Commissioner of Income Tax vs Carolina Investments Ltd.

Bhagabati Prasad Banerjee, J.—Pursuant to the direction of this Court u/s 256(2) of the income tax Act, 1961 (''the Act''), the Tribunal has referred the following questions of law to this Court:

Whether, the findings of the Tribunal that the shares, on which the assessee received dividend were held by the assessee as stock-in-trade was based upon any evidence ?

Whether, on the facts and in the circumstances of the case, the relief u/s 80M of the income tax Act, 1961 should be computed on the gross dividend or after deducting the proportionate expenditure as on by the income tax Officer ?

The brief facts relating to both the assessees are that in the assessment years 1985-86 and 1986-87, the assessee claimed deduction u/s 80M of the Act on the gross dividends of Rs. 37,708, Rs. 22,490, Rs. 1,99,500 and Rs. 2,49,500. The ITO, however, held that a part of the expenditure booked by the assessee was attributable to earning of the dividend income and in the absence of any apportionment in the books of account he estimated such expenditure at the rate of 5 per cent of the gross dividends. Aggrieved by the aforesaid orders of the ITO, the assessees filed appeals before the Commissioner (Appeals). Before the Commissioner (Appeals), the assessees submitted that they were dealers in shares and securities which were held by them as stock-in-trade and, accordingly, all items of expenditure incurred were referable to the business and same amount was deductible from the gross dividends earned by them. The Commissioner (Appeals) observed that the assessees were doing the business of dealing in shares and the dividend income accrued to them was in the course of such dealings.

The Commissioner (Appeals), accordingly, in his order held as follows:

I find myself in agreement with the appellant in the matter. The facts that at the relevant time the appellant was carrying on the business of dealing in shares has not been called into question and in such case no apportionment of the expenses as between the business income and dividend income is to be made as so held by the Hon''ble High Court at Calcutta in the decision reported in Commissioner of Income Tax Vs. New India Investment Corporation Ltd., The expenditure incurred by the appellant should in its entirety be treated as being referable to its business activity. I agree that the introduction of section 80AA by the Finance Act, 1980 has not brought about any alteration in the situation. I, therefore, allow the appeals on this point and direct the income tax Officer to recompute the deductions u/s 80M for the assessment years 1985-86 and 1986-87 on the gross dividends of Rs. 37,708 and Rs. 22,490, respectively. Consequently, the income tax Officer shall recompute the unabsorbed deduction u/s 80M to be carried forward.

Against the order of the Commissioner (Appeals), department filed appeal before the Tribunal. The learned counsel for the revenue submitted that for the purpose of relief u/s 80M the proportionate expenditure allocable for earning dividend income has to be deducted from the gross amount of dividend in view of section 80AA of the Act which was inserted with retrospective effect from 1-4-1968.

The Tribunal after considering the rival contentions of the parties have held that:

the assessees are found to be dealers in shares and shares were held by them as stock-in-trade by the Commissioner (Appeals). The Tribunal after examining the printed accounts of these two assessees found that the assessees are engaged in the business of dealing in shares and money-lending. Shares are held by them as stock-in-trade. The Hon''ble Calcutta High Court in the case of New India Investment Corpn. Ltd. (supra) held that where an assessee was holding shares and securities as its stock-in-trade and dividend was received by the assessee from such stock-in-trade and the assessee had incurred expenditure to earn its income, though the dividend earned by the assessee was assessable under the head ''Income from other sources'' it was really his ''business income'' and that the expenditure incurred by the assessee cannot be apportioned against income arising under two different heads, i.e., ''business'' and ''dividend''. The facts and circumstances of the case of these two assessees searely fit into the facts and circumstances of that case in New India Investment Corpn. Ltd. (supra). In such circumstances, the said decision is fully applicable and these in the facts and circumstances of the case I hold that the Commissioner (Appeals) was fully justified in directing the income tax Officer to recompute the deduction u/s 80M on the gross dividends without deducting anything towards the alleged expenditure for the purposes of earning the dividends.

It has been held in the case of Commissioner of Income Tax Vs. New India Investment Corporation Ltd., that, where the shares and securities are held as stock-in-trade and not by way of investment only, there is no scope for apportionment of the expenditure between the dividend income and business income. This view is not in conflict with the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, or the provisions of section 80A(2), read with section 80M(5) because in the type of cases like the instant case the dividend income as such cannot have any outgoing, so the question of deducting the gross dividend to net dividend did not at all arise.

With regard to the first question, the learned counsel appearing on behalf of the revenue could not show that the findings made by the Commissioner (Appeals) and the Tribunal was perverse and not based on evidence. There may be cases where there may be different sources of earning. In the absence of any particular expenditure incurred question of apportionment will not arise. Apportionment will only arise in the case where two or more types of business and expenditure have been incurred. This question also came up for consideration before a Division Bench of this Court in the case of CIT v. Enemour Investments Ltd. [1994] 72 Taxman 370. In that case from the statement of case it appears that the assessee-company was engaged in the business of dealing in shares and securities, etc., and claimed deduction u/s 80M on the gross dividend of Rs. 2,51,550 and Rs. 3,10,700 on the shares held by it respectively for the assessment years 1985-86 and 1986-87. In the course of assessment the ITO held that the part of the expenditure made by the assessee-company was attributable to earning of the dividend income and in the absence of any apportionment in the books of account the estimate of such expenditure at 5 per cent of the gross dividend of the two years was proper. He accordingly deducted a sum of Rs. 2,51,550 and Rs. 3,10,700 for the two assessment years respectively from the gross dividend and allowed the relief u/s 80M on the net dividend. The questions of law that were referred to in that case were as follows :

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the order of the Commissioner (Appeals) that though the income from dividends has to be assessed under a separate head, expenses incurred for the purpose of earning income from investments in shares should be allowed against income from dividend from such shares ?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the order of the Commissioner (Appeals) that deduction u/s 80M of the income tax Act, 1961 should be allowed on the gross amount of dividend received by the assessee and not on the net amount of dividend computed after deducting the apportioned expenditure ?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the order of the Commissioner (Appeals) directing the Assessing Officer to carry forward the unallowed deduction u/s 80M of the income tax Act, 1961, to the next assessment year in view of the provisions of section 80A(2), read with section 80M, of the income tax Act, 1961 ?

There all the questions were answered in the affirmative and in favour of the assessee and against the revenue.

Turning to the facts of this case, the ITO also estimated such expenditure as 5 per cent notionally without any further opportunity in this behalf. The question of expenditure is given on fact (sic) and must be based on materials. There is no finding of the ITO that the assessee had incurred expenditure in respect of other sources of income.

In that view of the matter, the first question of law is answered in the affirmative and in favour of the assessee.

The second question is answered by saying that the Tribunal was right in holding that the relief u/s 80M should be computed on the basis of the gross dividend and not after deducting the proportionate expenditure as done by the ITO in the facts and circumstances of the case.

There will be no order as to costs.

Dutta, J. - I agree.