Commissioner of Income Tax vs Chemical Holdings Ltd.

R. Jayasimha Babu, J.—The assessee is a dealer in shares. For the assessment year 1980-81, it reported a dividend income of Rs.

3,61,500. It claimed a deduction u/s 80M of the Income Tax Act, 1961, as it then stood. Section 80M of the Act in so far as it is applicable to the

case of the assessee provides for the deduction of 60 per cent, of the income received by way of dividends from other domestic companies. The

computation of the deduction u/s 80M is required to be made in accordance with Section 80AA.

Section 80AA captioned as computation of deduction u/s 80M reads as under :

Where any deduction is required to be allowed u/s 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.

The deduction allowable u/s 80M, therefore, is clearly on the amount computed in accordance with Section 80AA, which requires that before

allowing the deduction u/s 80M, computation of the income by way of dividends be first made in accordance with the provisions of the Act.

The computation in so far as dividends are concerned is to be made u/s 57. Section 57, Clause (1), 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 purpose of realising

the dividend or interest on behalf of the assessee, be deducted. In addition thereto, as provided u/s 57(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, shall also be

deducted.

The income from dividend is regarded as income from other sources and forms a different head of income. This head of income is different from

the head ""Profits and gains of business or profession"". Where an assessee has income from other sources such as dividends, and also has income

from the business or profession, and the deduction allowable under the respective heads is to be made in relation to the income realised under

those heads, the expenditure laid out exclusively for the purpose of earning dividend income cannot, for the purpose of claiming a larger benefit u/s

80M, bo ignored and that amount excluded u/s 37(3) in cases where an assessee has income from dividends as also from business, although

Section 37 provides for the deduction of the amount of interest paid in respect of the capital borrowed for the purpose of business or profession.

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 must be deducted u/s 57(iii) before computing the benefit u/s 80M.

Learned counsel for the assessee submitted that the entire amount of interest claimed by a dealer in shares, having a dividend income is required

to be allowed u/s 37(3) and placed reliance on the case of Commissioner of Income Tax, Gujarat-IV Vs. Cotton Fabrics Ltd., . It was held

therein that the interest paid on borrowings, being a business expenditure and the dividend also being a portion of the income of the business of the

assessee, it was not possible to allocate the amount of interest as against the income from dividends and the whole of the amount of interest is to be

allowed u/s 36(1)(iii). With great respect we are unable to agree.

The extent of benefit allowed by Parliament for dividend income is an amount, which is required to be calculated with reference to the net

dividend. The Act prescribes the amounts, which are deductible from the gross dividend to arrive at the figure of the net dividend. That

computation must necessarily be done before determining the amount on which deduction u/s 80M can be allowed. 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 the shares for which dividend is earned as expenditure in relation to his business, and

deduct the same u/s 36(1)(iii).

It is evident that the dividend could have been earned only after investments were made. The investment having been out of borrowed capital,

the interest payment made on such borrowings was clearly an amount, which was required to be regarded as expenditure laid out wholly and

exclusively for the purpose of earning dividend income. The amount of such interest is required to be deducted u/s 57(iii) before computing the

amount of the dividend on which the benefit u/s 80M was required to be allowed. The view of the Tribunal to the contrary, therefore, cannot be

upheld.

We, therefore, answer the question as to whether, on the facts and circumstances of the case, relief u/s 80M is to be granted on tbe gross

amount of the dividend received by the assesses or on the gross amount as reduced by the interest attributable to the money borrowed for the

purpose of investment and the expenditure incurred in realising the dividend income, by holding that the relief is to be given only on the net amount

of the dividend, i.e., after deducting from the gross dividend the interest paid by the assessee, which is attributable to the money borrowed for the

purpose of making the investment which yielded the dividend and the expenses incurred in realising the dividend income.

Counsel for the assessee points out that from the order of the Assessing Officer and of the Commissioner, 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 Commissioner to recompute that amount with

reference to the figures found in the assessment proceedings.