividend income which was to be computed under section 80 M was to be the net dividend income after deducting all costs, charges and expenditure incurred by the assessee for the purpose of earning that dividend income. Thus, this High Court had held that the dividend income which was to be taken into consideration under s. 80M was not the gross dividend income received by the assessee-company concerned but the net dividend income. This decision of the Court was reversed on appeal to the Supreme Court. that decision of the Supreme Court is to be found reported in Cloth Traders (P) Ltd. v. Addl CIT : [1979]118ITR243(SC) . There the Supreme Court held that the deduction permissible under s. 80M was to be calculated with reference to the full amount of dividends received by a company and not with reference to the dividend income as computed in accordance with the provisions of the act, that is, after making the deduction provided under the act. Thus according to the Supreme Court, the deduction under s. 80M was to be made with reference to the gross dividend income of the assessee concerned and not with reference to the net dividend income.

6. After this decision of the Supreme Court the Legislature by the Finance (No.2) Act of 1980 inserted s. 80 AA with retrospective effect from April 1, 1968. section 80 AA provides:

'Where any deduction is required to be allowed under section 80M in respect of any income by way of dividend from a domestic company which is included in the gross total income of the assessee, then, not withstanding 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 provision of this Act (before making any deduction under this chapter) and not with reference to the gross amount of such dividends.'

7. When one turns to the Statement of Objects and Reasons in connection with the Finance (No.2) Act of 1980, one finds that according to the Statement of Objects and Reasons, the new section, that is s. 80 AA, seeks to clarify that the deductions provided under any such section with reference to the inclusion in the gross total income of an assessee of any income of the nature mentioned in that section will be allowed with reference to the net amount of income of that nature included in the gross total income of the assessee and that the amount of income of that nature so included will be computed in accordance with the provisions of the act. It has also been clarified that it is because of the Supreme Court decision that it was necessary to make this very clear with retrospective effect so far as computation of relief under s. 80M is concerned. It is thus clear that because of enactment of the new s. 80 AA the position in law as was mentioned in the decision of this High Court in CLoth Traders (P) Ltd.'s case : [1974]97ITR140(Guj) .

8. In this decision in : [1979]118ITR243(SC) (Cloth traders (P) Ltd. v. Addl CIT), the Supreme Court made it clear that what the legislature wanted to do under s. 80M was to provide not for the quantum of income but to deal with the character of the income, particularly in the context of the words 'such income', which is dealt with in s. 80M. Therefore, it is clear that by enacting s. 80AA the Legislature has brought in the concept of quantum of income which is included in the gross total income of an assessee-company. Under s. 80B, sub-s. (5), 'Gross total income' means the total income computed in accordance with the provisions of the I. T. Act, before making any deduction under Chapter VI-A or under s. 280-O. We are concerned with s. 280-O in this case and, therefore, before making any deduction under s. 80M, total income has to be computed in accordance with all the provisions of the Act. It is very clear that while computing income under the Act whatever dividend income has been received by the assessee-company concerned under the provisions of this Act has to be computed under the provisions of ss. 56 and 57 which deal with income from 'other sources', that from April 1, 1968, for the purpose of assessment year 1969-70, the provisions of s. 80M have to be read in the light of s. 80AA even for assessment year 1969-70. And while computing which will be computed but while computing such net dividend income, what is material is that in the case of the assessee-company concerned, it if is carrying on business, its profits and gains under the head 'Business income' or 'profits and gains of business' have to be first computed and having ascertained the net figure, the assessee will then proceed to claim deduction under s. 80M in respect of the quantum of income from dividend which forms a part, a component, of the total business income. That is the only way in which all these provisions can be reconciled and can be brought together.

9. As a matter of fact, even after the decision of this High Court was rendered in Cloth Traders (P.) Ltd's case : [1974]97ITR140(Guj) , the same Division Bench decided in December, 1975, though it was reported as an Appendix to another decision of the Calcutta High Court) that if the borrowing is for the purpose of the business of the company, then interest has not to be apportioned as between the business requirements and the moneys borrowed for the purpose of investment in shares. No such the purpose of its business. That was question NO. 2 before the Division Bench in Laxmi Agents P. Ltd.'s case [1980] 125 ITR 227 onwards of the report the second question before the Division Bench has been dealt with. In that part particular case, the facts were that borrowings were made only for the purpose of the assessee's business of managing a company. The assessee invested in the shares of the managed company with a view to protest its managing agency business and hence the main object of this investment was not to earn dividend, and if the borrowings were required to enable the assessee to purchase these shares, it must follow that the interest was paid on the capital borrowed for the purpose of business. The Division Bench observed (p. 238):

'If once it is established that capital was borrowed for the purpose of business if is immaterial how that borrowed capital as applied because all that clause (iii) of s. 36(1) requires is that borrowings, on which interest is paid, should be for the purpose of business.'

10. It was pointed out that the principle that income falling under a specific head should be made chargeable under that head even if it is earned for business purposes, is to be worked out only for the limited purpose of computing the total income of an assessee. This decision of the Gujarat High Court was followed by the Calcutta High Court in CIT v. J.K. Industries (P.) Ltd. [1989] 125 ITR 218. It is thus clear that in the case of the present assessee, though the total income of the assessee is in the course of its business, it gets part of its income from dividends and computation of that income from dividends is to be done in accordance with the provisions of ss. 56 and 57 of the I.T. Act. But the computation having been so done, ultimately, it still forms part of the income of the business of the assessee and it is assessable as such as profits and gains of business carried on by the assessee. Under s. 36 of the I.T. Act, interest paid by an assessee for the purpose of carrying on its business is deducted in its entirely while computing profits and gains of the business and, therefore, it is not possible to allocate a portion of that interest as against income from dividends by stating that that interest had to be paid for the purpose of investing in shares held by the assessee.

11. It is clear, that reading the scheme of s. 80AA and the specific emphasis now on the words 'in connection with that income which goes to form a component of the total income of the assessee computed in accordance with the provisions of the Act', the real answer to the problem posed by the revenue is that, when the income from other sources is computed in accordance with the provisions of ss. 56 and 57, there is no deduction to be made by way of interest paid in respect of the income from dividends because the interests is paid by the assessee-company for the purpose of carrying on its business and the entire amount of dividend, call it gross minus nil, will be the amount with reference to which the relief under s. 80M will have to be computed.

12. Thus, s. 80AA makes no difference so far as the provisions of s. 80M are concerned on the facts of this particular case. We find that the facts of the case are similar to the facts as were before the Division Bench in Laxmi Agents P. Ltd. [1980] 125 ITR 227 and we entirely agree with the reasoning of division Bench decision in that case and we hold that in the instant case also, it is the entire amount of dividends earned by the assessee-company from intercorporate dividends which will be the amount with reference to which relief under s. 80M will have to be worked out. Section 80AA makes no difference because in the instant case, there is no expenditure which is incurred for the purpose of earning the amount of dividends. The expenditure incurred by way of payment of interest was incurred for the purpose of carrying on the business of the assessee and that has been deducted under s. 36(1)(iii) while computing the income of the assessee for the purpose of profits and gains from business.

13. Under these circumstances, the conclusion of the Tribunal is correct as the interest was paid by the assessee on money borrowed on overdraft and employed in the business of dealing in shares.

14. Question No. 1 is, therefore, answered in the affirmative, that is, in favour of the assessee and against the revenue.

15. We thus answer question No. 2 in favour of the assessee and against the revenue. The Commissioner will pay the costs of this reference to the assessee.


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