Commissioner of Income Tax vs Avik Investment and Trading Co. (P.) Ltd.

On an application u/s 256(2) of the Income Tax Act, 1961, this court has directed the Tribunal to refer the following question set out at page 2 of the paper book for the opinion of this court :

"Whether, on the facts of the case though the assessee was only a partner of a firm to which the dividend arose on the shares held by the firm, the Tribunal was correct in law in holding that the assessee (a partner) would be entitled to deduction u/s 80M of the Income Tax Act, 1961, on account of share income by way of dividend from the firm?"

In pursuance of our direction, the Tribunal has referred the question for our opinion.

The assessee is a private limited company and is one of the partners in a firm, Kusum Investment and Finance Corporation. The firm had at different times purchased shares of different companies and those shares stood registered in the names of the different partners. Since the firm is not entitled under the law to get the shares registered in its name, the shares are purchased in the names of the partners. On those shares the firm received the dividend and the shares of the assessee-company by way of dividend came to Rs. 77,129 in the assessment year 1984-85, Rs. 1,17,276 in the assessment year 1985-86, which were assessed in its assessment as income from "other sources". While assessing this dividend income, the Income Tax Officer did not allow deduction u/s 80M of the Act taking the view that the shares were owned by the partnership firm and not by the assessee-company.

In appeal before the Commissioner of Income Tax (Appeals), the Commissioner of Income Tax (Appeals) has also confirmed the view taken by the Income Tax Officer holding that the firm and its partners are two distinct assessable entities.

In second appeal before the Tribunal, the Tribunal has considered the decision of the Allahabad High Court in the case of CIT v. Sri Mohan Das 118 ITR 337 , the decision of the Madras High Court in the case of Commissioner of Income Tax Vs. K. Saraswathi Ammal and Others and J.H. Tarapore, and also the decision of this court in the case of Commissioner of Income Tax Vs. Indian Iron and Steel Co. Ltd., .

In Commissioner of Income Tax Vs. Indian Iron and Steel Co. Ltd., , this court has taken the view, when the beneficiary received income by way of dividend income through the trust, the beneficiary is entitled to the benefit of deduction u/s 80M of the Income Tax Act.

Learned counsel for the assessee submits that when a beneficiary on dividend income, through the trust is entitled for Section 80M deduction on the same analogy, a partner on dividend income, through a firm, should also be entitled for the deduction u/s 80M of the Act.

Learned counsel for the Revenue has not controverted these facts referred. In Commissioner of Income Tax Vs. Indian Iron and Steel Co. Ltd., , in the concluding paragraph, this court has observed as under (page 322) :

"Once the dividend income is included in the assessment and assessed, the assessee is entitled to all the benefits flowing from such inclusion under, the relevant provisions of the Act."

When the basic test for deduction u/s 80M is in whose hands the dividend income is assessed, in that case the assessee is entitled to all the benefits, flowing from such inclusion of dividend income, under the relevant provisions of the Act.

Following the proposition laid down by this court in the case of Commissioner of Income Tax Vs. Indian Iron and Steel Co. Ltd., , we answer the question referred in the affirmative, i.e., in favour of the assessee and against the Revenue.

The reference so made is accordingly disposed of.

All parties are to act on a xeroxed signed copy of this dictated order on the usual undertaking.