Commissioner of Income Tax vs Maganlal Chhaganlal (P.) Ltd.

B.P. Saraf, J.—By this reference u/s 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following question of law to this court for opinion at the instance of the Revenue :

"Whether, on the facts and circumstances of the case, the assessee was entitled to deduction u/s 80M on Its. 19,66,588 for the assessment year 1968-69 on the ground that the assessee is a dealer in shares ?"

The assessee is a private limited company carrying on the business of manufacturing of drums and barrels, dealing in shares and investing in shares. The controversy is regarding deduction of interest on money borrowed for purchasing shares from the dividend income for the purposes of calculating deduction u/s 80M(1) of the Income Tax Act, 1961, ("the Act"). The assessee claimed deduction u/s 80M on the gross dividend income. The Income Tax Officer did not accept this claim. He allowed deduction on the net amount of dividend arrived at after deducting interest on the money borrowed for purchasing shares and other expenses. The interest on loans obtained for purchasing shares was Rs. 19,38,200 and other expenses Rs. 22,214. The assessee appealed to the Commissioner of Income Tax (Appeals). The Commissioner deducted from the gross dividend, only interest relating to investment in shares of two companies, viz., Killick Nixon Ltd. and British Burmah Petroleum Ltd., amounting to Rs. 2,70,780 and dividend realisation expenses amounting to Rs. 3,252 and allowed relief u/s 80M(1) on the balance amount of Rs. 19,66,588. The Commissioner (Appeals) did not deduct the remaining interest paid by the assessee on the monies borrowed for purchase of shares from which dividend had been received on the ground that it was an expenditure incurred in connection with the business dealings of the assessee. The Commissioner (Appeals) followed the decision of the Gujarat High Court in Commissioner of Income Tax, Gujarat-IV Vs. Cotton Fabrics Ltd., . The above order of the Commissioner (Appeals) was confirmed by the Income Tax Appellate Tribunal ("the Tribunal"). Hence, this reference at the instance of the Revenue.

We have heard Mr. R.V. Desai, learned counsel for the Revenue, who submits that the controversy in this case now stands concluded by the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, , Mr. Atul Jasani, learned counsel for the assessee, on the other hand, submits that the above decision of the Supreme Court is not applicable to the present case. In support of his contention that deduction u/s 80M(1) of the Act in this case should be allowed on the gross dividend without deducting interest on borrowed money, he relies on the decision of the Calcutta High Court in Commissioner of Income Tax Vs. National and Grindlays Bank Ltd. (now known as Grindlays Bank Ltd.), .

We have considered the rival submissions and the decisions relied upon by learned counsel for the parties. We have perused the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, , and on a careful consideration of the same, we are of the clear opinion that the controversy in this case is squarely covered by the ratio of the said decision wherein it has been held that deduction u/s 80M(1) of the Income Tax Act, 1961, 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, i.e., after deducting the interest paid on monies borrowed for earning such income, and not with reference to the full amount of dividend received by the assessee. The Supreme Court has categorically held that income by way of dividend 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. The Supreme Court reconsidered its earlier decision in Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, , wherein it was held that the deduction required to be allowed u/s 80M must be calculated (page 259) "with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act", and came to a conclusion that the above decision was erroneous, and overruled the same.

Following the ratio of the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, , we hold that deduction u/s 80M(1) of the Act 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, 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.

We have also considered the decision of the Calcutta High Court in Commissioner of Income Tax Vs. National and Grindlays Bank Ltd. (now known as Grindlays Bank Ltd.), , wherein it has been held that relief u/s 80M is admissible on the gross amount of dividend income without deducting therefrom the interest paid for earning the dividend. In that case, the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, , was not brought to the notice of the court. The above decision of the Calcutta High Court, appears to be inconsistent with the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, .

For the reasons set out above, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee.

This reference is disposed of accordingly with no order as to costs.