1. In this case, at the instance of the assessee, the following question has been referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Commissioner of Income-tax that the relief under section 85A of the Act for the assessment year 1967-68, and under section 80M of the Act for the assessment years 1968-69 and 1969-70, was admissible only on the income from dividend as computed under the provisions of sections 56 and 57 after deducting the appropriate interest on borrowing utilised for investment in shares in respect of which dividend income was earned by the assessee and not on the gross amount of dividend actually received by the assessee ?'
2. The assessment years under consideration are assessment years 1967-68, 1968-69 and 1969-70. The relevant previous years are the financial years ended on 31st March, 1967, 31st March, 1968, and 31st March, 1969, respectively. The assessee is a limited company and the question is about what is known as inter-corporate dividends. The Tribunal in its order followed the decision of the Gujarat High Court in Addl. CIT v. Cloth Traders (P.) Ltd. : 97ITR140(Guj) . That decision was taken in appeal to the Supreme Court and it was reversed by the decision of the Supreme Court. The decision of the Supreme Court is reported in : 118ITR243(SC) (Cloth Traders (P.) Ltd. v. Addl. CIT). After the decision of the Supreme Court, the Legislature, by Finance (No. 2) Act of 1980, inserted s. 80AA but this amendment was with retrospective effect from April 1, 1968. In the statement of objects explaining the reasons for the insertion of section 80AA, it was specifically stated that the clause was being introduced so that the effect of the Supreme Court decision in Cloth Traders (P.) Ltd.'s case reported in : 118ITR243(SC) , may not be allowed to continue. The result is that so far as the assessment year 1967-68 is concerned, the assessee will get the benefit of the decision of the Supreme Court and for the assessment years 1968-69 and 1969-70, the assessee will not have that benefit. The Gujarat High Court in its decision held that in computing the relief to be granted under s. 85A (s. 80M) to the concerned assessee, what was contemplated was not gross dividend income but only the net dividend income and the average rate of tax which was to be deducted under s. 85A should be on the net income of dividends received by the assessee. According to the decision of the Supreme court, which reversed the Gujarat High Court decision, in a computation of the relief under s. 85A (80M) to the concerned assessee, it was gross dividend income which was to be taken into account and not the net dividend income after deducting interest, etc. As a result of the legislative amendment by way of insertion of s. 80AA, it is clear that the effect of the Gujarat decision will operate with effect from 1st April, 1968. In its decision in Cloth Traders (P.) Ltd.'s case : 118ITR243(SC) , the Supreme Court has clearly pointed out that s. 85A and s. 80M are both in identical terms though applicable to different assessment years. Section 80AA says :
'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.'
3. Section 12 of the Finance (No. 2) Act of 1980, which inserted s. 80AA in the I.T. Act, says 'after section 80A, the following section shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1968.....'
4. As a result of this amendment by way of insertion of s. 80AA, it is clear that for the assessment years 1968-69 and 1969-70, while computing the relief under s. 80M, it is the net dividend income computed in accordance with the provisions of the I.T. Act but without, making any deduction under Chap. VI-A (which is to be deducted), and that deduction is not to be with reference to the gross amount of such dividend. Thus, in the instant case, out of the three assessment years which are under reference, as regards assessment year 1967-68, in accordance with the decision of the Supreme Court reported in Cloth Traders (P.) Ltd. v. Addl. CIT : 118ITR243(SC) , it will be the gross dividend income with reference to which the relief under section 85A will be granted. As regards assessment years 1968-69 and 1969-70, in view of s. 80AA inserted by the Finance (No. 2) Act of 1980 with effect from 1st April, 1968, the computation of the relief under s. 80M of the Act will be with reference to the net dividend income and not with reference to the gross dividend income.
5. Under these circumstances, we answer the question referred to us as follows :
With reference to assessment year 1967-68, the relief under s. 85A will be with reference to the gross dividend income of the assessee.
6. With reference to the assessment years 1968-69 and 1969-70, the relief under s. 80M will be computed on the income from dividend as computed under the I.T. Act without giving any relief under Chap. VI-A of the Act, that is, on the net income as computed under the provisions of the Act.
7. The question is thus answered in favour of the assessee and against the Revenue so far as assessment year 1967-68 is concerned and in favour of the Revenue and against the assessee so far as the assessment years 1968-69 and 1969-70 are concerned. There will be no order as to costs of this reference.