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Punjab State Industrial Vs. Deputy Commissioner of Income Tax - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Chandigarh
Decided On
Judge
Reported in(2007)292ITR268(Chd.)
AppellantPunjab State Industrial
RespondentDeputy Commissioner of Income Tax
Excerpt:
1. in this case, the chandigarh bench of the tribunal for asst. yrs.1990-91 to 1992-93 in ita no. 1333/chd/1994, ita nos. 944 and 1591/chd/1995 vide order dt. 22 nov., 1996 held that deduction under section 80m is permissible on the net dividend to be determined after deducting proportionate administrative expenses and also deduction allowed under section 36(1)(iii) from the gross dividend. the assessee's appeal against the decision of the tribunal is pending in the high court. in the present case, the assessee made a request for constitution of the special bench in respect of common issue relating to computation of deduction under section 80m as in the case of mahavii spinning mms ltd. in ita no. 26/chd/1996 for asst. yr. 1991-92 vide para 2 of its order the tribunal held that no.....
Judgment:
1. In this case, the Chandigarh Bench of the Tribunal for asst. yrs.

1990-91 to 1992-93 in ITA No. 1333/Chd/1994, ITA Nos. 944 and 1591/Chd/1995 vide order dt. 22 Nov., 1996 held that deduction under Section 80M is permissible on the net dividend to be determined after deducting proportionate administrative expenses and also deduction allowed under Section 36(1)(iii) from the gross dividend. The assessee's appeal against the decision of the Tribunal is pending in the High Court. In the present case, the assessee made a request for constitution of the Special Bench in respect of common issue relating to computation of deduction under Section 80M as in the case of Mahavii Spinning MMs Ltd. in ITA No. 26/Chd/1996 for asst. yr. 1991-92 vide para 2 of its order the Tribunal held that no expenditure can be deducted on proportionate basis out of the common administrative expenses for the purpose of computation of deduction under Section 80M.The request of the assessee was accepted by the President of Tribunal.

The Special Bench is constituted mainly for deciding the common issue relating to computation of deduction under Section 80M of the IT Act, 1961. Three appeals have been filed by the assessee for asst. yrs.

1994-95, 1995-96 and 1997-98. The appeal of the assessee for asst. yr.

1996-97 stands decided against the assessee by the Tribunal. There are cross-appeals by the Revenue for the aforementioned assessment years.

The Revenue has also filed an appeal for asst. yr. 1996-97.

2. We have heard the parties and perused the record, Since all the appeals (seven in number) were allotted to the Special Bench for disposal, we proceed to decide the same on all issues including the hotly contested issue relating to computation of deduction under Section 80M. The main issue involved in the present appeals is as to whether in computing the deduction under Section 80M proportionate management expenses/administrative expenses are to be deducted from the dividend income in computing the deduction under Section 80M.3. The learned Counsel for the assessee Shri M.L. Garg contended before us that whereas deduction under Section 80M is permissible to the assessee on the net dividend but in this case, the assessee has not incurred any expenditure on interest, brokerage or commission, etc. for earning the dividend income and, therefore, gross dividend income is the net dividend income in respect of which deduction under Section 80M is claimed and allowable. It was contended that Section 36(1)(iii) provides for deduction in respect of interest on borrowed money utilized for the purposes of business. No money has been borrowed for the purposes of making investment in shares and as such no deduction of interest is warranted out of the gross dividend for computation of deduction under Section 80M. It was further contended that there is also no warrant for deducting administrative expenses proportionately for the purpose of computing deduction under Section 80M. Referring to the provisions of Section 80M and Section 80AA it was contended that as per scheme of the Act deduction under Section 80M is to be allowed out of the dividend income computed in accordance with the provisions of the Act. According to the learned counsel, it is not disputed that the dividend is included in the gross total income of the assessee. It was contended that for asst. yrs. 1990-91 to 1992-93 the Tribunal has taken a wrong view in holding that proportionate expenses debited to the P & L a/c are to be deducted for the purposes of computation of deduction under Section 80M. The assessee has taken the matter to the High Court and the same is pending adjudication. Relying upon the decision of the Bombay High Court in the case of CIT v. Central Bank of India , it was contended that deduction contemplated by Section 80M refers to the actual expenditure and, therefore, the rule of proportionality of expenses and interest cannot be imported into the computation of deduction under Section 80M. Reliance was also placed on the decision of the Calcutta Bench of the Tribunal in the case of Shaw Wallace & Co. Ltd. v. Dy. CIT (2001) 71 TTJ (Cal) 478 : (2002) 80 ITD 156 (Cal) at p. 174 para 19 of the order in support of the contention.

Shri Garg also placed reliance on the decision of the Calcutta High Court in the case of CIT v. United Collieries Ltd. .

Reliance was also placed on the following decisions in support of the contention: (i) Usha Martin Industries Ltd. v. Dy. CIT (2003) 79 TTJ (Kol) 23 : (2003) 86 ITD 261 (Kol).CIT v. Jai Hind Investment Industries (P) Ltd. , 4. After hearing of the appeals, the learned Counsel filed a letter inviting our attention to the decision of Madhya Pradesh High Court in the case of State Bank of Indore v. CIT to support the contention that the proportionate management expenses are not to be deducted for the purposes computation of deduction under Section 80M.5. The learned Departmental Representative, Shri R.K. Goyal, on the other hand, contended that the issue has been decided in favour of the Revenue by the Tribunal for the asst. yrs. 1990-91 to 1992-93 (supra) on the basis of the facts and circumstances of this case. It was submitted that each case has got to be decided on the basis of its own facts and, therefore, if a different view has been taken in any other case, that decision may not have any bearing on the facts of this case.

It was further contended that the decision of the Tribunal in assessee's own case having been decided in favour of the Revenue even if the Bench has taken a contrary view in the case of Mahavir Spinning Mills, the same is to be ignored. Referring to the decision in assessee's own case for asst. yrs. 1990-91 to 1992-93 (supra), the learned Departmental Representative pointed put that a finding of fact has been recorded by the Tribunal that the assessee has claimed combined expenses in respect of its business including investment in shares According to the learned Departmental Representative, this finding of fact has been recorded on the basis of facts and circumstances of this case and, therefore, the contention advanced on behalf of the assessee that no expenses have been incurred on account of interest and other expenses, is bound to be ignored. It was further contended that the decision of the Calcutta High Court in the case of CIT v. United Collieries Ltd. (supra) is not helpful to the assessee as it is on its own facts. The learned Departmental Representative further contended that the assessee is engaged in the business of promotion of industries in the state of Punjab. It is an organized activity and the investment in shares is also incidental to the main business of the assessee. The learned Departmental Representative invited our attention to Section 14A of the IT Act inserted with retrospective effect to support his contention that intention of the legislature is evident from the incorporation of the said section. According to the learned Departmental Representative Section 14A debars deduction in respect of any expenditure which has been incurred towards the earning of income which is not liable to tax. It was contended by the learned Departmental Representative that same analogy is applicable in respect of the income out of which deduction is permissible under Chapter VI-A of the IT Act, 1961.

6. Relying upon the decision of the Supreme Court in the case of CIT v.United General Trust Ltd. , it was contended that the issue is covered by the said decision of the Supreme Court in favour of the Revenue. It was pointed out that the Hon'ble Supreme Court has overruled the decision of the Bombay High Court in the case of CIT v.United General Trust (P) Ltd. to the contrary. It was claimed that in this case, reference was deemed to have been made and the question of law relating to deduction on proportionate management expenses for the purposes of computation of deduction under Section 80M decided in favour of the Revenue.

7. The learned Departmental Representative also relied upon the decision of the Chandigarh Bench of the Tribunal in the case of Haryana State Co-op. Supply & Marketing Federation Ltd. v. Asstt. CIT, ITA Nos.

681, 682 and 683/Chd/2002, reported at (2005) 92 TTJ (Chd) 1269Ed. in support of the contention that deduction under Chapter VI-A is to be allowed after taking into account the proportionate management and other indivisible expenses. Reliance was also placed on the following decisions to support the contention that deduction of expenses on proportionate basis has been recognized by Supreme Court and various High Courts and the principle that deduction under Section 80M is permissible in respect of net dividend income after giving effect to all the provisions of the Act.: (i) Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CIT ; (ii) CIT v. Sonepat Co-operative Marketing Society Ltd. ; (iii) Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT ; (iv) Kota Co-operative Marketing Society Ltd. v. CIT ; (v) Shekhavati General Traders Ltd. v. CIT (1987) 63 CTR (Raj) 138 : (1987) 167 ITR 116 (Raj);Addl. CIT v. Madan Mohan Lall Shri Ram (P) Ltd. ; (vii) Distributors (Baroda)(P) Ltd. v. Union of India and Ors.

; (viii) CIT v. United India Fire & General Insurance Co. Ltd. ;CIT v. Atam Ballabh Finance (P) Ltd. (2002) 177 CTR (Del) 369 : (2002) 258 ITR 485 (Del); (x) CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. ;CIT v. Industrial Finance Corporation of India .

8. It was further contended that the decision of the Bombay High Court in the case of CIT v. Central Bank of India (supra) is distinguishable on facts. Reliance was also placed on the decision of the Calcutta Bench of the Tribunal in the case of Dy. CIT v. S.G. Investments & Industries Ltd. (2004) 84 TTJ (Kol) 143 : (2004) 89 ITD 44 (Kol) wherein the Tribunal has examined decisions of the Supreme Court and the various High Courts and held that the expenditures incurred by the assessee together for various activities has got to be apportioned between taxable income and non-taxable income and where capital is borrowed for various indivisible business activities, proportionate interest paid on such borrowings is also to be deducted from gross dividend income before computing the amount of dividend on which exemption under Section 10(33) is to be allowed.

9. It was accordingly contended that there is no reason for taking a different view than the view expressed earlier by the Chandigarh Bench of the Tribunal in assessee's own case wherein the decision of the Supreme Court in the case of United General Trust Ltd. (supra) has been relied upon to arrive at the decision. The learned Departmental Representative also stated in writing that the decision of the Madhya Pradesh High Court in the case of State Bank of Indore (supra) cited on behalf of the assessee is distinguishable on facts and in any case the decision of the Supreme Court in United General Trust Ltd. (supra) has not been considered. It was further contended that proportionate management expenses have got to be deducted under Section 57 of the IT Act, 1961 10. In counter-reply, the learned Counsel for the assessee contended that the decision of Haryana State Co-operative Supply & Marketing Federation (supra) is inapplicable to the facts of this case insofar as in that case the deduction was permissible out of the business income under Section 80P(2) and in the case of the assessee the deduction is permissible out of the income from other sources. It was further contended that borrowed money has not been utilized for acquisition of share yielding dividend income.

11. We have given our careful consideration to the rival contentions and have also considered the earlier order of the Tribunal in the case of the assessee for asst. yrs. 1990-91 to 1992-93 (supra) and order of the Tribunal in the case of Mahavir Spinning Mills (supra). We first consider the main issue in these appeals relating to computation of deduction under Section 80M of the IT Act, 1961.

12. It hardly needs to be mentioned that the IT Act, 1961 provides for taxation of income of various persons. The Act recognizes some of the artificial entities as persons such as partnership firm is recognized as a person under the provisions of the Act. The Act also provided for taxation of the income of the firm as well the share income of the partners from the firm, which had suffered tax in the hands of the firm. This position now stands modified. In the case of a company whereas tax was imposed upon the income of a company, its shareholders were also liable to tax in respect of dividends received by way of distribution of the profit by the company. Section 80M as it existed before its omission provided some relief to the corporate shareholders in respect of the income received by way of dividends that would otherwise suffer tax, again in the hands of shareholder company. As pointed out earlier, the main controversy in this case revolves around computation of deduction under Section 80M as applicable for the relevant assessment years.

13. It will be useful to reproduce Section 80M and Section 80AA as applicable for the relevant assessment years. Section 80M reads as under: 80M. Deduction in respect of certain inter-corporate dividends.(1) Where the gross total income of a domestic company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends from another domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date. (2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under Sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

Explanation : For the purposes of this section, the expression 'due date' means the date for furnishing the return of income under Sub-section (1) of Section 139.

Section 80AA. Computation of deduction under Section 80MWhere 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.

15. It may be pertinent to mention that Section 80M was omitted by the Finance Act, 1997 (26 of 1997) w.e.f. 1st April, 1998 in consequence of insertion of Section 10(33) of the IT Act, 1961 granting exemption in respect of dividend income. However, the said section was reintroduced from asst. yr. 2003-04 as the exemption in respect of dividend income was removed. Subsequently, it was again omitted by the Finance Act, 2003 w.e.f 1st April, 2004 as the dividend income is now exempt in the hands of the shareholders. However, Section 14A has been incorporated with retrospective effect to ensure that exemption under Section 10(33) is granted only on the net component of dividend included in gross total income.

16. Section 80M applied to only one category of dividend, i.e., dividend received by domestic company from a domestic company. A domestic company means an Indian company or any foreign company which makes prescribed arrangement for the declaration and payment, within India of the dividend payable out of its income liable to tax under the IT Act, 1961. In order to get the benefit of this section, it was necessary that the company receiving dividend should be a registered shareholder of the company paying it. In the case of Cloth Traders (P) Ltd v. CIT , the Hon'ble Supreme Court held that deduction under Section 80M in respect of inter-incorporate dividends is to be computed with reference to the gross amount of such dividends and not the net amount thereof, i.e., dividend minus admissible expenditures. With a view to supersede the aforementioned decision of the Supreme Court, Section 80AA was inserted by Finance (No. 2) Act, 1980 with retrospective effect from 1st April, 1968 providing that deduction under Section 80M is to be allowed on the net dividend as computed in accordance with the provisions of the Act and included in the gross total income.Cloth Traders (P) Ltd v. CIT (supra) was also overruled by a larger Bench of the Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors. (supra), wherein it has been held that so for as Section 80M is concerned, the deduction required to be allowed under that provision has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of the dividend received by the assessee. The relevant portion of the decision is reproduced hereunder: The opening words of Section 80M, viz., 'where the gross total income of an assessee...includes any income by way of dividends from a domestic company' describe the condition which must be fulfilled in order to attract the applicability of the provision contained in Section 80M, The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company. 'Gross total income' is defined in Section 80B, Clause (v), to mean 'total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or Section 280-O'. Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income.

If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or in other words, forms part of the gross total income, the condition specified in the opening part of Sub-section (1) of Section 80M would be fulfilled and the provisions enacted in that sub-section would be attracted. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words 'such income by way of dividends' must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words 'such income by way of dividends" must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. That would obviously be the income by way of dividends computed in accordance with the provisions of the Act.

18. As is evident from the decision of the Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors. (supra) and the provisions of Section 80AA the deduction under Section 80M is permissible only with reference to the net income from dividends as computed under the provisions of the Act which is included in the gross total income. Therefore, it is necessary to find out the net income, by way of dividend, included in the gross total income.

19. There are two steps involved in the computation of deduction under Section 80M, First step is to determine the component of net dividend in accordance with the provisions of the Act which is included in the gross total income. The second step is to calculate the deduction out of the said net dividend income. It is often observed that the AO's calculate the net dividend income only at the stage of computation of deduction. It is always better to follow the procedure as warranted in law, i.e., first determination of income in accordance with the provisions of the Act and then computing of deduction. In order to take the first step of computation of component of income included in the gross total income, it would be necessary to peep deep into the scheme of taxation of the income under the provisions of the IT Act, 1961. We, therefore, proceed to examine the scheme of taxation under the provisions of IT Act, 1961.

20. It would be useful to refer to some of the relevant provisions of the Act. Section 4 of the IT Act, 1961 being charging section reads as under: 4.(1) Where any Central Act enacts that income-tax shrill be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions including provisions for the levy of additional income-tax of, this Act in respect of the total income of the previous year of every person.

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under Sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of the Act.

Total income' mans the total amount of income referred to in Section 5, computed in the manner laid down in this Act.

22. Section 14 of the IT Act, 1961 provides for classification of income chargeable to tax. It reads as under: 14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income: Chapter-VI deals with deductions out of gross total income. Some of the relevant provisions are as under: 80A. (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in Section 80C to 80U. (2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee.

(3) Where, in computing the total income of an AOP or a BOI any deduction is admissible under Section 8-G or Section 80GGA or Section 80GGC or Section 80HH or Section 80HHA or Section 80JJB or Section 80HHC or Section 80HHD or Section 80-1 or Section 80-IA or Section 80-IB or Section 80J or Section 80JJ, no deduction under the same section shall be made in computing the total income of a member of the AOP or BOI in relation to the share of such member in the income of the AOP or BOI (5) 'Gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.

Sections 80M and 80AA have been quoted earlier and are, therefore, need not be repeated here.

56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head 'Income form other sources', if it is not chargeable to income-tax under any of the heads specified in Section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of Sub-section (1), the following incomes, shall be chargeable to income-tax under the head Income from other sources', namely: 57. The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely: (i) in the case of dividends, (other than dividends referred to in Section 115-0)(or interest on securities) any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing such dividend (or interest) on behalf of the assessee.

(ia) the case of income of the nature referred to in Sub-clause (x) of Clause (24) of Section 2 which is chargeable to income-tax under the head 'Income from other sources', deductions, so far as may be, in accordance with the provisions of Clause (va) of Sub-section (1) of Section 36; (ii) in the case of income of the nature referred to in Clauses (ii) and (iii) of Sub-section (2) of Section 56, deductions, so far as may be, in accordance with the provisions of Sub-clause (ii) of Clause (a) and Clause (c) of Section 30, Section 31 and Sub-sections (1) and (2) of Section 32 and subject to the provisions of Section (iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or (fifteen) thousand rupees, whichever is less.

Explanation : For the purposes of this clause, "family pension" means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death; (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.

(1) Notwithstanding anything to the contrary contained in Section 57, the following amounts shall not be deductible in computing the income chargeable under the head 'Income from other sources' namely: (ia) any expenditure of the nature referred to in Sub-section (12) of Section 40A; (ii) any interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938) on which tax has not been paid or deducted under Chapter XVII-B; (iii) any payment which is chargeable under the head "Salaries", if it is payable outside India, unless tax has been paid thereon or deducted therefrom under Chapter XVII-B; (1A) The provisions of Sub-clause (iia) of Clause (a) of Section 40 shall, so far as may be, apply in computing the income chargeable under the head 'Income from other sources' as they apply in computing the income chargeable under the head 'Profits and gains of business or profession'.

(2) The provisions of Section 40A shall, so far as may be, apply in computing the income chargeable under the head 'Income from other sources' as they apply in computing the income chargeable under the head 'Profits and gains of business or profession'.

(3) In the case of an assessee, being a foreign company, the provisions of Section 44D shall, so far as may be, apply in computing the income chargeable under the head Income from other sources' as they apply in computing the income chargeable under the head 'Profits and gains of business or profession'.

(4) In the case of an assessee having income chargeable under the head 'Income from other sources', no deduction in respect of any expenditure or allowance in connection with such income shall be allowed under any provision of this Act in computing the income by way of any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature, whatsoever: Provided that nothing contained in this sub-section shall apply in computing the income of an assessee, being the owner of horses maintained by him for running in horse races, from the activity of owning and maintaining such horses.

Explanation : For the purposes of this sub-section, 'horse race' means a horse race upon which wagering or betting may be lawfully made.

(1) The provisions of Sub-section (1) of Section 41 shall apply, so far as may in computing the income of an assessee under the head 'Profits and gains of business or profession'.

23. A plain reading of the aforementioned provisions of the Act clearly indicates that income-tax is chargeable on the gross total income as computed in accordance with the provisions of the Act. The procedure for determination of income from business as well as income from other sources is provided under the statute. It may be pertinent to mention that certain deductions which may not be provided specifically under various provisions of the Act, can also be deducted in computing the net income from a particular source if deduction of such expenditure is necessary to ascertain the true income. We will deal with this aspect at a later stage. We shall initially deal with the deductions, which are permissible out of the dividend income assessed under the head "Income from other sources" specifically provided under the statute.

The deductions under the head "Income from other sources" are specifically provided under Section 57 of the Act which has been quoted elsewhere in this order. Section 58 restricts the deductions in certain circumstances. Section 57(iii) is a general clause for admissibility of deduction in respect of any expenditure laid out or expended wholly and exclusively for the purpose of making or earning the income. In the case of Vijaya Laxmi Sugar Mills Ltd. v. CIT , their Lordships of the Supreme Court have laid down the following principles for the purpose of deducting the expenses out of the income from other sources under Section 57(iii) of the Act: That the requirement under Section 57(iii) that the expenditure should have been incurred 'for the purpose of making or earning such income' shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income.

It is true that the connection between the expenditure and the earning of income need not be direct and it may be indirect. But since the expenditure must have been incurred for the purpose of that income, there should be some nexus between the expenditure and the earning of the income.

That there was no evidence to show that the expenses sought to be deducted were to facilitate the earning of the interest. The interest accrued sui generis. The interest was payable by the bank whether it was claimed or not and whether there was any establishment or not. The expenses incurred by the liquidator which were sought to be deducted could not be said to have been incurred with the object, or for the purpose, of earning the income and the expenses were not deductible under Section 57 in computing the income from interest.

24. A combined reading of Sections 56 to 59 and the decision of the Supreme Court referred to above reveals that deduction under Section 57 out of dividend income is to be made on the following conditions: (i) The expenditure should be incurred wholly and exclusively for the purpose of making and earning the income.

(iii) It should not be in the nature of personal expenses of the assessee [Section 58(1)(a)(i)].

(iv) It should be incurred in the accounting year and not in any prior or subsequent year.

25. It may be stated, even at the cost of repetition, that the connection between the expenditure and earning of income need not to be direct as held by the Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. (supra). It may be indirect. In the case of Seth R. Dalmia v. CIT , their Lordships of Supreme Court at pp.

652-653 have also held as under:In CIT v. H.H. Maharani Shri Vijaykuveiba Saheb of Mom and Ors.

(1975) 100 ITR 67 (Bom), a Division Bench of the Bombay High Court held that the deduction which is permissible under Sub-section (2) of Section 12 is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax and the dominant purpose of the expenditure incurred must be to earn income.

It was further held that the connection between the expenditure and the earning of income need not be direct and even an indirect connection could prove the nexus between the expenditure incurred and the income. We fully agree with the view taken by the Bombay High Court.

In view of the direct decision of this Court in Eastern Investments Ltd. v. CIT , it is not necessary for us to multiply authorities. Summarising, therefore, the facts of the present case, the position which emerges is as follows: (1) that a genuine and bona fide contract had been entered into between the assessee and the bank for transfer of large number of shares to the assessee.

(1) that the assessee in pursuance of this agreement had raised a loan of Rs. 44,14,990 from the bank in order to acquire the shares and had paid interest of Rs. 2,04,744 for this purpose; and (3) as a result of the aforesaid acquisition, under Clause (3) of the agreement the dividends, rights, bonuses, etc., held by the bank were held for the benefit of the assessee after they were declared.

It is obvious that if the assessee would not have paid the interest on the loan raised by him he would not have been able to get the dividend income.

26. It is also relevant to mention that the expenditure which is incurred for the purposes of earning income, as laid clown by the Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. v. CIT (supra) need not yield income in the relevant year for the purpose of qualifying for deduction. The Supreme Court in the case of CIT v.Rajendra Prasad Moody held that interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under Section 57(iii) of the IT Act, 1961, in computing its income from dividend under the head "Income from other sources". It is, therefore, evident from the authorities quoted above that interest paid on borrowed monies utilized for the purchase of shares is allowable as a deduction in computing the income under the head "Income from other sources". Section 57(i) also provides deduction on account of the commission and remuneration, to a banker or any other person for the purpose of realizing such dividend or interest on behalf of the assessee.

27. As pointed earlier, the expenses which are deductible under Section 57(iii) must have a close nexus with the earning of the income from other sources Whether the expenses have been incurred or laid out for the purpose of earning the income from other sources, is a question of fact to be determined on the facts and in the circumstances of each case. There will be no difficulty to determine the issue in such cases where the assessee has a single source of income such as income from other sources. In such cases, the tests laid down by various High Courts and Hon'ble Supreme Court will enable the determination of the issue without any difficulty. There would also not be much difficulty in such cases where the assessee derives income from various sources but the income derived from other sources is unconnected with the business activities of the assessee. The difficulty arises in such cases where the assessee has income from various sources and the expenditure is combined expenditure taken into account in the computation of net income as per the books of account maintained by the assessee.

28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources.

29. It has to be borne in mind that no deduction would be permissible in respect of such establishment expenses which are unconnected with the earning of income assessable under the head "Income from other sources". In case of company liquidation, the expenses incurred by a liquidator such as salary and other expenses were not allowed as deduction from income earned by way of interest from a fixed deposit in the relevant year on the ground that the expenses were not incurred for earning of the income. The Hon'ble Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd v. CIT (supra) has laid down the following principles for the purposes of deducting the expenses out of the "income from other sources": (i) It is true that the connection between the expenditure and the earning of income need not be direct and it may be indirect. But, since the expenditure must have been incurred for the purpose of that income, there should be some nexus between the expenditure and the earning of the income.

(ii) The requirement under Section 57(iii) that the expenditure should have been incurred "for the purpose of making or earning such income" shows that the object of spending or the end or aim of the intention of such spending was for earning the interest income.

(iii) If any expenditure was incurred like commission for collection or similar expenditure which may be considered as spent solely for the purpose of earning that income, the position may be different.CIT v. Official Liquidator, Pilot Pen Co.

(P) Ltd. (2002) 253 ITR 533 (Mad), it was held that where the expenses are incurred by the official liquidator to maintain the infrastructure for the earning of interest income and without such expenses it would not have been possible to earn interest, the deduction is permissible from the gross income from other sources. Similar view has been taken in the following cases: (ii) Wandoor Jupiter Chits (P) Ltd. (In Liquidation) In re (1992) 195 FTR 244 (Ker) (iii) CIT v. Benaras Electric Light & Power Co. Ltd. CIT v. Gannon Dunkerley & Co. (P) Ltd. (vi) Palani Sri Murugan Textiles Ltd. (By Official Liquidator) v. Asstt. CIT 31. Reference to Section 58 of the IT Act would also be relevant to appreciate as to whether the establishment expenses are to be deducted in computing the income from other sources Section 58(iii) restricts the deduction on account of any salary if it is paid outside India without deduction of tax. On the basis of the aforementioned decisions and the relevant provisions of the Act, it is not difficult to appreciate that in computing the income from other sources the expenses such as salary, interest, commission, brokerage laid out or expended wholly and exclusively for the purpose of making or earning the income shall have to be deducted in computation of the income for the purpose of inclusion in the gross total income.

32. It hardly needs to be emphasized that the tax is on "income" and certain expenditure even if it does not fall within the specified deductions would be deductible in computing the net income.

33. The concept of income is well understood not to be the gross receipts but only the net income properly so-called and, therefore, such deductions may be made as are necessary to ascertain the true income. In order to determine the net income derived by the assessee which forms the basis for taxation, it is necessary to take into account the gross receipts which are reduced by the outgoings. Under various heads of income, certain deductions are regulated under the Act and as such at times it is necessary to make adjustments in the net income determined in accordance with the recognized method of computation. In order to appreciate as to whether only deductions as provided under Section 57 are to be made in computing the dividend income, it will be useful to find out some precedents.

34. In the case of Probhat Chandra Barua v. Emperor 5 ITC 1 (PC), it was held that tax under the head income from other sources is not upon gross receipt but upon income properly so-called and, therefore, such deduction may be made as are necessary to ascertain the true income. In this case, it was held that while assessing the income from zamindari the annual jama or Government revenue should be deducted. In the case of CIT v. Raja Sri Sri Kalyani Prasad Deo (1945) 13 ITR 17 (Pat), it was held that in respect of non-agricultural income derived from coal fields situated in zamindari, a proportionate part of jama should be allowed. In the case of Sachindia v. CIT 5 ITC 396, it was held that where a receiver is appointed by the Court of Estate yielding both agricultural and non-agricultural income, a proportionate portion of the receiving salary should be deducted in computing the non-agricultural income under Section 56.

35. Similarly, in the case of establishment expenses incurred by the assessee to keep itself alive for earning income from other sources has been held to be an allowable expenditure in the following cases:Chinai & Co. (P) Ltd. v. CIT 36. Since there are also some precedents relating to the income from profits and gains of business, it will be useful to derive benefit from the same in order to come to a fair conclusion. We, therefore, proceed to consider the procedure for determination of business income which may help us in determination of the issue at hand.

37. Section 2(24) of the Act defines income to include profits and gains of business. Section 29 of the IT Act, 1961 provides that profits and gains of business shall be computed in accordance with provisions of Sections 30 to 43D of the Act.

38. The word "profits" is to be understood, said Lord Halsbury in Gresham Life Assurance Society v. Styles 3 Tax Cases 185, 188 (HL) in its natural and proper sense in a sense which no commercial man would misunderstand. The said principle was approved by the Privy Council in Pondicherry Rly. Co. Ltd. v. CIT 5 ITC 363 and by the Supreme Court in the case of Badridas Daga v. CIT , Calcutta Co. Ltd. v. CIT and CIT v. Bai Shirinbai K. Kooka . In the case of Badridas Daga v. CIT (supra), their Lordships of the Supreme Court held that profits should be computed after deducting the losses and expenditure incurred for the purpose of the business, profession or vocation, though such losses and expenses may not be expressly allowed under Sections 30 to 43 unless the losses and expenses are expressly or by necessary implication disallowed by the Act. The relevant portion of the judgment is reproduced as under: While Section 10(1) of the Indian IT Act, 1922. imposes a charge on the profits or gains of a business, it does not provide how these profits are to be computed. Section 10(2) enumerates various items which are admissible as deduction but they are not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under Section 10(1). Profits and gains which are liable to be taxed under Section 10(1) are what are understood to be such under ordinary commercial principles.

When a claim is made for a deduction for which there is no specific provision under Section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it.

The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and legitimate expenses of the business 40. In the case of CIT v. Seshasayee Paper & Boards Ltd. , the Madras High Court held that the charge of IT Act is not on gross receipts but on profits and gains properly so-called.

Similar view was expressed by Madras High Court in the case of CIT v.Prasad Process (P) Ltd. 41. In the case of Godhra Electricity Co. Ltd. v. CIT , their Lordships held that the income-tax is on real income. The relevant portion of the judgment is as under: Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialize.

42. Admittedly the above principles have been laid down in relation to the income by way of profits and gains of business. But in our view, these principles are equally applicable to the income from any other source referred to in Section 14 of the Act. It hardly needs to be emphasized that the intention of the legislature to grant relief to the corporate assessees is in respect of the dividend income which is included in the gross total income out of the income which has suffered tax in the hands of the company It will be useful to refer to the view of the Supreme Court in the case of Escorts Ltd v. Union of India , "we think all misconceptions will vanish and all the provisions will fall into place if we bear in mind a fundamental though unwritten, axiom that no legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed". It would be unreasonable to presume that the legislature intended to give relief to the assessee under Section 80M in excess of the tax that would otherwise be chargeable on dividend income in the hands of the recipient of such income. It is, therefore, in our view, necessary to determine the net component of dividends included in the gross total income on which deduction under Section 80M is permissible to the assessee.

43. Therefore, in order to determine the issue relating to the computation of deduction under Section 80M, it is necessary to trace out the source of income of dividend in the case of any assessee. The mere fact that the dividend income is to be computed under the head "Income from other sources" may not be decisive about the source of income by way of dividend. As pointed out earlier, in some cases the earning of dividend may be in the course of carrying on the business or may be incidental to the business. On the other hand, in some cases, the earning of dividend income may be unrelated to the activities of business of the assessee and may also not be incidental to business activities.

44. It has to be borne in mind that "Heads of income" and the "Source of income" are not the same. The Hon'ble Supreme Court in the case of CIT v. Chugandas & Co. and in the case of United Commercial Bank Ltd. v. CIT held that the heads of income are intended merely to indicate the classes of income and that the heads do not exhaustively delimit sources from which income arises and that business income is broken up under different heads only for the purpose of computation of the total income and that by that breaking up the income does not cease to be the income of the business, the different heads of the income being only the classification prescribed by the IT Act for computation of income. Madhya Pradesh High Court in the case of CIT v. Shrikishan Chandmal (1966) 60 ITR 303 (MP) at p, 306 held that the break-up indicated by Section 14 of the Act should not be regarded as rigidly delimiting the sources under different heads for purposes of other provisions of the Act. This view is further supported by the decision of the Supreme Court in the case of Brook Bond & Co. Ltd. v. CIT . In this case, their Lordships held as under: Held, (i) that the mere circumstance that the appellant had shown the dividend income under the head "Income from other sources" in its returns could not in law decide the nature of the dividend income. It had to be determined from the evidence whether, having regard to the true nature and character of the income, it could be described as income from business, even though it fell for computation under another head.

45. Their Lordships in this case also laid down the following principles of law: It is a cordinal principle of law relating to income-tax that income-tax is a single charge on the total income of an assessee.

For the purpose of computation, the statute recognizes different classes of income which it classifies under different heads of income. For each head of income, the statute has provided the mode of computing the quantum of such income. The mode of computation varies with the nature or the class of such income, for the deductions permissible under the law in computing the income under each head bear a particular relevance to the nature of the income.

The statute operates on the principle that it is the net income under each head which should be considered as a component of the total income. The statute permits specified deduction from gross receipts in order to compute the net income. The net income under the different heads is then pooled together to constitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and of unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, i.e., the quantum of income which is assessed to tax.

46. In the case of CIT v. Cocanada Radhaswami Bank Ltd. , their Lordships of Supreme Court expressing similar view held as under: Some of the decisions cited at the Bar may conveniently be referred to at this stage. The Judicial Committee in Punjab Co-operative Bank Ltd. v. CIT has clearly brought out the business connection between the securities of a bank and its business, thus; In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank often receiving a small rate of interest on it.

A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash easily realizable securities to meet any probable demand by the depositors....

In the present case the Tribunal held, on the evidence, and that was accepted by the High Court, that the assessee was investing its amounts in easily realizable securities and, therefore, the said securities were part of the trading assets of the assessee's banking business. The decision of this Court in United Commercial Bank Ltd. v. CIT does not lay down any different proposition. It held after an exhaustive review of the authorities, that under the scheme of the IT Act, 1922, the head of income, profits and gains enumerated in the different clauses of Section 6 were mutually exclusive, each specific head covering items of income arising from a particular source. On that reasoning this Court held that even though the securities were part of the trading assets of the company doing business, the income therefrom had to be assessed under Section 8 of the Act. This decision does not say that the income from securities is not income from the business. Nor does the decision of this Court in East India Housing and Land Development Trust Ltd. v. CIT support the contention of the Revenue. There, a company, which was incorporated with the objects of buying and developing landed properties and promoting and developing markets, purchased 10 bighas of land in the town of Calcutta and set up a market therein. The question was whether the income realised from the tenants of the shops and stalls was liable to be taxed as "business income" under Section 10 of the IT Act or as income from property under Section 9 thereof. This Court held that the said income fell under the specific head mentioned in Section 9 of the Act. This case also does not lay down that the income from the shops is not the income in the business. In CIT v. Express Newspapers Ltd. this Court held that both Section 26(2) and the proviso thereto dealt only with profits and gains of a business, profession or vocation and they did not provide for the assessment of income under any other head, e.g., 'capital gains'.

47. The decision of the Supreme Court in United Commercial Bank Ltd. (supra), is also relevant. In this case, it was held as under: 3The heads described in Section 6 and further elaborated for the purpose of computation of income in Sections 7 to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of income; the heads do not exhaustively delimit sources from which income arises. This is made clear in that business income is broken up under different heads only for the purpose of computation of the total income; by that break-up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Indian IT Act for computation of income.

48. In the case of Apollo Tyres Ltd. v. CIT , it was held as under: The Tribunal had found as a fact on material on record that the investment by the assessee-company in units of the UTI was in the course of its business and its business of manufacture and sale of tyres and the business of purchase and sale of units of the UTI were common in nature and both toe businesses were intertwined and interlaced; and, therefore, the business in purchase and sale of units was an "eligible business" within the meaning of the definition of 'eligible business" in Section 32AB(2) and the assessee was entitled to deduction of 20 per cent of the profits from that business, though the income therefrom was declared by the assessee-company as 'Income from other sources'.

The High Court, on a reference, accepted the finding and affirmed the decision of the Tribunal. On appeal to the Supreme Court.

Held, affirming the decision of the High Court, that the business of the assessee-company of buying and selling of units was an 'eligible business' as contemplated under Section 32AB, and the income earned from its investment in the units of the UTI had to be included in computing the profits of 'eligible business' under Section 32AB. The fact that the income was shown under a different head of income did not deprive the assessee-company of the benefit under Section 32AB so long as the investment in the units was in the course of its 'eligible business'.

Decision of the Kerala High Court in CIT v. Appollo Tyres Ltd. affirmed on this point.

49. In the case of Mehsana District Central Co-operative Bank Ltd. v.ITO (2001) 170 CTR (SC) 169, their Lordships of Supreme Court held that the income derived by a co-operative bank from utilization of its funds for statutory reserves under Section 67(2) of the Gujarat Co-operative Societies Act, 1961 and income from hiring out of safe deposit vaults was part of the ordinary banking business of a bank. Therefore, the income derived by the co-operative bank was eligible for deduction under Section 80P(2)(a)(i).

50. In the case of CIT v. Ramanathapuram Distt. Co-op. Central Bank Ltd. , their Lordships of Supreme Court held that interest on securities, subsidies from the Government and dividend received by the assesseeco-operative society carrying on banking business, were business income of the assessee, and as such the assessee was entitled to deduction under Section 80P(2)(a)(i) of the IT Act, 1961. Similar view has been taken by the Hon'ble Supreme Court [sic-the Madras High Court] m the case of CIT v. Ramanathapuram District Central Co-operative Bank Ltd. (1997) 142 CTR (Mad) 80 : (1997) 224 ITR 226 (Mad).

51. On the basis of the above view, we hold that the source of dividend income in some cases may be from business notwithstanding the fact that it has got to be computed under the head "Income from other sources".

52. On the analysis of above decisions, following principles of law emerge: (i) That deduction under Section 80M is permissible on the net dividend income computed in accordance with the provisions of the Act and included in the gross total income.

(ii) That for determination of net dividend income included in the gross total income, it is necessary to trace the "Source of dividend income" notwithstanding the fact that it is assessable under the head "Income from other sources".

(iii) That computation of dividend income in accordance with Act does not restrict the scope of computation to Sections 56 to 59 of the Act. That the real component of dividend income included in the gross total income shall have to be computed in accordance with the Act and established principles of accounting.

(iv) The nature of dividend income may vary from case to case. In some cases, the dividend earned by the assessee may be on investments made in the domestic company(s) de hors any business considerations (we will hereafter refer, to this category as category 'A'), In some cases, the earning of dividend may be in the course of business activities of the assessee or may be incidental to the business of the assessee (we will hereafter refer to this category as category 'B'). The computation of net income in the case of category 'A' cases and category 'B! cases will vary.

53. We first deal with category 'A' cases. The cases where the investments are made purely on consideration of long-term investments and not on any business considerations. In such cases, the source of dividend income is itself "Income from other sources" and the head of income is also "Income from other sources" 54. In category 'A' cases, the dividend income shall have to be computed by deducting from the gross dividend receipts the expenses specified under Section 57 and further adjustments if any made under Sections 58 and 59 of the Act, As has been explained earlier, deduction under Section 80M has got to be allowed out of the dividend income as computed under the provisions of the Act and included in the gross total income of the assessee. It has also been explained that provisions of the Act are not confined to provisions of Sections 56 to 59 only. At the cost of repetition it, may be stated that it is well settled principle of law that deduction in respect of expenditure incurred by the assessee may be permissible in. computing the taxable income notwithstanding the fact that deduction is not specified under any provision of the Act. In the case of Badridas Daga v. CIT (supra), their Lordships of Supreme Court held that any loss on embezzlement is allowable as a deduction in computing the income from business notwithstanding the fact that there is no specific provisions for allowance of deduction for such expenses. Therefore, if any expenditure claimed by the assessee as deduction in computing the gross total income is attributable to the earning of dividend income, the same shall have to be deducted from the gross dividend income notwithstanding the fact that the said deduction does not necessarily fall within Sections 57 to 59 of the Act. In the case of any assessee carrying on business and making investment in shares unconnected with his business, the expenses incurred by him for the purposes of other business cannot be attributed to the earning of dividend income.

Therefore, there is no justification for apportionment of expenses incurred by the assessee for the purposes of business between receipts of business and dividend received on investment unconnected with the business of the assessee. This view that the proportionate management expenses are not to be deducted in computation of the such dividend income for the purpose of deduction under Section 80M is supported by various authorities, some of which may be mentioned hereunder to complete the record as it is not necessary to elaborately refer to such cases in support of this view:CIT v. Jai Hind Investment Industries (P) Ltd. 56. Their Lordships of Madhya Pradesh High Court in the case of State Bank of Indore v. CIT (supra) held as under: Held, that, since in the instant case, the taxing authorities had not taken into consideration the actual expenditure incurred by the assessee while earning the dividend but had only proceeded to take notional expenditure, the same was not sustainable in law. The expenditure of 10 paise per Rs. 100 of dividend income was not deductible for purposes of Section 80M.57. The Bombay High Court in the case of CIT v. Central Bank of India (supra) held as under: As held in numerous cases by the Court, Chapter VI-A constitutes a separate code dealing with deductions to be made in computing total income. Section 80M refers to special deduction in respect of inter-corporate dividends. As held by the Bombay High Court in the case of CIT v. Maganlal Chhaganlal (P) Ltd. , in order to compute deduction under Section 80M, one has to compute the amount of dividend in accordance with the Act after deducting interest on monies borrowed by earning such income. The print to be noted is that deductions contemplated by Section 80M referred to actual expenditure whereas, deductions contemplated by Section 20(1) are estimated proportionate expenses and interest. Therefore, one cannot import deductions from interest on securities in the case of a banking company under Section 20(1) into the deductions contemplated by Section 80M. In the case of CIT v. United Collieries Ltd. the Calcutta High Court has held that the special deduction under Section 80M is allowable on the net dividend which is arrived at after taking into account actual expenditure incurred by the assessee in earning the dividend income and that there was no scope for any estimate of expenditure being made and there was no scope for allocation of notional expenditure unless the facts of a particular case so warranted. In our view, Section 20(1) contains a rule of proportionality of expenses and interest and that rule is based on estimation of expenditure whereas, Section 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend unless the facts of a particular case warrant otherwise, Therefore, we answer the latter question in favour of the assessee-bank and against the Department.East India Agencies (P) Ltd. v. CIT (supra) have followed decision of Madras High Court in the case of South Arcot Electricity Distribution Co. Ltd. v.CIT wherein it was observed as under: On a reference to the Madras High Court under Section 256(1) of the IT Act, 1961, it was held that the income assessed was the "interest income" and the expenditure allowed was not incurred solely for the purpose of making or earning the interest income. After pointing out that the assessee was not carrying on any business during the relevant assessment years, it was held that tne deductions claimed by the assessee were not expenditure incurred solely for the purpose of earning interest income and that those expenses are so remote that they have no connection with the earning of the interest, Incidentally, the question of the estimate of the expenditure made by the ITO for the purpose of earning income had also come up for consideration before the Madras High Court. It was contended that the allocation should have been with reference to the total expenditure and not with reference to the actual income earned in that year, The ITO had estimated the expenses at 10 per cent of the receipts and disallowed the balance of the claim. It was observed that no effort is necessary for receiving interest from fixed deposits and the compensation. It appears that, no material had been produced by the assessee to show that he was entitled to a larger allowance. In such situation, the Madras High Court held that the allocation made by the ITO has to be taken as a reasonable estimate.

59. It is, therefore, not difficult to appreciate that in such type of cases, i.e., category 'A' cases, the proportionate management expenses and other expenses unrelated to earning of dividend income are not to be deducted for calculation of deduction under Section 80M. We are, therefore, of the considered opinion that the net dividend income determined in accordance with provisions of Sections 56 to 59 is not to be reduced by proportionate profit and loss expenses/overheads unrelated to the earning of dividend income in category 'A' cases. We hold accordingly.

60. The above view, however, may not hold good in category 'B' cases.

As pointed out earlier, category 'B' cases are such cases where dividend, is earned in the course of carrying on business or is incidental to the business activities of the assessee. We have earlier discussed that deduction under Section 80M is permissible out of the net dividend income included in the gross total income and as computed in accordance with provisions of the Act in respect of which there is no dispute 61. In order to find out what is the component of income included in the gross total income of the assessee out of the dividend income earned in the course of business or incidental to business activities, one will have to necessarily consider the deductions taken into account by the assessee in working out the net income from business determined after taking into account the gross dividend and other business receipts. Most of the expenditure such as salary, interest and other management expenses will fall under Section 57. In such type of cases, we hardly need to emphasise that the receipts including dividend income is reduced by expenses incurred in the course of business to determine the net component of business income. The expenses being mixed in character cannot be identified in respect of one or the other source of receipts. It is in this type of cases that the principle of proportionality is applicable. The principle of apportionment of proportionate expenses for computation of deduction under Section 80M has been approved by the Supreme Court in the case of CIT v. United General Trust Ltd. (supra). In this case, Hon'ble Supreme Court had reversed the decision of the Bombay High Court. It would, therefore, be useful to refer to the decision of the Bombay High Court in the case of CIT v. United General Trust (P) Ltd. (supra) which has been reversed by the Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra). In this case, the following question of law was raised by the Revenue before the Bombay High Court: Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. to the assessment year in question without considering the effect of the amendment operative from 1st April, 1968, and in thus holding that the assessee would be entitled to the deduction under Section 80M on the gross dividend before deduction of the proportionate management expenses? Tulzapurkar J.The question in respect of which rule has been obtained by the CIT thus: Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. to the assessment year in question without considering the effect of the amendment operative from 1st April, 1968, and in thus holding that the assessee would be entitled to the deduction under Section 80M on the gross dividend before deduction of the proportionate management expenses.

In our view, the question as framed does not really arise out of the Tribunal's order since the only question which was agitated before the Tribunal was whether the deduction under Section 80M of the Act was to be computed with reference to the gross dividend income without deducting therefrom the proportionate management expenses and the Tribunal, relying on the decision of this Court in Sahu Brothers (Saurashtra)(P) Ltd. (?) and in the case of CIT v. New Great Insurance Co. Ltd. , held that the relief under Section 80M was to be computed with reference to the gross dividend income. It appears clear that the aforesaid question seems to be finally concluded by the decision of the Supreme Court in the case of CIT v. Industrial Investment Trust Co. Ltd .

63. The Hon'ble Supreme Court in the case of CIT v. United General Trust Co. Ltd, (supra) reversing the decision of the Bombay High Court held as under: Both counsel for the Revenue and the assessee are agreed that the only question which was sought to be raised by the Revenue, but which was not allowed by the High Court is concluded against the assessee and in favour of the Revenue by the decision of this Court in Distributors (Baroda) (P) Ltd. v. Union of India and Ors.

. Indeed, the same result follows from Section 80AA introduced by the Finance (No. 2) Act, 1980, with retrospective effect from 1st April, 1968.

For the above reason, the appeals are allowed. The application under Section 256(2) of the IT Act made by the Revenue shall be deemed to have been allowed, a reference made and answered in the manner indicated above.

We may clarify that the assessment years concerned herein are 1970-71, 1971-72 and 1972-73.

64. As a result of the decision of the Supreme Court, the question of law sought by the Revenue as to whether the assessee would be entitled to deduction under Section 80M on the gross dividend before deduction of the proportionate management expenses, was answered in favour of the Revenue. Their Lordships of the Supreme Court have referred to its own decision in the case of CIT v. United General Trust Ltd. (supra) and the provisions of Section 80AA introduced by the Finance (No. 2) Act, 1980 w.e.f. 1st April, 1968 to support the answer in favour of the Revenue. The Hon'ble Supreme Court having answered the question raised by the Revenue in favour of the Revenue, its esteemed opinion is binding upon any authorities working under its jurisdiction.

65. Admittedly, the issue relating to reduction of proportionate management expenses from the gross dividend was not considered by the Hon'ble Supreme Court in detail. In such circumstances what is the effect of the decision of the Supreme Court when it does not contain reasons as to how proportionate management expenses are to be deduced for computation of dividend income included in the gross total income.

66. In our view, the effect of the decision of the Supreme Court can be ascertained from another decision of the apex Court in the case of Kunhayammed and Ors. v. State of Kerala and Anr. . The relevant portion of the decision is reproduced as under: Once special leave to appeal from an order has been granted by the Supreme Court the order impugned before the Supreme Court becomes an order appealed against. Any order passed thereafter by the Supreme Court would be an appellate order and would attract the applicability of the doctrine of merger. It would not make any difference whether the order is one of reversal or of modification or of dismissal affirming the order appealed against. It would not also make any difference if the order is a speaking or non-speaking one.

67. Thus the decision of the Hon'ble Supreme Court that proportionate management expenses are to be deducted from the gross dividend is of binding nature notwithstanding the fact that the detailed reasoning is not contained m the decision of the Hon'ble Supreme Court.

68. The principle of apportionment of expenses proportionately in the case of indivisible expenses was again reiterated by the Hon'ble Supreme Court in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT (supra). In this case, the two questions referred to the High Court were as under: (1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the case of the assessee is covered by Section 81(i)(d) only and the provisions of Section 66 r/w Section 110 of the Act are not attracted is erroneous in law? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to rebate under Section 81(i)(d) of the Act on the whole of the amount of profit of Rs. 89,976 without deduction of proportionate overhead expenses? 69. Their Lordships of the Supreme Court held that the rebate allowed to the assessee was in respect of the amount to be computed after deduction of proportionate overhead expenses. Since the reasoning given by the Hon'ble Supreme Court will be helpful in resolving the issue involved in this case, we reproduce the same as under: The appellant was a co-operative society engaged in the purchase of agricultural implements, seeds, livestock and other articles intended, for agriculture for the purpose of supplying them to its members as well as to non-members. For the asst. yrs. 1964-65, 1965-66 and 1966-67 the appellant claimed exemption from income-tax under Section 81(i)(d) of the IT Act, 1961, on the gross profits and gains of the business with its members. But the ITO granted relief only on the net amount as was includible in the computation of its total income under Section 110, since the income exempted under Section 81(i)(d) was to be included in its total income as required by Section 66. For the first two years, the Tribunal accepted the claim of the appellant but for the third year the Tribunal rejected the claim and upheld the ITO's order. On reference, the High Court held, rejecting the claim of the appellant, that the only way of working out the scheme of the provisions of Section 81(i)(d) in the light of Sections 66 and 110 was first to calculate to total income and the income-tax thereon, secondly, to ascertain the net profits in respect of the activities on which income-tax was not payable by setting off against the gross profits the proportionate amount of expenditure and then to determine the profits and gains from the taxable activities and thereafter from the income-tax on the total income grant a rebate at the average rate of income-tax on the amount on which no tax was payable. On appeal to the Supreme Court: Held, (i) affirming the decision of the High Court, that since Section 66 required the computation of the total income by including all income on which no income-tax was payable under Chapter VII, the income on which no income-tax was payable by a co-operative society under Section 81(i)(d) falling in Chapter VII had to be necessarily included in its total income. Section 110 was then attracted. Hence, when the income of the co-operative society on which no tax was payable was included in its total income, it became entitled to a deduction from the amount of income-tax chargeable on its total income. That meant that the co-operative society became entitled to deduction or exemption of income-tax payable by it only on the net amount of profits and gains, i.e., on the income of its business otherwise computable m accordance with the provisions of the IT Act, 1961, for the purpose of charging income-tax thereon and which was included in its total income, and not on the amount of its gross profits and gains of business on which no income-tax was payable.CIT v. Maganlal Chhaganlal (P) Ltd. (supra), the Bombay High Court held that "deduction under Section 80M of the IT Act, 1961 has to be calculated with reference to the amount of dividend computed in accordance with provisions of the Act and forming part of the gross total income, i.e., after deducting interest on monies borrowed for earning such income and not with reference to the full amount of dividend received by the assessee". In this case, the assessee was a private limited company carrying on the business of manufacturing of the drums and barrels, dealing in shares and investing in shares. The controversy arose in regard to deduction of interest on money borrowed for purchasing of shares from the dividend income for the purposes of calculating deduction under Section 80M of the IT Act, 1961. The assessee claimed deduction under Section 80M on the gross dividend income on the ground, that deduction on account of interest was permissible under Section 36(1)(iii). The claim of the assessee was rejected by the Hon'ble High Court.

71. In the case of Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CIT (supra), their Lordships of the Himachal Pradesh High Court held that proportionate expenses were to be deducted from computation of income qualifying for deduction under Section 80P(2)(a)(iii) of the Act.

72. In the case of Shekhavati General Traders Ltd. v. CIT (supra), their Lordships of Rajasthan High Court held that relief in respect of dividends received from a domestic company was available only with respect to net amount of dividend after deducting proportionate expenses.

73. In the case of CIT v. Chemical Holdings Ltd. (supra), their Lordships of Madras High Court held as under: The computation insofar as dividends are concerned is to be made under Section 57. Section 57, Clause (i), requires that in the case of dividends or interest on securities any reasonable sum paid by way of commission or remuneration of a banker or any other person for the purposes of realizing the dividend, interest on behalf of the assessee should be deducted. Where moneys are borrowed for investment in shares, to the extent the interest charged is capable of being regarded as expenditure laid out or expended wholly and exclusively for the purpose of making or earning dividend income, the interest so paid is liable to be deducted under Section 57(iii) before computing the benefit under Section 80M. It is not possible to hold that an assessee has, by reason of being a dealer in shares, an option not available to other assessees also deriving income from dividends, to deduct the interest paid on the amount borrowed for investing in he shares for which dividend is earned as expenditure in relation to his business, and deduct the same under Section 36(1)(iii).

The assessee, a dealer in shares, claimed deduction under Section 80M in respect of the gross amount of dividends received by it. The Tribunal upheld the claim of the assessee. On a reference: Held, that the relief under Section 80M could not be granted on the gross amount of dividend received by the assessee but on the gross amount as reduced by the amount of interest attributable to the money borrowed for the purpose of investment and the expenditure incurred in realising the dividend income.CIT v. Industrial Finance Corporation of India (supra), their Lordships of the Delhi High Court held that deduction under Sections 80K and 80L have to be computed with reference to the net dividend, i.e., after deduction of expenses relatable thereto under Section 57 of the IT Act, 1961.

75. It is, therefore, evident that in such cases where the dividend is earned in the course of business or its earning is incidental to the business carried on by the assessee, the indivisible expenses have got to be apportioned for determining the net component of income included in the total income 76. This principle may be elaborated with reference to an example in assessee's own case. The receipts are profit on sale of shares, interest and dividend income. We may assume that the assessee had derived income from dividends only without there being any receipt on account of interest or profit on sale of shares. If we were to confine ourselves to determination of the income under Sections 56 to 59, then the assessee would be deprived of various deduction claimed in the P & L a/c. We have noted elsewhere in this order that the assessee's claim is that no expenditure of whatsoever nature has been incurred by the assessee for earning the dividend income. If this contention were to be accepted and the income computed under Sections 56 to 59 then the gross dividend income received by the assessee would be liable to tax without any other deduction for the expenses incurred However, it is not so insofar as it is well established principle of law that the tax is on real income. The assessee in fact, has incurred expenses for earning the business income If the receipts of the business are by way of dividends, the expenditure incurred by the assessee in earning such income by way of carrying on the business activities shall have to be taken into account for determining the net income which is chargeable to tax notwithstanding the fact that such expenditure is not covered under Sections 57 to 59 of the Act. In this case, the interest and dividend receipts of the assessee are from activities of the business of the assessee. In earning the business income, the assessee has incurred indivisible expenditure between the receipts, which shall have to be taken into account, for the purpose of determination of the net income chargeable to tax. It is, therefore, evident from the above example that in computation of the net income which is included in the gross total income, all the provisions of the Act have got to be kept in mind and not merely provisions of Sections 56 to 59. The charging section has also to be kept in mind in determining the net component of income which is included in the gross total income as it is only the net income which is included in the gross total income. Having held that the dividend income is incidental to the business activities of the assessee, there is no escape from the view that it is the net component of dividend income determined after deduction of proportionate expenses for determining the net component of dividend income which is included in the gross total income.

77. It may be pertinent to mention that the decision of the Calcutta Bench of the Tribunal in the case of Dy. CIT v. S.G. Investments & Industries Ltd. (supra) was sought to be distinguished on the ground that the said decision has been rendered with reference to provisions of Section 14A applicable in respect of income not. liable to tax. It was further contended that the said decision would not be applicable in respect of the income which is included in the gross total income out of which deduction is permissible. The principle laid down in the decision of the Tribunal in the case of S.G. Investments & Industries Ltd. (supra) that the component of net income is to be determined after taking into account all the deductions claimed is in our view applicable even in such cases where the net component of income is to be determined for the purpose of grant of deduction under Section 80M.As pointed out earlier, deduction is permissible out of the net component of dividend income included in the gross total income. It is also pertinent to mention that the decision of the Supreme Court in the case of Rajasthan State Warehousing Corporation v. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) was superseded by insertion of Section 14A with retrospect effect. It is, therefore, evident that the intention of the legislature has never been to grant deduction or exemption in respect of dividend income in excess of net component of income included in gross total income.

78. Moreover, the contention advanced on behalf of the assessee that the decision of the Tribunal in the case of Dy. CIT v. S.G. Investments & Industries Ltd. (supra) is inapplicable as it relates to exempted income, is of no consequence, insofar as the two decisions of the Hon'ble Supreme Court, one in the case of CIT v. United General Trust (P) Ltd. (supra) and another in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT (supra) relate to deductions/rebate out of the income included in the gross total income. The decisions cited on behalf of the assessee have been considered by us. Most of the decisions relate to the dividend earned on pure investments unrelated to business of the assessee. Some of the High Court decisions may appear contrary to the decisions of the Supreme Court referred to above. In none of the decisions cited before us, the aforesaid decisions of the Supreme Court have been considered. We hardly need to mention that if there is a conflict between the decision of the High Court and that of the Supreme Court, the decision of the Supreme Court will prevail. We accordingly, with utmost respect to the decisions of the High Courts referred to above follow the principle laid down by the Hon'ble Supreme Court (supra).

79. We, therefore, hold that in category 'B' cases, i.e., the cases where income by way of dividend is part of the business income or is incidental to the business income, the expenses incurred shall be apportioned between the gross dividend and other receipts of business proportionately and deduction allowed on the net dividend so calculated.

80. The summary of the Special Bench decision on the main issue is thus as under: (i) Where the dividend received is on investments unrelated to the business of the assessee or is not incidental to the business activities of the assessee the gross dividend shall be reduced by specified deductions and the proportionate management/overhead expenses related to the business income of the assessee would not fall under Section 57(iii) of the Act and, therefore, not to be deducted.

(ii) That where the dividend receipt is part of the business income of the assessee or is incidental to the business activities of the assessee, the indivisible expenses of business have got to be apportioned between the various receipts of business income including dividend and deduction under Section 80M calculated on net income accordingly.

81. On the basis of the above principles of law it will be relevant to ascertain the nature of the dividend income derived by the assessee.

82. As per the Industrial Policy of Punjab Government, the assessee corporation has been established to engage itself in setting up and promoting new industrial units in Punjab. The projects are jointly set up by the entrepreneur and PSIDC, i.e., the assessee. The assessee provides initial finance by buying equity. The following portion of the annual report for financial year 1996-97 will indicate the nature of the activities of the assessee: (a) The company's investment, in pursuance of its objects to assist by way of equity participation for the advancement, promotion and development of industry in the State is meant to be held for long-term and as such are valued at cost.

(b) The profit/loss on sale of shares is being accounted for in the year in which the share scripts along with the duly executed transfer deeds are actually delivered to the transferees irrespective of the time at which the consideration for the same has been received.

(c) The corporation makes disinvestment of its shareholdings in joint/assisted sector projects and private sector projects as per the provisions contained in the financial collaboration agreements and buy back undertakings respectively executed by the collaborators/promoters with the corporation.

(d) As per financial collaboration agreements the collaborators have to buy back the shares at the end of specified period at the highest market price quoted on recognized stock exchange(s) or the book value along with the simple interest at the lending rate at which the financial institutions/banks have provided long-term finance to the company, whichever is higher.

However, the terms of standard Financial Collaboration Agreement have been amended w.e.f 18th Oct., 1996 which provide for buy back of the Corporation's investments at the highest price quoted on the stock exchanges 3 months prior to the date of option or with interest at the rate of which the corporation provides term loans to the loanees, compounded half-yearly, whichever is higher,. Hence no provision for depreciation in the value of investment has been made as per the guidelines provided in terms of IDBI Circular dt. 26th April, 1994, 23rd June, 1994 and 8th May, 1996 and 19th Feb., 1997, (e) The market value of shares in case of quoted shares is calculated on the basis of shares last quoted in a recognized stock exchange on or before 31st March as the case may be. However, in case of shares which are not quoted in stock exchange since long have been started at cost.

In promotion of projects being undertaken by the corporation, the expenses incurred on such projects during the implementation stages are charged to the Revenue of the year in which the payment are made and shown under the head 'Project Survey Expenses'. The recovery of such expenses of the respective projects (excepting the cases of abandoned projects where no recoveries are made) are credited to the head 'Receipts on account of projects matured' in the years of maturity of respective projects. The above policy has been adopted because promotion of projects is a major activity of the corporation. Recovery, if any, made in the subsequent years on account of abandoned projects is credited to the miscellaneous income in the year of actual receipt.

83. It will also be relevant to refer to the source of income of the assessee and the nature of expenditure claimed against such income. We, for the sake of convenience, refer to the statement of income for the financial year 1996-97:Income 1996-97 1995-96Profit from sale of investment 145555035 35812583Income from interest 403149177 300092535Dividend on investment 111125603 79418338Other income 12269860 17676038 __________ __________Total Rs. 672099675 432999494 ___________ __________expenses 19603327 18888427Administrative and other expenses 17780867 17771433Financial expenses 602746979 365392860Depreciation 2627889 2576852 ___________ _________ 84. The assessee has secured loans from IDBI and from SIDBI used for its business on which interest has been paid. Deduction under Section 80M has been claimed by the assessee on the gross dividend income for all the assessment years.

85. It is evident from the facts stated above that the source of dividend of the assessee is interlinked with the business activities of the assessee. It is in the light of these facts that one has to consider the decision of the Tribunal in assessee's own case for asst.

yrs. 1990-91 to 1992-93 where the issue was decided in favour of the Revenue. The relevant portion of the order is reproduced hereunder: 19. We have considered the rival submissions and have gone through the orders passed by the AO as well as the learned CIT(A), relevant portion of which has been extracted by us extensively in para 16 to bring the whole controversy into close focus. Earlier deduction admissible in the inter-corporate dividend was to be calculated with respect to the gross amount of dividend received by a domestic company from an Indian company and not with respect to the dividend income as computed in accordance with the provisions of the Act, i.e., after making deduction provided under the Act as per the decision of the Hon'ble Supreme Court in the case of Cloth Traders (P) Ltd. v. Addl. CIT . In order to get over the difficulty caused by the decision in the case of Cloth Traders (P) Ltd. (supra), the Finance (No. 2) Act 1980 inserted of new section being Section 80AA to provide that deduction under Section 80M in respect of inter-corporate dividend will be calculated with respect to the dividend income as computed in accordance with the provisions of the IT Act (before making any deduction in Chapter VI-A) and not with respect to gross amount of such dividend. This provision was introduced with retrospective effect from 1st April, 1968. The decision in the case of Cloth Traders (P) Ltd. (supra) was subsequently overruled by the Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors.

and the Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. (supra) after referring to the decision in the case of Distributors (Baroda) (P) Ltd. (supra) as well as the fact of introduction of Section 80AA by the Finance (No. 2) Act, 1980 with retrospective effect from 1st April, 1968, overruled the judgment of the Bombay High Court; in the case of CIT v. United General Trust (P) Ltd. . The position which emerges after the decision of the Hon'ble Supreme Court in the case of United General Trust (P) Ltd. referred to supra in that, proportionate management expenses have to be deducted from the gross dividend for purposes of relief admissible under Section 80M. In the case of the assessee, from the statement annexed along with the return, it is seen that the income from dividend shows in the profit and loss account is a figure of Rs. 2,21,77,240 which is the gross dividend without considering any expenditure incurred for earning of the said income. The assessee has claimed deduction under Section 80M with respect to this gross dividend income which is not in accordance with law in view of the decision of the Supreme Court in the case of United General Trust (P) Ltd. (supra). Besides, the income from dividend the assessee also has income from interest, income from sale of shares and other misc. income, the total income being Rs. 10,45,23,890 inclusive of gross dividend income of Rs. 2,21,77,240. Out of this gross income of Rs. 10,45,23,890, the assessee had claimed combined expenses of Rs. 6,88,13,469. In the absence of any data available on record, the first appellate authority was justified in holding that the expenses claimed in the P & L a/c were deemed to have been claimed on a pro-rata basis for earning the income from dividend. The contention of Shri M.L. Garg, the learned Counsel that no commission or remuneration had been paid and no other expenditure had been incurred wholly an exclusively to earn the dividend income and, therefore, the gross income from dividend is also the not income, cannot be accepted because it is not supported by any documentary evidence. Even the reliance by Shri Garg on the decision of the Calcutta High Court in the case of CIT v. United Collieries (supra) is not of much help to the assessee because in that judgment, it is specifically held that deduction under Section 80M is allowable only on the net dividend after taking into account the expenditure, if any, incurred for the purpose of earning such dividend. The contention of the learned Counsel for the assessee that in the case of the assessee corporation, gross dividend income was the net dividend income, cannot be accepted on its fact value because it cannot be presumed that no expenditure whatsoever was incurred, for the purpose of earning a huge dividend income of Rs. 2,21,77,240. In the present case, admittedly in the profit and loss account, the assessee had claimed an expenditure of Rs. 6,88,13,469 against the total income of Rs. 10,45,23,890. This comes to about 60 per cent of the total income. In this view of the matter, we are of the opinion that the learned first appellate authority was justified in estimating the net dividend income at 50 per cent of the gross dividend income as per the guidelines of the Hon'ble Supreme Court in the case of United General Trust Ltd. Accordingly, we uphold the order of the learned CIT(A) in this regard and dismiss the ground taken by the assessee.

86. For asst. yr. 1996-97, the Chandigarh Bench of the Tribunal in ITA No. 539/Chd/2000 also decided the issue against the assessee by following its earlier order or reference for asst. yrs. 1990-91 to 1992-93 but no appeal or reference for the aforementioned assessment years has been filed against the said order to the High Court.

87. It is evident from the order of the Tribunal in assessee's own case that the decision of the Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra) has been relied upon by the Tribunal for arriving at the decision. The another Bench of the Tribunal in the case of Mahavir Spinning Mills Ltd. have referred to the decision of the Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra) and pointed out that the said decision has got to be seen in the context in which it was rendered. The Bench has further recorded a finding of fact that no expenses had been incurred by the assessee to earn dividend income and, therefore, deduction under Section 80M was, permissible on the gross dividend income. The decision of the Tribunal in the case of Mahavir Spinning Mills Ltd. (supra) is inapplicable to the facts of this case insofar as in that case a finding of fact has been recorded by the Tribunal that no expenditure has been incurred by the assessee for earning the dividend income. Moreover, the Bench has not noticed the earlier decision of the Tribunal in assessee's case and, therefore, the said decision is per incuriam. In assessee's case, the Tribunal has recorded a finding of fact for asst. yrs. 1990-91 to 1992-93 (supra) to the effect that the entire expenses incurred by the assessee are also attributable to the earning of the dividend income as such is incidental to carrying on the business of the assessee.

88. Taking the totality of the facts and circumstances of this case into consideration, we hold that in computing the deduction under Section 80M the proportionate expenses incurred by the assessee for earning the business income which includes receipts by way of dividend are to be proportionately deducted for arriving at the net dividend income.

89. Before parting with this issue, we would like to clarify that in this case, it may appear that there is a contradiction in the order insofar as profit derived on sale of shares has been held to be assessable under the head "Capital gains" and for the purpose of deduction under Section BOM, the dividend income earned by the assessee has been held to be incidental to the carrying on the activities of business by the assessee. It is, however, not so. The assessee has made investment in the course of business by purchasing shares of the companies promoted by it. The investment in purchase of shares though for the purpose of business, is a capital investment as the assessee is not dealing in shares. Therefore, when the shares are held for more than the specified period, the profit derived on sale of such shares has been held to be assessable under the head "Capital gains". However, the dividend earned on investment made in the course of business, has been held to be from the source of business as the yield of investment would be on revenue account and not necessarily on capital account.

This observation may be elaborated with an example. We may take a case where the assessee purchases vehicles from a party and provides the same to the seller of the vehicles for use on payment of lease rent.

The investment in vehicles would be capital investment but the lease rent for the exploitation of the vehicle would be a revenue receipt. As and when vehicles are sold by the assessee the gain, if any, on such sale would be assessed as capital gain. In this case, the assessee has purchased shares and such shares not having been treated as stock-in-trade, the profit on the sale of such shares, in our view, is bound to be assessed under the head "Capital gains". This finding, in our humble view, does not contradict our finding that the dividend earned by the assessee is in the course of carrying on of its business.

We have expressed the view that whereas purchase of shares is a capital investment in the course of business, the dividend has been realized in the course of exploitation of the capital asset of the assessee, namely, the investment in shares. We are, therefore, of the view that there is no contradiction in the order, 90. We now proceed to consider the grounds of appeal raised by the assessee as well as by the Revenue in cross-appeals.

91. Ground No. 1 in asst. yr. 1994-95 and ground No. 2 in asst. yr.

1995-96 in assessee's appeal are as under: 1. (i) That the learned CIT(A) was not justified in holding that the amount which is admissible as deduction under Section 36(i)(viii) is to be deducted from the dividend income to arrive at the net dividend income for purpose of deduction under Section 80M. (ii) That income from dividend being income from other sources, the only deductions permissible to arrive at net income, are as specified in Section 57. Deduction under Section 36(l)(viii)which is admissible on total income as computed, is not an expenditure to deduce the net income.

2. (i) That the learned CIT(A) was not justified in holding that the amount which is admissible as deduction under Section 36(i)(viii) is to be deducted from the dividend income to arrive at the net dividend income for purpose of deduction under Section 80M. (ii) That income from dividend being income from other sources, the only deductions permissible to arrive at net income, are as specified in Section 57. Deduction under Section 36(i)(viii) which is admissible on total income as computed, is not an expenditure to reduce the net income.

92. The abovementioned grounds of appeal relate to computation of deduction under Section 80M after deduction under Section 36(i)(viii).

The AO had computed the deduction under Section 80M first determining the net dividend income after apportionment of expenses and further reducing the same by deduction claimed and allowed to the assessee under Section 36(i)(viii). The CIT(A) has upheld the view of the AO that the net dividend computed has got to be further reduced by deduction allowed under Section 36(i)(viii) for the purpose of computation of the amount on each deduction under Section 80M is to be calculated.

93. It has been agreed by the parties before us that the issue is covered in favour of the Revenue by the decision of the Tribunal in assessee's own cases in ITA Nos. 1333/Chd/1994, 944 and 1591/Chd/1995 for asst. yrs. 1990-91 to 1992-93 (supra). The operative portion of the order in para 15.5 is reproduced hereunder: Thus, as per combined reading of Sections 80AA and 80M of the IT Act, the deduction under Section 80M would be admissible with reference to the amount of dividend income computed after allowing deduction under Section 36(1)(viii) of the IT Act. The counsel of the appellant has made reference to the decision of the Tribunal in the case of the appellant itself for the asst. yr. 1980-81 and subsequent assessment years to support the contention that deduction under Section 36(1)(viii) is admissible from total income inclusive of dividend income irrespective of the fact that this is income under the head other sources and further deduction under Section 80M is admissible with reference to the dividend income before allowing deduction under Section 36(l)(viii) of the II' Act; in this regard, reference was made to the assessment records. It appears that the issue whether deduction under Section 36(1)(viii) of the IT Act was admissible from the dividend income came up for consideration in this year for the first time. At the time of framing the assessment the AO held that dividend income was income from other sources, therefore, deduction under Section 36(1)(viii) was not admissible with respect of this income, Therefore, dividend income was excluded for the purpose of allowing deduction under Section 36(1)(viii) and deduction under Section 80K and 80M of the IT Act was thereafter allowed from such dividend income. The issue was decided in favour of the appellant in first appeal. The CIT(A) following the order of the Tribunal, Chandigarh Bench, in the case of Punjab Financial Corporation, held "in consonance with the decision of the Tribunal, cited supra, I am of the opinion that gross total income means the sum total of income computed under various heads of income, for example, income from salary, house property, securities, business, capital gains and other sources after set off of loss. Accordingly, the AO (Asst.) is directed to recomputed the deduction on the basis of the order of the Tribunal, However, at the time of giving effect to this order, applicability of provisions of Section 80AA which had been introduced through Direct Taxes Finance (Pb) Act 1980 was lost sight of. The deduction under Section 80K and 80M was allowed as originally determined, at the time of assessment, the deduction was allowed as claimed because deduction under Section 36(d)(viii) claimed @ 40 per cent had been denied. However, once deduction under Section 36(1)(viii) of the IT Act was held to be allowable, deduction under Section 80M needed reconsideration under the provisions of Section 80AA of the IT Act which does not appear to have been carried on. Thus there is no finding of any appellate authority at any stage that deduction under Section 80M is permissible with reference to dividend in one before allowing deduction under Section 36(1)(viii) of the IT Act irrespective of the fact that the deduction under Section 36(1)(viii) @ 40 per cent is being allowed from the said dividend income. By claiming deduction under Section 36(1)(viii) from the dividend income and again claiming deduction under Section 80M of the IT Act with reference to the dividend income before deducting allowance under Section 36(1)(viii) @ 60 per cent, the appellant is in fact claiming 100 per cent exemption in respect of dividend income which is not permissible under any provisions of the IT Act. From the discussion and reference to the assessment record, it is evident that the finding of the Tribunal is regarding allowing deduction under Section 36(1)(viii) of the IT Act out of dividend income also irrespective of the fact that it is being assessed as income under the head 'Other sources'. This finding stands accepted by the AO as the claim under Section 36(1)(viii) of the IT Act has been allowed and there is no dispute regarding this issue. In this view of the matter, the first ground of appeal is rejected and it is held that the deduction under Section 80M of the IT Act is admissible only with reference to the net dividend income after deducting allowance under Section 36(1)(viii) of the IT Act claimed at the rate of 40 per cent.

94. Respectfully following the order of the Tribunal in assessee's own cases for asst. yrs. 1990-91 to 1992-93 (supra), we uphold the orders of the Revenue authorities in this regard and dismiss the grounds of appeal raised by the assessee.

95. Second ground of appeal in asst. yr. 1994-95 and ground No. 1 in asst. yr. 1997-98 in assessee' appeal are common and are as under: 2. That the learned CIT(A) was further (sic-not) justified in upholding the disallowance of rent of Rs. 3 lacs of guest house expenditure as business expenditure. It is against the order of the Hon'ble Tribunal in earlier years wherein it was held that rent of guest house is an admissible business expenditure.

1. The learned CIT(A) was not justified in upholding the disallowance of guest house rent amounting to Rs. 2,27,700. The issue stands decided by the Hon'ble Tribunal in favour of the assessee in earlier year.

96. The abovementioned grounds relate to the disallowance of guest house rent, etc. The parties agreed before us that the issue is covered in favour of the Revenue by the decision of the Special Bench in the case of Eicher Tiactors Ltd. v. Dy. CIT . Respectfully following the aforementioned decision of the Special Bench, we uphold the disallowance and dismiss the common grounds of appeal raised by the assessee in this regard.

97. First ground of appeal in asst. yr. 1995-96 and second ground of appeal in asst. yr. 1997-98 are common and are as under: 1. That the learned CIT(A) was not justified in holding that an amount of Rs. 2 lacs be deducted on estimate basis on account of administrative expenses to arrive at this net dividend income for purpose of deduction under Section 80M. There is no scope for estimating any expenditure under Section 57, and the expenditure ordered to be deducted do not fall under Section 57.

2. That the learned CIT(A) was further not justified in holding that an amount of Rs. 3 lacs on estimate be deducted from dividend income to allow deduction under Section 80M. The gross dividend received by the assessee is the net dividend income as no expenses as provided under Section 57 have been incurred to earn the dividend.

98. The abovementioned grounds of appeal relate to computation of deduction under Section 80M. The CIT(A) has estimated the expenses attributable to the earning of dividend income at Rs. 2 lacs for asst.

yr. 1995-96 and Rs. 3 lacs for asst. yr. 1997-98. There are cross grounds of appeal raised by the Revenue in regard to computation of deduction under Section 80M. Such grounds are ground No. 2 in asst. yr.

1994-95, ground No. 3 in asst. yr. 1995-96 and ground No. 5 in asst.

yr. 1997-98. For asst, yr. 1996-97, the Revenue has raised the issue in ground No. 5. These grounds of appeal are reproduced hereunder for the sake of ready reference: 3. The learned CIT(A) has also erred in allowing relief out of the addition made by the AO by restricting the claim under Section 80M to Rs. 1,12,10,100 against Rs. 2,66,90,728 claimed by the assessee.

3. The learned CIT(A) has further erred in directing the AO to allow the deduction under Section 80M. 5. Learned CIT(A) has erred in directing AO to allow the deduction under Section 80M of the Act after deducting expenditure, if any, incurred by the assessee under Section 57 of the Act and the administrative expenses estimated at Rs. 3 lacs.

5. Learned CIT(A) has also erred in directing AO to allow the deduction under Section 80M of the Act after deducting expenditure, if any, incurred by the assessee and the administrative expenses estimated of Rs. 3 lakhs as against expenses @ 95.24 per cent of the earnings worked put by the AO.99. We have elaborately discussed that deduction under Section 80M is permissible to the assessee in respect of the net income and since in this case the dividend earned by the assessee is in the course of the business, the expenses incurred for the purpose of business income have got to be apportioned between the business receipts including dividend proportionately. In asst. yrs. 1990-91 to 1992-93 the Tribunal has considered 50 per cent of the gross dividend income as expenses attributable to the earning of the dividend income. Whereas the AO has estimated the expenditure on higher rate than 50 per cent adopted by the Tribunal, the CIT(A) has resorted to ad hoc estimation. We taking into account the totality of the facts and circumstances of this case consider the estimate made by the Tribunal at 50 per cent of the gross dividend as reasonable. We accordingly direct the AO to compute the deduction under Section 80M by deducting 50 per cent of the gross dividend on account of expenses attributable to the earning of such dividend income. The orders of the CIT(A) and those of the AO for the respective assessment years are modified accordingly.

100. Now we deal with the remaining grounds of appeal of the Revenue.

Ground No. 1 in asst. yr. 1994-95, ground No. 1 in asst. yr. 1995-96, ground No. 2 in asst. yr. 1996-97 and ground No. 2 in asst. yr. 1997-98 relate to deduction on account of project survey expenses. These grounds of appeal are reproduced hereunder for the sake of ready reference: 1. On the facts and circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 2,03,574 made on account of project survey expenses.

1. On the facts and circumstances of the case, the learned CIT(A) Chandigarh has erred in deleting the addition of Rs. 9,23,404 rightly made by the AO treating it as capital expenditure.

2. Learned CIT(A) erred in deleting the addition of Rs. 5,22,435 made on account of project survey expenses, by holding the same in the nature of revenue expenditure.

2. Learned CIT(A) has erred in deleting the addition of Rs. 1,73,273 made on account of Project Survey expenses being capital expenditure. Learned CIT(A) has erred in holding the same in the nature of revenue expenditure.

101. The AO had treated these expenses as of capital nature. The CIT(A) decided the issue in favour of the assessee. Parties have agreed before us that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee's own case for asst. yrs. 1990-91 to 1992-93 (supra). The issue has been dealt in para Nos. 5 and 6 of the order. Since the facts are identical, we adopt the reasoning given by the Tribunal in the aforementioned decisions to uphold the order of the CIT(A) in this regard: 5. We have considered the rival submissions and have also gone through the orders passed by the AO as well as the learned CIT(A).

The assessee corporation is a wholly owned Government company of the Punjab Government and is inter alia, engaged in the business of promoting and operating scheme for the industrial development of Punjab. In the course of its business activities, the assessee gets projects report and feasibility studies prepared by qualified persons and incur expenditure over them. Upto the asst. yr. 1989-90, such expenditure was claimed as revenue expenditure and was allowed as such by the AO however, for the asst. yr. 1990-91, the AO held it to be "capital expenditure". On appeal, the CIT(A) treated the expenditure of revenue nature but held that the assessee ought to have shown the value of unsold project reports/feasibility study reports as stock-in-trade to arrive at the correct profits. The learned first appellate authority before whom the decision of the Karnataka High Court referred to supra was cited, observed that the full facts of the case were not discussed in the judgment cited and there was no discussion as to part of the closing stock of the assessee corporation or not. The question which we have to decide is as to whether the expenditure amounting to Rs. 8,34,427 incurred by the assessee in the assessment under consideration is a revenue expenditure or a capital expenditure. The learned first appellate authority has held it to be revenue expenditure and that decision is in accordance with the ratio of the decision of the Karnataka High Court referred to supra. However, the learned first appellate authority has sustained the addition to the extent of Rs. 7,47,078 on the ground that the assessee had not accounted for the valuation of these project/feasibility reports in the closing stock as according to her the assessee itself had pleaded that the project/feasibility reports generated by the assessee were stock-in-trade. The Hon'ble Supreme Court in the case of Kedamath Jute Mfg. Co. v. CIT has held that "whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might have taken of his rights; nor can the existence or absence of entries in his book of account be decisive or conclusive in the matter". Therefore merely because the assessee had pleaded that the preparation of project reports/feasibility reports would result into stock-in-trade, would not change the exact nature of the expenditure debited in relation thereto. The issue is squarely covered by the decision of the Karnataka High Court in the case of Kamataka State Industrial & Investment Development Corporation (supra) and as such the Departmental authorities ought to have allowed the entire expenditure debited under this head as a revenue expenditure.

6. Before parting with the matter, we may mention that even if the contention of the first appellate authority that the expenditure on the preparation of project/feasibility reports resulted into stock-in-trade, then the adjustment has to be given for the cost of the reports which were available with the assessee corporation as on 1st April, 1989 about which no date is available and whatever is the valuation of the closing stock debited will have to be taken as the opening stock of the subsequent assessment year. Since the assessment is a wholly owned company of the Punjab Government and the rate of tax is almost the same is the case of a company, there is hardly any purpose in disturbing the treatment being claimed and allowed by the AO in relation to expenditure on preparation of project/feasibility reports upto asst. yr. 1989-90 which was to treat the expenditure as of revenue nature Accordingly, the addition of Rs. 7,47,078 sustained by the CIT(A) is directed to be deleted.

102. Another common issue involved in the appeals of the Revenue is relating to assessing the profit on sale of shares under the head "Capital gains". The Revenue has raised the ground of appeal in this regard in ground No. 2 in asst. yr. 1994-95 ground No. 2 in asst. yr.

1995-96 and ground No. 1 in asst. yr. 1996-97 and ground No. 1 in asst.

yr. 1997-98. These grounds are reproduced hereunder for the sake of ready reference: 2. The learned CIT(A) has further erred in deleting the addition of Rs. 28,88,58,740 made on account of sale of shares and directing the AO to assess it under the head 'Capital gain'.

2. The CIT(A) has erred in deleting the addition of Rs. 12,10,97,295 rightly made by AO by treating the profit on sale of shares as business income.

1. On the facts and circumstances of the case, the learned CIT(A) in appeal No. 538/P/1998-99 has erred in deleting the addition of Rs. 3,52,52,583 made on account of business income from sale of shares, by holding that the income arising on the sale of shares is to be assessed under the head 'Capital gains' and not business income.

1. On the facts and circumstances of the case, the learned CIT(A), Chandigarh in appeal No. 427/P/1999-2000 has erred in deleting the addition of Rs. 14,55,55,035 which was made by treating the profit on sale of investment as business income as against long-term capital gain of Rs. 7,08,03,637 shown by the assessee.

103. This, issue is also covered in favour of the assessee by the order of Tribunal for asst. yrs. 1990-91 to 1992-93 (supra). The operative portion is in para 11 of the order which is hereby adopted and reproduced hereunder: 11. We have carefully considered the rival submissions and have gone through the orders of the AO as well as the learned CIT(A). As per the Industrial policy of the Punjab Government, the assessee-corporation was to act as a catalyst for establishment of new industrial projects in the State of Punjab, the assessee corporation was to act as a catalyst for establishment of new Industrial Project in the state of Punjab by acting as promoters/collaborators along with other industrial entrepreneurs.

At the time of the start of the project, the assessee corporation makes investment and when the production in the projects reaches upto a certain level where after the projects become self-sufficient, it disinvests those holdings in that project by selling it to the other promoter with a view to realize funds for investments in other projects. Thus basically the investment in shares of companies which were jointly promoted by the assessee along with other industrial undertakings is in the nature of an investment and any profit/gain earned by the assessee on the realization of such an investment is liable to tax under the head 'Capital gains' and this position has all along been accepted even by the Departmental authorities upto the asst. yr. 1989-90.

Accordingly, we hold that the profit and gain realized by the assessee on account of disinvestment of shares is liable to tax as capital gams. As such the assessee is entitled to deduction under Section 48(2).

104. Ground No. 4 in asst. yr. 1994-95 raised by the Revenue is as under: 4. The learned CIT(A) has also erred in directing the AO to afford opportunity to the assessee to create further reserve for claiming deduction under Section 36(1)(viii).

105. This issue is also covered in favour of the assessee by the decision of the Tribunal in assessee's own case in ITA Nos. 1319 and 1318/Chd/1987 and ITA No. 527/Chd/1999 for asst. yr. 1984-85, 1982-83 and 1983-84. Since the decision of the CIT(A) is in conformity with the decision of the Tribunal in assessee's own case for earlier years, we find no justification to interfere.

106. Ground No. 3 in asst. yr. 1996-97 of the appeal of the Revenue is as under: 3. Learned CIT(A) erred in deleting the disallowance of Rs. 7,77,594 made on account of expenditure under the head 'Business promotion expenses'.

107. The AO had treated the expenditure as capital expenditure. The CIT(A) has given details of the expenditure in para 4.3 of his order as under: 4.3 The submissions made by the appellant have been considered carefully and I have also gone through the details of the expenses which are as under:(i) Conference on Chandigarh Gateway to golden opportunities of 73,217.00business in Punjab headed by Chief Minister of Punjab.(ii) Meeting of Senior Executives of Financial Institutions along 69,03.08with Chief Minister and DCMD to promote the industry m Punjab(iii) Meeting of Company and other Officers with Ambassadors of 5,258.00Latin American Countries to Promote Trade and Co-operationbetween their countries and The State of Punjab(iv) Air ticket of CM and other officers for meeting with investors 76,940.00in Bombay(v) Printing of new diaries 90,620.00(vi) National Seminal Dynamics of Rural Transformation in India, 10,000.00held at Punjab University on developmental topics,(vii) PSIDC share towards Hall reserved for Dl for Display of 35,313.00products in Exhibition & Literature in a trade show by CIIon Good Health held at Udyog Sahayak, Chandigarh(viii) Paid to M/s Hindustan Thompson Associates Pvt. Ltd. for 3,63,000.00designing, preparing network, photography charges, TP wiringand printing of corporate brochuies of PSIDC in 3000 no's forinfrastructure development of the corpn.(ix) Lunch to dignitaries in Hotel Mountview.

8,318.00(x) Air tickets of Chief Minister H.S. Brar & others for visit to 32,658.00Bombay,(xi) Presentation with slide projector at Punjab Bhawan, 1,116.00Chandigarh on activities of PSIDC.(xii) Captioned Exhibition organized By CII at Hotel Taj Palace, 3,098.00New Delhi, for rendering all assistance to PSIDC's stall,(xiii) Chief Secretary meeting with officers of Industries Deptt.9,020.00 On going through these expenses, it is seen that these expenses have been basically incurred for promotion of business and for attracting or inviting industrial participation from outside State and are incidental to the business of the appellant corporation.

Accordingly, the impugned addition is ordered to be deleted and the appellant gets a relief of Rs. 7,77,594.

108. Considering the nature of the expenses and the business of the assessee, the CIT(A) has held that the expenditure has been incurred for promotion of the business of the assessee and for attracting/inviting industrial participation from outside the State. We are in agreement with the finding of the CIT(A) and, therefore, find no justification to interfere. The ground raised by the Revenue is accordingly dismissed.

109. Ground No. 3 in asst. yr. 1997-98 of the appeal of the Revenue is as under: 3. Learned CIT(A) has erred in deleting the disallowance of Rs. 82,168 made on account of expenditure under the head "Udyog Sahayak Expenses". Learned CIT(A) has erred in holding this expenditure of revenue nature.

110. The relevant facts relating to this issue are that the assessee had incurred expenditure as a contributor for running a cell "Udyog Sahayak" for providing assistance/guidance to entrepreneurs for setting up of industries in the State of Punjab. During the year total expenditure on running the cell amounted to Rs. 4,93,010. The assessee had to contribute 30 per cent which works out to Rs. 82,168. The AO treated this expenditure as of capital nature. The CIT(A) considering the facts that one of the objective of the corporation was to industrialise the State of Punjab and that the expenditure had been incurred by the assessee for furtherance of business and for industrialization of the State held the expenditure as of revenue nature. The CIT(A) has also relied upon the decision of the Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. v. CIT andCIT v. Sales Magnesite (P) Ltd. 111. In our considered view, there is no infirmity in the order of the CIT(A) insofar as the expenditure has been incurred by the assessee for furtherance of its objective of industrialization of the State of Punjab. The AO had wrongly treated this expenditure of capital nature.

We accordingly decline to interfere.

112. Ground No. 4. in the appeal of the Revenue for asst. yr. 1997-98 reads as under: 4. Learned CIT(A) has erred in deleting the disallowance of Rs. 1,59,312 made on account of staff welfare expenses.

113. The relevant facts relating to this issue are that the assessee had debited a sum of Rs. 1,37,330 on account of gifts to employees and a sum of Rs. 21,982 on account of providing dinner for a farewell party. The AO disallowed the claim. The CIT(A) considered that the gifts made to the employees of the value of less than 1,000 had been incurred due to commercial expediency to keep the employees happy and satisfied. The expenditure of Rs. 21,982 on account of dinner for farewell party has also been considered to have been incurred for the purpose of business. The CIT(A) has also relied upon the decision of the Supreme Court in the case of Shahzada Nand & Sons v. CIT , the relevant portion of the order is reproduced as under: Commercial expediency must be tested in the context of current socio-economic thinking-commercial expediency must be judged not in the light of the 19th Century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc. a part of it should in all fairness go to the employees.

114. The findings of facts recorded by the CIT(A) have not been controverted before us much less rebutted by any evidence. Since the expenditure has been incurred by the assessee purely on commercial consideration, the CIT(A) was justified in deleting the addition. We accordingly, decline to interfere.

115. In the result, the appeals of the Revenue as well as appeals of the assessee are partly allowed.

1. At the very outset, I apologies for the delay in disposal of these appeals. These were first heard by the Special Bench on 24th May, 2005 and my learned Brother Shri M.A. Bakshi, the Hon'ble Vice President, Chandigarh Zone had agreed to propose an order on behalf of the Bench.

The said order was accordingly proposed. I had reservation on the view taken in the proposed order and felt need to have further discussion with other Hon'ble Members of this Bench. The discussion was only possible during my camps at Chandigarh. It emerged in the course of discussion that my Brother Shri M.A. Bakshi, the Hon'ble Vice President had strong views about his approach in the case. But all the same, he agreed to consider my points of view. Accordingly, I had prepared a written note for consideration of the learned Members of the Bench. The said note was duly discussed and after discussion, it was thought appropriate by the Bench to allow further hearing to the parties as considerable time had elapsed between the last hearing of case and disposal of the matter.

2. Accordingly, a fresh hearing was granted to the parties on 6th March, 2006 and certain doubts were got clarified from learned representatives of the parties. The matter was again discussed.

However, no consensus could be reached and accordingly my brother Shri Bakshi, the Hon'ble Vice President has sent a signed proposed order for consideration of other Members.

3. I have very carefully gone through the order proposed and sent on 24th March, 2006 by my learned Brother Shri Bakshi, the Hon'ble Vice President but regret my ability to agree with the conclusion reached by the learned Brother.

4. The short question involved before us relates to computation of deduction under Section 80M of the IT Act. It is the contention of the assessee that only actual expenditure incurred in realizing or in earning dividend income deductible under Section 57 and 58 of IT Act are to be deducted and not proportionate administrative or interest expenditure. The assessee did not incur any expenditure and, therefore, deduction under Section 80M be allowed on the gross amount of dividend.

There is no dispute that last year this issue was decided against the assessee and sail! matter is pending before the Hon'ble High Court. In some earlier year the issue was decided in favour of the assessee. In the light of decisions of different High Courts and the Tribunals and other important circumstances, a Special Bench was constituted to hear the matter.

5. The facts of the case are noted in the proposed order of my learned Brother and I deem it unnecessary to reproduce them in detail. Relevant statutory provisions and case law have also been noted and cited in detail. I would have to make a brief reference to what my learned Brother has observed in the proposed order and also record my reasons for not agreeing with him. This is an unpleasant duty I will have to perform.

On consideration of proposed order of my Brother, I have no problem in agreeing with him in what is stated upto p. 12 of the proposed order.

On p. 13 in para 23, my learned Brother has drawn legal inferences. I am unable to agree with the following general observations made at p.

13 of the order. These are against the scheme of the IT Act. For instance Section 29 in case of business income.

It may be pertinent to mention that certain deductions which may not be provided specifically under various provisions of the Act can also be deducted in computing the net income from a particular source, if deduction of such expenditure is necessary to ascertain the true income.

My learned Brother has stated at p. 13 that he would deal with this aspect of the matter at a later stage. He has stated that deduction under the head "Income from other sources" are specifically provided under Section 57 and as per Clause (iii) of said section, any expenditure laid out or expended wholly and exclusively for purposes of making or earning of income is deductible. He, thereafter quotes from the decision of the Hon'ble Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. v. CIT and emphasized that as per the above decision, connection between expenditure and earning of income need not be direct and it may be indirect. My Brother further quotes," but expenditure must have been incurred for purpose of that income and, there should be some nexus between expenditure and the earning of income." It is further quoted that expenditure in the said case was not held to be deductible under Section 57 as interest had accrued sui generis and expenses were not incurred with the object or for purpose of earning the income and were not deductible.

The learned Vice President thereafter quotes the following from decision of Hon'ble Supreme Count in the case of Seth R. Dalmia v. CIT as under: ...deduction which is permissible under Sub-section (2) of Section 12 is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax and the dominant purpose of the expenditure incurred must be to earn income. It was further held that the connection between the expenditure and the earning of income need not be direct and even an indirect connection could prove the nexus between the expenditure incurred and the income....

...It is obvious that if the assessee would not have paid the interest on the loan raised by him he would not have been able to get the dividend income.

Thereafter reference is also made to decision of Supreme Court in the case of CIT v. Rajendra Prasad Moody where deduction of interest was allowed although investment in shares did not yield any income under the head "Income from other sources".

6. In my humble opinion, the law as per aforesaid decisions and Section 57(iii) is clear that expenditure to be allowed for deduction under the head "Other sources" must be incurred for purposes of making or earning such income. It should be incurred with object or purpose of earning income. There should be nexus between expenditure and income although such nexus may not be a direct one. There can possibly be no exception to this well settled law.

Thereafter at p. 16, the Hon'ble Vice President has posed the following question: 28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources.

7. Again the learned Brother refers to decision of Vijaya Laxmi Sugar Mills Ltd. (supra) where expenses incurred by Liquidator on salary and other expenses were not allowed out of income earned by way of interest, for the reasons that these expenses had no connection with receipt. The learned Vice President, thereafter refers to decision of Hon'ble Madras High Court in the case of CIT v. Official Liquidator Pilot Pen Co. (P) Ltd. (2002) 253 ITR 533 (Mad), wherein the question was whether security charges in respect of land and building could be set off against "other income" (there was no income from the said source of land and factory on which expenditure were incurred). Their Lordships treated the question as fully covered by decision of Hon'ble Madras High Court in the case of CIT v. Gannon Dunkarlay & Co. (P) Ltd. (1999) 152 CTR (Mad) 106 : (2000) 243LTR 646 (Mad) and allowed the expenses.

In the case of CIT v. Gannon Dunkerlay & Co. (supra), the official Liquidator in the case of winding up of company, had claimed certain expenditure against interest income. The deduction was allowed with the following observations: Held, that the expenditure was incurred in the performance of his duties by the official liquidator and the nature of the expenditure clearly showed that the expenditure was incurred to protect and preserve the assets. The finding of the Tribunal in the instant case was that the expenditure was incurred to maintain the infrastructure for earning or making interest income and without incurring expenditure, it would not have been possible to earn income by way of interest. The finding of the Tribunal clearly showed that there was a nexus between the expenditure and the interest income earned and that finding regarding the nexus was a finding of fact. The Tribunal was correct in holding that the entire expenditure incurred by the assessee was deductible under the provisions of Section 57(iii).

In the above case, their Lordships of Hon'ble Madras High Court distinguished decision of Hon'ble Supreme Court in Vijaya Laxmi Sugar Mills Ltd. (supra) by observing that in the case before them, expenses were found to be incurred to preserve the assets and to maintain source which yielded the income. Expenses were incurred for purposes of earning income and there was nexus between expenditure incurred and interest earned by official liquidator. Their Lordships referred to the decision of Supreme Court in the above case and gave the following basis for permitting deduction of expenses: According to the Supreme Court, the expenditure claimed under Section 57(iii) of the Act was not allowed because there is not even some sort of evidence to show that the expenses incurred by the liquidator were to facilitate the earning of or at least for preserving the estate. In the abovesaid decision, the Supreme Court held that if any expenditure were incurred like commission for collection or such similar expenditure, it may be considered as spent solely for the purpose of earning that income, the position may be different.

8. Thereafter some more decisions are noted at the end of p. 16 of the proposed order and reference is made to Section 58 of IT Act which admittedly has no application in the present case. The principle laid down in the case of Vijaya Laxmi Sugar Mills (supra) or case of Seth R.Dalmia (supra) are correctly noted but thereafter in para 32, my learned Brother has observed as under: 32. It hardly; needs to be emphasized that the tax is on "income" and certain expenditure even if it does not fall within the specified deductions would be deductible in computing the net income.

9. With greatest respect, I do not see any nexus between the legal inference drawn and cases quoted and referred to above. The decisions of Supreme Court and Madras High Court have reiterated a settled proposition that for purposes of deduction under the head "Other sources"; expenses must have nexus to the earning of income and should have been spent with the object of making or earning such income. The discussion on above lines leaves no scope to draw a general inference that expenditure, even if it is not specified in the statute, would be deductible for computing income. In my humble opinion to accept the general proposition de hors of facts of a given case is not possible.

10. The learned Vice President has also discussed concept of income.

There is no dispute that total income (after deducting expenditure) computed in accordance with provisions of the IT Act is to be charged to tax.

11. The learned Vice President has referred to the cases of Probhat Chandra Barua v. Emperor 5 TTC 1 and CIT v. Raja Sri Sri Kalyani Prasad Deo (1945) 13 ITR 17 (Bom).

In the first case of Probhat Chandra Barua (supra), their Lordships of Privy Council observed as under: At p. 240 his Lordship observed : "Their Lordships were unable to ascertain upon what footing the appellant had been assessed in respect of the income derived from his zemindari, i.e., whether on the gross income or after some allowance had been made in respect of the jama assessed and paid upon the lands. Their Lordships are of opinion that, in assessing the appellant to income-tax in respect of the income derived from the zamindari, his income, profits and gains from that source should be computed after making proper allowance in respect of the jama assessed and paid.

The assessee is sought to be assessed in respect of the non-agricultural income derived from the coal fields which are situated within his zamindari. The assessee is, therefore, entitled to claim a deduction for the jama which should be ascertained as paid by him for the lands in his zemindari which produced him the royalties, otherwise the tax would not be upon "income, profits and gains" but on his gross receipts.

12. The aforesaid principles were applied in the case of Raja Sri Sri Kalyani Prasad Deo (supra) alter rejecting the contention of the Revenue that there was no provision to allow deduction of expenses claimed, with reference to provision of Section 12(2) providing for deduction of expenses incurred for purposes of making or earning such income.

13. It is evident from above that their Lordships while deciding above cases had principle in mind that tax has to be upon "income, profits and gains and not on gross receipt." In my considered opinion, no different proposition than one laid down by their Lordship in the case of Vijay Laxmi Sugar Mills Ltd. (supra) and Seth R. Dalmia (supra) was laid down by Privy Council in the above mentioned cases.

14. There is reference to certain cases allowing establishment expenses to the assessee to keep alive the earning of income assessable under "other sources". Establishment expenses incurred for purposes of earning income from other sources were allowed as they had necessary nexus with earning of income. This is the proposition laid down by all the decisions referred to above and there can be no problem in agreeing with the above proposition. In all these cases, expenditure were allowed under the head "Other sources" as expenses were incurred for purposes of earning or making income assessed under the head "Other sources". Expenses were allowed in above cases under a specific provision of the statute.

15. In para 36, there is reference to certain precedents relating to income assessable under the head "Profits and gains of business" and as to what is the procedure laid down for the determination of business income. In the following para, reference is made to large number of decisions including decisions of Supreme Court in the case of CIT v.S.C. Kothari and to case of Godhra Electricity Co.

Ltd. v. CIT , the case of Escorts Ltd. v. Union of India and the proposition laid down in the aforesaid decisions. My learned Brother at p. 19 of the order has drawn the following inference: It would be unreasonable to presume that the legislature intended to give relief to the assessee under Section 80M in excess of the tax that would otherwise be chargeable on dividend income in the hands of the recipient of such income. It is, therefore, in our view, necessary to determine the net component of dividends included in the gross total income on which deduction under Section 80M is permissible to the assessee.

There can be no dispute on above proposition as similar observations have been made in the decision of Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors.

.

16.1 further agree with the proposition that dividend although assessable under the head, "Income from other sources" may nevertheless be treated as "business income". But I can agree with my learned Brother to the above extent only. I am unable to share my learned Brother's views that for purposes of computation of deduction under Section 80M, it is necessary to trace out the source of income of dividend. I am not sure with reference to which decision or statutory provisions, above observations have been made. I am also further unable to agree that in some cases, the earning of dividend may be in the course of carrying on the business or may be incidental to business.

17. In my humble opinion, shares may be held by an assessee as a capital investment or as stock-in-trade. Nature of holding of shares in the hands of an assessee is material. It may be business or capital investment depending upon large number of factors chiefly the intention of the assessee. However, once nature of shareholding is accepted or known, no further test is required to be applied for determining nature of dividend income. If holding of shares is business (stock-in-trade), then dividend earned is business income, although required to be taken under the head "Other sources" for computation of income. If shares are held as a capital investment, the dividend cannot be treated as business income. There is no question of holding that dividend was acquired in the course of the business or it is related to business activity. The reason being that dividend is distributed or allowed on account of ownership or holding of shares. It is an income which is incidental to the holding. It is "sui generis". No separate efforts need be made to earn dividend income apart from efforts to acquire shares. Therefore, only nature of shareholding in the hands of assessee is required to be determined to find out nature of dividend income. At any rate, in my humble view, this issue is not very material for resolving the controversy involved before us.

18. There is then discussion of heads of income and sources of income.

Reference is made to classification of income under Section 14 of the IT Act and decisions of Supreme Court in the case of Brook Bond & Co.

Ltd. v. CIT , in case of CIT v. Cocanada Radhaswami Bank Ltd. , United Commercial Bank Ltd. v. CIT dividend income in certain circumstances can be taken as business income although for computation, it is assessed under the head "Other sources", But this will depend upon facts and circumstances of the case and statutory provisions under consideration.

19. After analysis of different cases, the following propositions are laid down by my learned Brother, the Hon'ble Vice President: 52. On analysis of above decisions, following principles of law emerge: (1) That deduction under Section 80M is permissible on the net dividend income computed in accordance with the provisions of the Act and included in the gross total income.

(ii) That for determination of net dividend income included in the gross total income, it is necessary to trace the 'source of dividend income' notwithstanding the fact that it is assessable under the head 'Income from other sources'.

(iii) That computation of dividend income in accordance with Act does not restrict the scope of computation to Sections 56 to 59 of the Act. That the real component of dividend income included m the gross total income shall have to be computed in accordance with the Act and established principles of accounting.

(iv) The nature of dividend income may vary from case to case. In some cases, the dividend earned by the assessee may be on investments made in the domestic company(s) de hors any business considerations (we will hereafter refer to this category as category 'A'). In some cases, the earning of dividend may be in the course of business activities of the assessee or may be incidental to the business of the assessee (we will hereafter refer to this category as category 'B'). The computation of net income m the case of category 'A ' cases and category 'B' cases will vary.

20. After careful consideration, I accept principle (i) above but am unable to subscribe to the principles (ii) to (iv) laid down by my learned Brother, the Hon'ble Vice President. None of the cited authorities mentioned or discussed above have laid down these principles. It is one thing to say that dividend income, although taken for computation under the head "Other sources" is business income for certain specific purposes but a totally different proposition to say that for determining net income included in the gross total income on account of dividend, it is necessary to trace the source of the dividend for purposes of Section 80M of the IT Act. I have not been able to find any legal justification for above view in the proposed order of my learned Brother. This I say with all the respect for my learned Brother. The other proposition "for computation of dividend income in accordance with the Act" one need not restrict for deduction to Sections 56 to 59 of the Act, also does not follow from any decision. In fact I find that my learned Brother has himself emphasized that it is necessary to establish nexus between expenditure and earning and making of income. The expenditure must be incurred for purposes of earning income. The aforesaid proposition is well settled and based upon interpretation of Section 57 of the IT Act I find, it difficult to accept that computation of dividend income is not to be restricted to Sections 56 to 59 of the Act, The nature of dividend income vary from case to case depending upon nature of holding as discussed above and not on any other consideration.

21. My learned Brother has referred to cases in categories 'A' and 'Br.

My learned Brother, Hon'ble Vice President has put in category 'A' cases where proportionate management expenses are not to be deducted while computing deduction under Section 80M of the IT Act. According to him, the view is supported by the following decisions: (ii) Shaw Wallace & Co. Ltd. v. Dy. CIT (2001) 71 TTJ (Cal) 478 : (2002) 80 ITD 156 (Cal); (v) Usha Martin Industries Ltd. v. Dy. CIT (2003) 79 TTJ (Kol) 23 : (2003) 86 ITD 261 (Kol) at p. 273;CIT v. Jai Hind Investment Industries (P) Ltd. , It has been observed that expenses in above category of cases are unrelated to earning of dividend income and, therefore, not deductible.

One cannot challenge above legal proposition and, therefore, I do not make any further comments on view expressed by my learned Brother in 'A' category cases.

It has been observed that as per decision of Supreme Court in the case of Badridas Daga v. CIT , expenditure on embezzlement were allowed in computing income from business notwithstanding the fact that there is no specific provision for allowance of deduction of such expenses. On the basis of above and other authorities, my learned Brother has concluded that expenditure even while computing income from other sources can be allowed although not specified in Sections 57 to 59 of the IT Act and above expenses can also be taken into account while computing deduction under Section 80M of the IT Act. I am unable to subscribe to the above view.

22. In the case of Badridas Daga (supra), the question of law referred to the Court was as under: Whether the said sum of Rs. 2,02,442-13-9 being part of the amount embezzled by the assessee's munim is allowable as a deduction under the Indian IT Act either under Section 10(1) or under the general principles of determining the profit and loss of the assessee or Section 10(2)(xv)? In the result, we are of opinion that the loss sustained by the appellant as a result of misappropriation by Chandratan is one which is incidental to the carrying on of his business, and that it should, therefore, be deducted in computing the profits under Section 10(1) of the Act. In this view, the order of the lower Court must be set aside and the reference answered in the affirmative. The appellant will get his costs of this appeal and of the reference in the Court below. Appeal allowed.

It is clear from above that deduction has been allowed as loss incidental to the carrying of business under a specific provision relating to computation of profits and gain of business.

23. In fact principle relating to deduction under the head "Business" cannot be universally applied to deduction permissible under the head "Other sources". In the case of CIT v. Malayalam Plantations Ltd. , their Lordship of Supreme Court held that expression "for purposes of business" is wider in scope than the expression "for purposes of earning profit". It was held that the expression "for the purpose of business" may take in not only the day-to-day running of the business, but also the rationalization of its administration and modernization of its machinery. It may include measures for the preservation of the business and for the protection of its assets. It was further held that the purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.

24. My learned Brother has then put certain cases in category 'B' where according to him dividend is earned in the course of carrying on business or is incidental to business activities of the assessee.

Dividend is incidental income and may be "business income" if shares are held as stock-in-trade but it is not possible to accept that dividend can be earned "in the course of carrying on of business". The assessee may be a dealer in shares and thus carry business in shares and in that case dividend as incidental income would be business income. I have already said about this proposition in the earlier part and need not elaborate further on the point.

25. In order to hold that proportionate management and other expenses can be deducted either under Section 57 or otherwise my learned Brother has referred to and relied upon the decision of Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. . My learned Brother has also reproduced decision of Bombay High Court in the above case holding that question as framed was not arising out of the order of the Tribunal. Since only question which was considered by the Tribunal was whether deduction under Section 80M of the IT Act was to be computed with reference to gross dividend income without deducting therefrom the proportionate management expenses. The Tribunal relying upon decision of Bombay High Court held that relief was to be allowed with reference to gross dividend income. My Brother has held that question was answered in favour of the Revenue and said decision relating to deduction of proportionate management expenses is binding upon any authority working under its jurisdiction. He has also observed that question of deduction of proportionate expenses was not considered by the Supreme Court in detail. However, he has quoted decision of Hon'ble Supreme Court in the case of Kunhayammed and Ors. v. State of Kerala and Anr. to emphasize that even if decision of Supreme Court is short or non-speaking, it would have binding effect.

26. The decision of Supreme Court in the ease of United General Trust (P) Ltd. (supra) has been given on a concession, hut without entering into any sort of controversy and without entertaining any doubt about the binding nature of the decision of the Hon'ble Supreme Court, one must see as to what is the proposition laid down by the Supreme Court which is binding under Article 141 of the Constitution. The question referred to the Hon'ble Court is reproduced in the decision of Hon'ble Bombay High Court and is as under: Whether, on the facts and in the circumstances of the case, and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT v. New Great Insurance Co. Ltd. to the assessment year in question without considering the effect of the amendment operative from 1st April, 1968, and in thus holding that the assessee would be entitled to the deduction under Section 80M on the gross dividend before deduction of the proportionate management expenses? As already stated the Tribunal held that deduction under Section 80M was to be allowed on gross dividend in line with the decision of Hon'ble Bombay High Court in the case of CIT v. New Great Insurance Co.

Ltd. . The aforesaid decision was challenged by the Revenue on the ground that above view could not be taken in the light of amendment in the Act made w.e.f 1st April, 1968. The Hon'ble High Court answered the question against the Revenue but that view was contrary to the decision of Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India (supra) and also contrary to the amendment made by Finance (No. 2) Act, 1998 with retrospective effect from 1st April, 1968. It is so held by the Supreme Court. So the decision of the Tribunal and High Court are reversed for above reasons.

This is the proposition of law laid down by Hon'ble Supreme Court which is binding on all authorities. The portion of the referred question underlined by my learned Brother is consequential. The said question relating to deduction of proportionate management expenses under Section 80M was neither considered nor decided by the Tribunal in the light of the view that deduction was to be allowed on gross dividend, a legal view which was reversed. As per the settled law, the said question of deduction of proportionate expenses was required to be decided by the Tribunal on taking up the matter after receiving answer to the question referred to the Court. As the question was not considered and decided by the Tribunal, the question of answering said question or laying down any legal proposition relating to same did not arise. At any rate, the Bench of apex Court has not laid down any proposition beyond what was laid by Constitutional Bench in the case of Distributors (Baroda) (P) Ltd. (supra). A reference to aforesaid decision would be made a little later.

27. My learned Brother has also drawn support from the decision of Hon'ble Supreme Court in the case of Sabarkantha Zilla Kharid Vechan Sangh Ltd. v. CIT for the proposition that expenses can be apportioned in case of claim of indivisible expenses.

In the aforesaid case, the Supreme Court has followed the case of Distributors (Baroda) (P) Ltd. (supra). Further the decision has been given on peculiar facts of the case and on interpretation of Section 80-I, Sections 66 and 110 of IT Act. Further the decision pertains to business income. There can be no dispute that where there is no prohibition under the statute and accounts are mixed for business income, proportionate income can be taken and in the like manner expenditure can be allowed on proportionate basis as a deduction.

However, this proposition is to be applied subject to language used in the statutory provision being considered.

28. My learned Brother and Hon'ble Vice President then referred to the decision of Calcutta Benches of Tribunal in the case of Dy. CIT v. S.G.Investments & Industries Ltd. (2004) 84 ITJ (Kol) 143 : (2004) 89 ITD 44 (Kol). The said decision is admittedly given with reference to Section 14A and not with reference to Section 80M of IT Act.

There is then reference to the decision of the Hon'ble Bombay High Court in the case of CIT v. Maganlal Chhaganlal (P) Ltd. . In the said case, the Court held that assessee was entitled to deduction under Section 80M on gross dividend whereas Revenue's contention was that interest paid on money borrowed for purchase of shares on which dividend was allowed, was required to be deducted. Their Lordship of Bombay High Court following the decision of Supreme Court in the case of Distributors (Baroda) (P) Ltd. (supra) answered the reference in favour of the Revenue. While doing so, their Lordship allowed deduction of interest out of the total income as "interest was paid on money borrowed for earning such income". Thus deduction of interest was allowed in terms of Section 57 of the IT Act.

29. The decision of Himachal Pradesh High Court in the case of Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CIT , and of Delhi High Court in the case of CIT v.Industrial Finance Corporation of India referred to by my learned Brother and Hon'ble Vice President are on Sections 80P, 80K and 80L of the IT Act. The language and purpose of above sections is quite different and, therefore, above decisions may not be relevant, more particularly when direct decisions on Section 80M are available on the points.

My learned Brother, Hon'ble Vice President also referred to and relied upon the decision of Hon'ble Madras High Court in the case of CIT v.Chemical Holdings Ltd. . In that case Hon'ble Madras High Court has held as under: Held, that the relief under Section 80M could not be granted on the gross amount of dividend received by the assessee but on the gross amount as reduced by the amount of interest attributable to the money borrowed for the purpose of investment and the expenditure incurred in realizing the dividend income.

There can be no dispute on the proposition that expenditure incurred in realizing dividend income are deducted. If shares on which dividend is received are purchased with borrowed funds, then interest paid can be deducted while computing dividend income under Section 57 of the IT Act and deduction under Section 80M is to be allowed accordingly. But the pertinent question is to find nexus between expenditure and income. In the above referred to case, their Lordship ultimately observed as under: Counsel for the assessee points out that from the order of the AO and of the CIT, it is not clear as to whether the amount of interest deducted was the whole of the amount paid as interest by the assessee or only the portion relatable to the amount used by the assessee for investing in shares to earn the dividend. We, therefore, remand the matter to the CIT to recompute that amount with reference to the figures found in the assessment proceedings.

30. It is evident from above that deduction under Section 57 is to be allowed on finding relationship between expenditure and income, an exercise Revenue has to undertake before allowing deduction while computing dividend income. The deduction cannot be made on estimate or presumption basis. This is even demonstrated from the decision cited and relied upon in the order of my learned Brother.

31. Reference has also been made to Brooke Bond & Co. Ltd. v. CIT (supra), wherein their Lordship of the Supreme Court has observed as under: It is a cardinal principle of the law relating to income-tax that income-tax is a single charge on the total income of an assessee.

For the purpose of computation, the statute recognizes different classes of income which it classifies under different heads of income. For each head of income, the statute has provided the mode of computing the quantum of such income. The mode of computation varies with the nature of the class of such income, for the deductions permissible under the law in computing the income under each head bear a particular relevance to the nature of the income.

The statute operates on the principle that it is the net income under each head, which should be considered as a component of the total income. The statute permits specified deductions from gross receipts in order to compute the net income. The net income under the different heads is then pooled together to constitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and of unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, the quantum of income, which is assessed to tax. Ordinarily, when income pertains to a certain head, the source of such income is peculiar to that head, but it is not unusual that commercial considerations may properly describe the source differently. For instance, a banking concern may hold securities in the course of its business. The securities constitute its trading assets and income from them would, in the commercial sense, be regarded as business income. However, for the purposes of computation under the income-tax law, the income from such securities would be computed not under the head "Income from business" but under the head "Interest on securities". In United Commercial Bank Ltd. v. CIT , this Court pointed out that business income was broken up under different heads only for the purpose of computation of the total income, and that by such break-up the income did not cease to be the income of the business. This principle was followed by this Court in CIT v. Chugandas & Co. commercial considerations may properly describe the source differently. For instance, a banking concern may hold securities in the course of its business. The securities constitute its trading assets and income from them would, in the commercial sense, be regarded as business income.

(a) that dividend income can be business income although computed under the head "Other sources".

(b) For determining nature of dividend income, the nature of holding of shares is to be seen. If income is from securities, it has to be seen whether securities are held in the course of the business and are its trading assets. Income from securities in a commercial sense can be regarded as "business income". A banking concern may hold securities in the course of its business.

(c) Net income under each head should be computed and clubbed to determine total income.

(d) The statute permits specified deduction from gross receipts in order to compute the net income under each head.

32. Now I again revert to Sections 80AA and 80M of IT Act to consider the requirement of above section without reproducing them. It being suffice to mention that deduction of dividend under Section 80M is allowed in the case of a domestic company, in computing the total income of such domestic companyfor an amount equal to so much of amount of income by way of dividend from another domestic company as does not exceed the amount of dividend distributed.

Section 80AA providing for computation of deduction under Section 80M contains these words, "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".

33. In both the relevant sections, the deduction is allowed of an amount equal to so much of an amount of dividend as computed in accordance with provisions of this Act and included in the total income. The controversy raised will lose its sheen if due importance is attached to the words "dividend income" computed in accordance with provisions of this Act. It is computed dividend income on which deduction is allowed and, therefore, there is no question of considering dividend as business income. The dividend indisputably is assessable under the head "Other sources" and deductions are permissible out of dividend income as per provisions of Sections 57 to 59 of the IT Act. In most of the cases cited and considered above, question arose with reference to deduction permissible under Section 57(iii) of the IT Act which provides that deduction of any expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purposes of making or earning of income would be allowed. In such cases where it was established that expenditure was incurred for purposes of making or earning dividend income or for realizing such dividend income, the deduction of expenditure was allowed. There has to be nexus between expenditure and income to claim deduction although such nexus may not be direct. I have already considered decision of Supreme Court in the case of Vijaya Laxmi Sugar Mills Ltd. (supra) where deduction of certain expenses out of interest was not allowed as expenses were not incurred with object or purpose of earning the income.

The head of the income may not be conclusive and dividend income, although computed under the head "Other sources" can be treated as "business income" for certain specified sections where there is no restriction or condition and word "business" is to be taken as taken under common parlance. But whereas in the provision under consideration there is restriction or conditions are attached for allowing deduction, the deduction can be allowed only if conditions are satisfied. For purpose of Section 80M the deduction has to be out of "dividend income computed in accordance with provisions of this Act." There is no question of considering anything else but dividend income under the head "Other sources", (and) not under the head "Business". No provision authorizes re-computation of dividend income for purposes of Section 80M of the Act.

34. The effect and implication of restriction placed by statutory provisions was also considered by their Lordship in the case of CIT v.Chugandas & Co. (supra). In the case of CIT v. Chugandas & Co. (supra) the assessee had earned interest on securities held as trading assets.

The assessee claimed exemption on the interest earned under Section 25(3) of IT Act, 1922, which at the relevant time provided as under: 25(3) Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian IT Act, 1918 (VII of 1918), is discontinued, then, unless there has been a succession by virtue of which the provisions of Sub-section (4) have been rendered applicable, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance, and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period. Where any such claim is made, an assessment shall be made on the basis of the income, profits and gains of the said period, and if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference.

The AO did not allow exemption to the assessee under the above provision as according to him interest on securities was liable to be assessed to tax under the head "Interest on securities" (Section 8) and not under the head "Business" (Section 10) of the IT Act. When the matter was carried to the Hon'ble Bombay High Court, one of the learned Judges (Tendolkar, J.) was of the opinion that the income of the business was to be computed under Section 10 and such income alone could be admitted to the exemption under Section 25(3). However the majority of the Court held that all income earned from business qualified for the exemption. Their Lordships of Supreme Court agreed with the majority view of the Hon'ble High Court. In the decision their Lordships made the following pertinent observation: Tax is charged under the IT Act on specific units, such as, individuals, HUFs, companies, local authorities, firms and AOP or partners of firms and members of associations individually, and business, profession or vacation is not a unit of assessment. When, therefore, Section 25(3) enacts that tax was charged at any time on any business, it is intended that the tax was at any time charged on the owner of any business. If that condition be fulfilled in respect of the income of the business under the Act of 1918, the owner or his successor-in-interest qua the business, will be entitled to get the benefit of the exemption under it if the business is discontinued. The section in terms refers to tax charged on any business, i.e., tax charged on any person in respect of income earned by carrying on the business. Undoubtedly, it is not all income earned by a person who conducted any business, which is exempt under Sub-section (3) of Section 25; non-business income will certainly not qualify for the privilege. But there is no reason to restrict the condition of the applicability of the exemption only to income on which the tax was payable under the head "Profits and gains of business, profession or vocation." The legislature has made no such express reservation and there is no warrant for reading into Sub-section (3) such a restricted meaning. Sub-section (3) it may be noticed does not refer to chargeability of income to tax under a particular head as a condition of obtaining the benefit of the exemption.

Diverse other provisions of the Act lend strong support to that view. Where the legislature intended to refer to a specific head of taxation under Section 6 of the Act as a condition for imposing an obligation or claiming a right, the legislature has in terms referred to such a head. For instance, by Section 18(2) liability is imposed upon any person responsible for paying any income chargeable under the head "Salaries" to deduct income-tax and super-tax on the amount payable. Similarly, under Section 18(3) the person responsible for paying income-tax under the head "Interest on securities" is liable to deduct income-tax and super-tax at the prescribed rates on the amount of interest payable. Section 24 enables set off in respect of loss sustained under any of the heads mentioned in Section 6 against income, profits and gains from any other head in that year. These are some of the provisions in which reference is made to specific heads of taxation. But the exemption under Section 25(3) is general; it is not restricted to income chargeable under Section 10 of the Act.

It is evident from above as to the relevance of the head under which a particular income is computed for charging to income-tax. Whether particular section imposes a condition of chargeability under a particular head to allow benefit of exemption depends upon the language and text of the section. Their Lordship in the case of Chugandas & Co.

(supra) has given illustrations of several sections where the legislature has specified a particular head of income as a condition for claiming exemption. If there is no restriction of the nature discussed above then business profit and gain can be taken on a commercial basis irrespective of head under which the income has been computed. But this proposition is not of universal application as is evident from the para quoted from the case of Chugandas & Co. (supra).

The language and text of the section required to be considered have a bearing on the question when "business" is to be given commercial meaning or income is to be taken as computed under the Act.

35. In my considered opinion, the decision of Constitutional Bench in Distributors (Baroda) (P) Ltd. v. Union of India (supra), does clinch the matter. In the said case, the issue was as to how and on what amount deduction under Section 80M is to be allowed. The question was raised in a writ challenging amendment introduced in the shape of Section 80AA through Finance (No. 2) Act, 1980 with retrospective effect. It was the claim of the assessee that above amendment could not be introduced with, retrospective effect in the light of decision of Hon'ble Supreme Court in the case of Cloth Traders (P) Ltd. v. Addl.

CIT . Their Lordship rejected above contention and held that provisions of Section 80AA were merely declaratory of the law as it always was and it was further held that an erroneous view was taken by the Supreme Court in the case of Cloth Traders (P) Ltd. (supra).

36. In reaching above conclusion, their Lordship set out the history of legislation preceding enactment of Section 80M. Their Lordships considered various decisions on Section 99 of the IT Act as also on Section 85A of IT Act. Thereafter, the Hon'ble Court proceeded to consider Section 80M of IT Act which is reproduced at p. 132 of the report. The decision of Hon'ble Gujarat High Court in Addl CIT v. Cloth Traders (P) Ltd. and of Supreme Court (supra) were thoroughly analyzed. Their Lordship placed strong reliance on the decision of Supreme Court in the case of Cambay Electric Supply Co. Ltd. v. CIT . Their Lordship held that above decision undoubtedly was on a different provision namely Section 80E, but reasoning which prevailed with the Court in placing particular interpretation were equally applicable to interpretation of Sub-section (1) of Section 80M. The provision of Section 80E(l) considered by their Lordship is reproduced at p. 138 of the report and is as under: 80E, Deduction in respect of profits and gains from specified industries in the case of certain companies.(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent thereof in computing the total income of the company.

The sub-section required "computation of business income in accordance with provision of the Act" included in the "total income". Thereafter three steps required to be taken, for computing deduction under Section 80E(1), are stated by the Court. As noted earlier, the deduction was to be allowed on profits and gains computed in accordance with provisions of the Act and included in the total income. Their Lordship observed as under: As indicated earlier, Sub-section (1) contemplates three steps being taken for computing the special deduction permissible thereunder and arriving at the net income exigible to tax and the first two steps read together contain the legislative mandate as to how the total incomeof which the profits and gains attributable to the business of the specified industry forms a partof the concerned assessee is to be computed and according to the parenthetical clause, which contains the key words, the same is to be computed in accordance with the provisions of the Act except Section 80E and since in this case it is income from business, the same will have to be computed in accordance with Sections 30 to 43A which would include Section 32(2) (which provides for carry forward of depreciation) and Section 33(2) (which provides for carry forward of development rebate for eight years). In other words, in computing the total income of the concerned assessee, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figure that will become exigible to the deduction of 8 per cent contemplated by Section 80E(1).

It will thus be seen that, according to this decision, the words "such profits and gains" in the latter part of Sub-section (1) of Section 80E were referable to the quantum of the profits and gains attributable to the specified business included in the total income as referred to in the earlier part of the provision. If this decision lays down the correct interpretation of Sub-section (1) of Section 80E, the same interpretation must also govern the language of Sub-section (1) of Section 80M. Structurally, there is hardly any difference between Section 80E, Sub-section (1), and Section 80M, Sub-section (1), and the reasoning which appealed to the Court in the interpretation of Sub-section (1) of Section 80E must apply equally in the interpretation of Sub-section (1) of Section 80M. We find ourselves wholly in agreement with the view taken by this Court in Cambay Electric Supply Co. Ltd. v. CIT and we must, therefore, dissent from the interpretation placed on Sub-section(1) of Section 80M by the decision in Cloth Traders' case (supra).

37. It is clear from above that even when it was required that "profits and gains of business be computed in accordance with provisions of the Act", it was held that, "same will have to be computed in accordance with Sections 30 to 43A which included Section 32(2)" of the Act.

Computation of profit in accordance with provision of the Act was read as the legislative mandate.

Requirement is to look for "key words" in the parenthetical clause. It must, therefore, be clear from above that when section talk of computation of dividend income in accordance with provisions of the Act, "the dividend income" has to be computed as per provision of Sections 56 to 59 of the IT Act, No other provision is relevant having regard to authoritative pronouncement of Supreme Court in Distributors (Baroda)'s case (supra). Sufficiently strong language has been used by employing words like "legislative mandate" "key words in parenthetical clause" to rule out application of commercial principles in interpreting Section 80M. It is not possible to ignore restrictions imposed on applicability of deduction and in particular ignore the words, "dividend income computed in accordance with provisions of this Act". The section does not say "business income". Therefore, there is no question of referring to any of the provisions relating to deduction under the head "Profits and gains of business". The decisions of Hon'ble Supreme Court and High Courts referred to above requiring application of commercial principle and holding dividend income as business income have no application in view of clear language of Section 80M of IT Act and the strong words used by the apex Court describing restriction imposed by the language of Section 80M.East India Agencies (P) Ltd. v. CIT (supra), their Lordships of Kerala High Court have followed the decision of Madras High Court in the case of South Arcot Electricity Distribution Co. Ltd. v. CIT , wherein it was observed as under: On a reference to the Madras High Court under Section 256 (1) of the IT Act, 1961, it was held that the income assessed was the "interest income" and the expenditure allowed was not incurred solely for the purpose of making or earning the interest income. After pointing out that the assessee was not carrying on any business during the relevant assessment years, it was held that the deductions claimed by the assessee were not expenditure incurred solely for the purpose of earning interest income and that those expenses are so remote that they have no connection with the earning of the interest.

Incidentally, the question of the estimate of the expenditure made by the ITO for the purpose of earning income had also come up for consideration before the Madras High Court. It was contended that the allocation should have been with reference to the total expenditure and not with reference to the actual income earned in that year. The ITO had estimated the expenses at 10 per cent of the receipts and disallowed the balance of the claim. It was observed that no effort is necessary for receiving interest from fixed deposits and the compensation. It appears that no material had been produced by the assessee to show that he was entitled to a larger allowance. In such situation, the Madras High Court held that the allocation made by the ITO has to be taken as a reasonable estimate.

39. In the case of CIT v. United Collieries Ltd. (supra), their Lordship considered the following question and observed as under: Whether, on the facts and in the circumstances of the case, deduction under Section 80M should be allowed on the gross dividend income without deducting the allocation of expenses incurred in earning such dividend income? In our view, only the actual expenditure incurred by the assessee in earning the dividend income shall be deducted from the gross dividend income. There is no scope for any estimate of expenditure being made and no notional expenditure can be allocated also for the purpose of earning income unless the facts of a particular case warrant such allocation.

In that view of the matter, we are of the view that only the actual expenses should be taken into account, in reducing the dividend income and not any notional expenditure as has been done in the instant case. We, therefore, decline to answer the question. The Tribunal will find out the expenditure, if any, actually incurred in earning the dividend and, to that extent, the dividend income should be reduced and relief under Section 80M should be allowed on that.

40. Bombay High Court in the case of CIT v. Central Bank of India (supra) held as under: As held in numerous cases by the Court, Chapter VI-A constitutes a separate code dealing with deductions to be made in computing total income. Section 80M refers to special deduction in respect of inter-corporate dividends. As held by the Bombay High Court in the case of CIT v. Maganlal Chhaganlal (P) Ltd. , in order to compute deduction under Section 80M, one has to compute the amount of dividend in accordance with the Act after deducting interest on monies borrowed for earning such income. The point to be noted is that deductions contemplated by Section 80M referred to actual expenditure whereas, deductions contemplated by Section 20(1) are estimated proportionate expenses and interest. Therefore, one cannot import deductions from interest on securities in the case of a banking company under, Section 20(1) into the deductions contemplated by Section 80M. In the case of CIT v. United Collieries Ltd. , the Calcutta High Court has held that the special deduction under Section 80M is allowable on the net dividend which is arrived at after taking into account actual expenditure incurred by the assessee in earning the dividend income and that there was no scope for any estimate of expenditure being made and there was no scope for allocation of notional expenditure unless the facts of a particular case so warranted. In our view, Section 20(1) contains a rule of proportionality of expenses and interest and that rule is based on estimation of expenditure whereas, Section 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend unless the facts of a particular case warrant otherwise.

Therefore, we answer the latter question in favour of the assessee-bank and against the Department.

41. In the case of State Bank of Indore v. CIT (supra), their Lordship of Madhya Pradesh High Court (Indore Bench) after considering decision of Hon'ble Supreme Court in the case of Distributors (Baroda)(supra) held as under: A careful perusal of Section 80M as interpreted by the Supreme Court in Distributors (Baroda) (P) Ltd. v. Union of India and Ors.

r/w Section 57 would only suggest that while giving benefit under Section 80M, the gross income of dividend cannot be taken into account but an income calculated after making deduction as per the provisions of the Act (s. 57) has to be taken into consideration.

The question may still arise as to whether any notional expenditure can be taken into consideration for the purpose of deduction while calculating the income from dividend or only expenditure actually incurred by an assessee can be taken into consideration while calculating the deduction claimed under Section 80M. In our considered opinion, there lies a distinction between what we call notional expenditure and actual expenditure. If it is proved to be a case of actual expenditure incurred by an assessee while earning/depositing the dividend, then certainly the amount actually incurred by way of expenditure has got to be deducted in accordance with the procedure prescribed under the Act. But when there is nothing on record to show that any expenditure is incurred by an assessee while earning/depositing the dividend, then it is difficult for us to hold that some hypothetical and/or notional expenditure can be made a basis for deduction. In other words, we have not been able to notice any provision which may entitle the taxing authorities to work out by way of expenditure any notional figure for the purpose of s, 80M though, in fact, it has not been so incurred by an assessee while encashing the dividend.

In somewhat similar circumstances, this question had come up for consideration thrice before the Calcutta High Court. These cases areCIT v. National & Grindlays Bank Ltd. , CIT v. United Collieries Ltd. and lastly CIT v. Enemour Investments Ltd. (1994) 72 Taxman 370 (Cal). In all the three cases, their Lordships of the Calcutta High Court have taken a consistent view that we have taken. It has been held that (p. 860 of 203 ITR): In our view, only the actual expenditure incurred by the assessee in earning the dividend income shall be deducted from the gross dividend income. There is no scope for any estimate of expenditure being made and no notional expenditure can be allocated also for the purpose of earning income unless the facts of a particular case warrant such allocation.

In that view of the matter, we are of the view that only the actual expenses should be taken into account in reducing the dividend income and not any notional expenditure as has been done in the instant case.

In our opinion, the view that we have taken is not in conflict with the decision of the Supreme Court in Distributors (Baroda) (P) Ltd.'s case (supra). Indeed, we may make it clear that in case, the taxing authorities or the assessee, as the case may be, is able to prove or show that a particular amount was actually incurred by the assessee in earning dividend income, then certainly to the extent the amount actually incurred has got to be deducted from the gross dividend income and then the same is to be taken into consideration under Section 80M. Since, in this case, the taxing authorities have not taken into consideration, the actual expenditure incurred by the assessee while earning the dividend, but have only proceeded to take notional expenditure, the same cannot he held to be sustainable into law. We cannot countenance such view. In our opinion, it is not in accordance with the view even taken by the Supreme Court in the case of Distributors (Baroda)'s case (supra) and the view taken by the Calcutta High Court in the cases referred supra. Such view, thus needs to be overruled.

In view of the foregoing discussion, we answer the question referred to us in favour of the assessee and against the Revenue. In other words, we answer the question by holding that the Tribunal was not right in confirming the order of the lower authorities and was further not right in holding that the expenditure at 10 paise per Rs 100 of dividend income be taken for deduction under Section 80M.42. In the present case, the assessee was holding shares as a capital investment. The shares were not stock-in-trade of the assessee. The dividend income earned by the assessee might have some connection with business. But this connection is not sufficient to make dividend incomebusiness income. Shares were held by the assessee as a capital investment. Dividend received by the assessee-company can under no circumstances be held to be business income. It is incidental income received by the assessee on account of holding of a capital investment.

It cannot have a character different from the character of shares in the hands of the assessee. Shares were not trading assets. Therefore, dividend receipts could only be assessed under the head "Other sources". Out of dividend receipts only expenditure referred to in Section 57 could be deducted, i.e., any sum expended wholly and exclusively for the purpose of making or earning such income (dividend). In this case, I see no reason to take a view different from one taken by Madhya Pradesh High Court in the case of State Bank of Indore (supra) or by Bombay High Court in the case of Central Bank of India (supra). To the same effect are the decisions of other High Courts referred to in above paras. Different Benches of the Tribunal have also held that actual expenditure incurred by the assessee for earning dividend are to be taken into consideration. Reference can also be made to the decision of Calcutta Bench in the case of Usha Martin Industries Ltd. v. Dy. CIT (supra) which in my humble opinion, has correctly applied the principles laid down by the apex Court. There is no justification to deduct expenses on estimate basis or in proportion of the receipts shown by the assessee from various sources. The AO has to make deduction of "actual expenses" or of such expenses which could be held to have been incurred by the assessee and deductible from the dividend income under the head "Other sources". In the light of above discussion, I am inclined to hold that there is no justification on the part of the AO in making a proportionate deduction of expenses. The AO has not placed any material on record to controvert or reject the contention of the assessee that no expenditure was incurred for earning dividend income. No material is available on record to show that assessee actually incurred expenses for earning dividend income and that claim of the assessee to the above effect was erroneous. Without material I see no justification on the part of the AO to deduct proportionate expenses.

43. The Hon'ble Vice President has laid down the proposition that where dividend income is earned in the course of business or where earning is incidental to the business carried on by the assessee, expenses have got to be apportioned for determining the net component of income included in the total income. In para 76 of the proposed order, a finding has been recorded that assessee did incur expenses for earning business income and dividend. Expenditure incurred for earning such income are mixed and, therefore, all expenses are to be taken into account for determining net income which is chargeable to tax notwithstanding the fact that such expenditure is not covered under Sections 57 to 59 of the Act. With utmost respect and for reasons given above, I am unable to agree to the above view. In my opinion, there is no legal justification to brand dividend income in these cases as business income for purposes of Section 80M or treat dividend as earned in the course of the business.

My learned Brother and Hon'ble Vice President for his view has also relied upon the decision of Calcutta Bench of Tribunal in the case of Dy. CIT v. S.G. Investments & Industries Ltd. (supra). The said decision was admittedly given, having regard to provision of Section 14A of the IT Act and in my humble view has no application to the facts and circumstances of the case.

44. The ultimate conclusion of my learned Brother and Hon'ble Vice President is reflected in para 28 which is as below: 28. A pertinent question that requires consideration is as to whether establishment expenses are allowable as a deduction in computing the income from other sources.

The question is ultimately answered in the affirmative. With utmost respect, I am unable to subscribe to the view taken in the above para.

I have recorded above my reasons for not agreeing with the view taken by my learned Brother, the Hon'ble Vice President. The issue is not res Integra and is fully covered in favour of assessee, as per direct decisions of various High Courts and of Supreme Court including Distributors (Baroda) (supra).

45. One controversy left is as to how deduction under Section 80M is to be computed where interest on borrowed funds is paid by the assessee, a dealer in shares and when accounts for all sources are mixed. In my considered opinion, all expenses incurred for earning, making or realizing dividend income are to be deducted while computing dividend income. Only on net dividend deduction under Section 80M is to be allowed. Having regard to the scheme of the Act, one has to determine first the business income of a dealer in shares in accordance with provisions of the Act. If interest has been paid for acquiring shares which are stock-in-trade and on which dividend is also received, the interest is liable to be deducted under Section 36(1)(iii) of the IT Act and not under Section 57 of the IT Act. The reason being that income of a source is required to be computed under the residuary head, i.e., "Other sources" if it is not classified for computation under any other heads mentioned in Section 14 of the IT Act. Therefore, one has first to proceed to compute the income under the head "Business" and see what are the deductions permissible under the said head. If interest paid on borrowed funds for acquiring shares, satisfies the conditions of Section 36(1)(iii), it is to be taken and allowed deduction while computing business income. Secondly, as noted earlier, expression, "for purposes of business" is wider than the scope of expression, "for purposes of earning profit". It is, therefore, imperative that all permissible deduction under the head "Business" are first to be considered. Only left out deduction can be considered under the head "Other sources". However, if on the basis of material, a finding can be recorded that shares were acquired with borrowed funds, with main object of earning dividend, then interest paid on borrowed funds is to be deducted under Section 57 of the IT Act. It is not possible to lay down any rule of universal application. The question has to be determined with reference to facts and circumstances of the case. But facts of a given case are required to be considered in the light of above principles.

46. In the light of above discussion, the following propositions emerge: (i) That deduction under Section 80M is to be allowed on net dividend income computed as per provisions of Sections 57 to 59 of the IT Act. The deduction is not to be allowed on gross dividend receipt.

(ii) That net dividend income is to be computed under the head "Other sources" after deduction of expenditure incurred for purposes of earning, making or realizing dividend income.

(iii) The deduction to be allowed out of dividend income are as per specified provision of the statute. These cannot be allowed on general commercial considerations.

(iv) That actual expenditure incurred are to be taken into consideration. There is no question of taking expenditure on estimate or presumption basis while computing dividend income or while allowing deduction under Section 80M of the IT Act.

(v) That where shares are acquired out of borrowed funds, on which dividend is received, deduction of interest paid can be allowed under Section 57, provided loan was taken for making and earning dividend income. There is no question of deduction of any amount paid as interest, to which provisions of Section 36(1)(iii) are applicable, while computing deduction under Section 80M of the IT Act.

47. In the light of above propositions, I am unable to agree with the order of the Tribunal for asst. yrs. 1990-91 to 1992-93 in the case of the assessee. There is no material to hold that assessee spent any amount on earning or making or realizing any dividend. There is further no evidence to show that borrowed funds were utilized for acquiring shares on which dividend was paid to the assessee. No evidence of incurring of any actual expenditure has been shown. In the circumstances, when no expenditure has been shown to have been incurred for earning, making or realizing dividend income, there is absolutely no question of deducting any part of interest or management expenses or expenses allowed as a deduction to the assessee under Section 36(1)(viii) or any other provision of the IT Act, while computing dividend income. I, therefore, direct that deduction under Section 80M be allowed to the assessee as claimed by the assessee in all the assessment years under appeal.

48. There are grounds other than under Section 80M for asst. yrs.

1995-96, 1996-97, 1997-98 and 1998-99. These are referred to and discussed by the learned Vice President in the proposed order. Except on question of deduction under F 80M, on which I have given a separate decision, I agree with my learned Brother on other issues disposed of in the proposed order.

49. In the result, appeals of the assessee and of Revenue are allowed in terms stated above.


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