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Judgment
N. Kumar, J.—This appeal is admitted on 21-11-2006 to consider the following substantial questions of law:
(1) Whether the Tribunal was correct in holding that deduction u/s 36(1)(viii) is allowable under business income and not under the head Income from other sources as the same has to be reduced from dividends received as it forms part of the total income ?
(2) Whether Section 80AA clearly states that deduction u/s 80M has to be allowed only on the dividend income as computed under the provision of the Act after deducting the expenses incurred for earning the same under the head Income from other sources and not on the gross dividends received ?
The facts leading to this appeal are as follows:
The Assessee is a housing finance company and is entitled to claim deduction u/s 36(1)(viii) of the Income Tax Act, 1961 (hereinafter, referred to as the Act). The Assessee claimed deduction u/s 36(1)(viii) on a total income which included dividend income of Rs. 5,41,41,490. The assessing authority observed the deduction u/s 80M could be allowed on income by way of dividend as computed in accordance with the provisions of this Act. He reckoned that since deduction at 40 per cent of the gross total income was claimed u/s 36(1)(viii), to the extent of deduction u/s 36(1)(viii), the dividend income has to be reduced and deduction u/s 80M is to be allowed after reducing such claim u/s 36(1)(viii). Being aggrieved by the same, the Assessee filed an appeal before the Commissioner (Appeals) who accepted the contention of the Assessee that deduction u/s 80M should be with reference to the income by way of dividends computed under the head "Income from other sources" and included in the gross total income as provided u/s 80AA and the addition made by the assessing authority was deleted. In the appeal filed by the revenue, the Tribunal held that the deduction u/s 36(1)(viii), if it is allowed while computing business income and the income from dividend is chargeable to tax under the head "Income from other sources", this deduction u/s 36(1)(viii) will not alter the dividend income at all and therefore, the order passed by the lower appellate authority was affirmed which had modified the order of the assessing authority.
Learned Counsel appearing for the revenue, assailing the impugned orders contends once the dividend income is taken into account to arrive at the total income and thereafter, 40 per cent of the said total income if it is utilised for raising special reserve created for providing long-term finance for industrial or agricultural development in India, the Assessee is entitled to deductions not exceeding 40 per cent of the total income. Again, if benefit is granted u/s 80M deducting the dividend income from the total income, it Would amount to double benefit. It is under these circumstances Section 80AA was introduced providing for calculating the net income in accordance with the Act. In those circumstances, both the lower appellate authorities were not justified in interfering with the order passed by the assessing authority.
Per contra, Sri Parthasarathi, learned Counsel appearing for the Assessee submitted Chapter VI-A deals with deductions to be made in computing total income, whereas, Section 36(1)(viii) which falls under Chapter IV, deals with profits and gains of business or profession and the deductions which are permitted in computing the income chargeable to income tax. Both operate in totally different areas. There is no overlapping and merely because some additional benefit accrues to the Assessee, which is not prohibited in law, the appellate authorities were justified in interfering with the assessment order, Section 80AA has no application at all in this regard.
In order to appreciate the aforesaid contentions, it is necessary to refer to the relevant provisions which have a bearing in deciding the substantial questions of law.
Section 28 deals with profits and gains of business or profession. Section 36(1) mandates that the deductions provided for in sub-cls. (i) to (xii) shall be allowed in respect to the matters dealt with therein, in computing the income referred to in Section 28. Therefore, the income chargeable to income tax under the head "Profits and gains of business or profession" is to be arrived at after allowing the deductions u/s 36 of the Act. In this context, Section 36(1)(viii) which is one such deduction, reads as under:
In respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head Profits and gains of business or profession before making any deduction under this clause carried to such reserve account).
A careful reading of the aforesaid provisions makes it clear that in respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development in India, an amount not exceeding 40 per cent of the total income computed before making any deduction under these clauses and Chapter VI-A carries to such reserve account. In other words, in computing the total income, no deduction under that clause as well asunder Chapter VI-A has to be made. To such deduction, one has to find out what is the total income and then, an amount not exceeding 40 percent of the total income could be deducted from the taxable income under the heading "Profits and gains". These provisions are found in Chapter IV which deals with computation of total income. Section 56 which falls in the very same chapter, deals with income from other sources.
Section 57 provides that the income chargeable under the head "Income from other sources" shall be computed after making the following deductions:
Deductions.--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 115O 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 realising such dividend or interest on behalf of the Assessee;
(ia) in 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 els. (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 38;
(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.
One such deduction is "in the case of dividends or interest on securities, any reasonable sum paid by way of commission or remuneration to a financial institution or any other person for the purpose of realisation of dividend or interest on behalf of the Assessee is deductable." Chapter VI-A deals with deductions to be made in computing the total income. Section 80AA specifically deals with computation of deductions u/s 80M. It provides where any deduction is 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 dividend as computed in accordance with the provisions of this Act namely, Sections 56 and 57 before making any deductions under this chapter and not with reference to the gross amount of such dividends. Section 80M deals with deductions in respect of certain industrial corporate dividends.
A harmonious reading of these provisions makes it clear that if a person is claiming benefit of Section 80M and in realising the said dividend, if any expenditure is incurred and he is claiming benefit of that expenditure u/s 57 while calculating the total income under this Act, it is the net income after deducting the expenditure which is to be taken into consideration. This has nothing to do with calculating the total income for the purpose of Section 36(1)(viii). Section 36(1)(viii) is a deduction on the taxable income under the heading of "Profits and gains". If the income of the Assessee includes dividend income, that section specifically states in computing the total income, the said dividend income should not be deducted i.e., in arriving at the total income, the income from the dividend is also to be taken into consideration and 40 per cent of that, the Assessee is entitled to deduction. Therefore, we do not see any justification to hold that because once benefit is conferred u/s 36(1)(viii), the Assessee is not entitled to benefit u/s 80M read with Section 80AA. Both these provisions are operating in altogether two different fields. Moreover, in the absence of any provision which prohibits such benefit to the Assessee, the appellate authorities were justified in giving the benefit of these provisions to the Assessee. In that view of the matter, both the substantial questions of law raised are answered against the revenue. Accordingly, the appeal is dismissed.