Commissioner of Income Tax vs J.K. Bankers

C.S.P. Singh, J.—The Income Tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following question of law for our opinion :

"Whether the Tribunal was right in holding that relief u/s 80K is allowable on the gross amount of dividend received from J. K. Synthetics Ltd., and in rejecting the claim of the department that this relief was allowable only with respect to the net amount of dividend arrived at after deducting the interest payable on loans taken for the purchase of the shares ? "

The question referred relates to the assessment year 1972-73. The assessee had purchased shares of J. K. Synthetics Ltd., and for making the purchase, had borrowed certain amounts of money bearing interest. In the relevant previous year the assessee received an amount of Rs. 3,24,238 as dividend from M/s. J. K. Synthetics Ltd. The assessee claimed that this amount be deducted from its income u/s 80K while computing its income. The contention was, however, rejected by the ITO on the ground that no certificate had been issued for the assessment year either provisionally or finally by the. ITO assessing the company, and further that, in any event, the assessee would be entitled to a deduction only for an amount arrived at after deducting the interest paid on the loans raised for purchasing the shares. He, accordingly, granted relief only to the extent of Rs. 92,548 as representing the net amount of dividend received by the assessee. The appeal filed against this order before the AAC failed. The matter was then taken up in appeal by the assessee before the Tribunal. By the time, the Tribunal took up the appeal for hearing, the Commissioner had directed the ITO assessing M/s. J. K. Synthetics Ltd. to pass an order u/s 197(3), and determine the portion of the dividend declared by the company, which would be exempt u/s 80K in the hands of the shareholders. The Tribunal in view of this held that the assessee would be entitled to deduction u/s 80K in respect of the entire dividend received from M/s. J. K. Synthetics Ltd., to the extent to which these dividends were attributable to the profits of the company in respect of which the company was entitled to relief u/s 80J. It also held, following the decision of the Supreme Cour-t in the case of (1976) 102 ITR 533 (SC) , that it was not necessary that the relief u/s 80J in respect of the company should have been quantified before relief to a shareholder could be given u/s 80K. As regards the view of the revenue authorities that the amount of interest paid by the assessee on loans raised by it for purchasing shares had to be deducted from the amount of dividend received, it held following the decisions of the Madras High Court in the cases of Commissioner of Income Tax Vs. Madras Motor and General Insurance Co. Ltd., and Madras Auto Service Vs. Income Tax Officer, that the interest could not be deducted for purposes of calculating the relief u/s 80K. The Commissioner has now come up in reference before us.

The field of controversy appears to be covered by the decision relied upon by the Tribunal, and the view taken conforms with the statutory provisions. We may also briefly give our reasons for upholding the view of the Tribunal. The relevant part of Section 80K under which relief was being claimed was as under :

" 80K. Deduction in respect of dividends attributable to profits and gains from new industrial undertakings or ships or hotel business.--Where the gross total income of an assessee, being-

(a) the owner of any share or shares in a company, or

(b) a person who is chargeable to tax under this Act on the income by way of dividends on any share or shares in a company owned by any other person,

includes any income by way of dividends paid or deemed to have been paid by the company in respect of such share or shares, there shall, subject to any rules that may be made by the Board in this behalf, be allowed, in computing his total income, a deduction from such income by way of dividends of an amount equal to such part thereof as is attributable to the profits and gains derived by the company from an industrial undertaking or ship or the business of a hotel, on which no tax is payable by the company under this Act for any assessment year commencing prior to the 1st day of April, 1968, or in respect of which the company is entitled to a deduction u/s 80J for the assessment year commencing on the 1st day of April, 1968, or for any subsequent assessment year. "

The rule framed u/s 80K is Rule 20, which runs as under:

"20. Computation of portion of dividend attributable to profits and gains from new industrial undertakings or ships or hotel business.--(1) The amount of the dividend paid or deemed to p& paid by a company in respect of any previous year (hereinafter referred to as the '' relevant previous year '') for which a deduction is allowable u/s 80K shall be determined in accordance with Sub-rules (2) to (5).

(2) The aggregate of that part of the profits and gains of the company of the relevant previous year and of the previous years preceding the relevant previous year, on which no tax was payable by it u/s 84 of the Act or under Sub-section (1) of Section 15C of the Indian income tax Act, 1922 (11 of 1922), or, as the case may be, in respect of which a deduction is allowable u/s 80J of the Act, shall first be ascertained.

(3) From the amount ascertained as in Sub-rule (2) there shall be deducted the aggregate of the amounts of dividends, paid or deemed to be paid by the company in respect of the said preceding previous years, on which tax was not payable u/s 85 of the Act or under subsection (4) of Section 15C of the Indian Income Tax Act, 1922 (XI of 1922), or, as the case may be, in respect of which a deduction is allowable u/s 80K.

(4) The dividend paid or deemed to have been paid by the company in respect of the relevant previous year shall be regarded as having been paid out of its funds in the following order, namely;--

(i) first, out of, and to the extent of, the resultant sum determined as in Sub-rule (3) ; and

(ii) then, out of the remaining funds.

(5) The part of the dividend which is regarded as having been paid out of the sum mentioned in Clause (i) of Sub-rule (4) shall be the amount for which a deduction is allowable u/s 80K and in the certificate to be given under Sub-rule (4) of Rule 31, this part shall specifically be indicated. "

It will be noticed that before advantage u/s 80K can be taken, dividend received by an assessee must be from a company, which is entitled to a deduction u/s 80J. Now, as held by the Supreme Court in the case of (1976) 102 ITR 533 (SC) , it is not necessary that the relief for which a company is entitled u/s 80J should have been quantified by an order passed by the ITO u/s 197(3), for granting relief to a shareholder u/s 80K. There does not appear to be a serious controversy that J, K. Synthetics Ltd. is entitled to relief u/s 80J. In fact from the order of the Tribunal it appears that the Commissioner, Kanpur, had issued an order directing the ITO assessing J. K. Synthetics to pass an order u/s 197(3), and determining the portion of dividend paid by a company which would be exempt u/s 80K in the hands of the shareholder. Thus, one has to proceed on the footing that the dividend received by the assessee was one in respect of which M/s. J. K, Synthetics Ltd. was entitled to deduction u/s 80J. Rule 20 sets out the computation of the portion of dividend attributable to the profits and gains from a new industrial undertaking. There is no suggestion, and it is not the department''s case that the amount of Rs. 3,24,238 received by the assessee as dividend from M/s. J, K. Synthetics did not conform to the computation of dividend as required to be done under Rule 20. The only dispute is as to whether deduction u/s 80K should be made after deduction of the interest paid by the assessee on the loans raised by it for purchasing the shares. Neither Section 80K nor Rule 20 permits such a deduction. Section 80K contemplates deduction of the entire dividend income, provided that it is attributable to the profits and gains of a company which is entitled to deduction u/s 80J. This being the statutory position, the question of any further deduction from the amount of dividend received by the assessee does not arise. The Madras High Court in the cases of Commissioner of Income Tax Vs. Madras Motor and General Insurance Co. Ltd., and Madras Auto Service Vs. Income Tax Officer, has held likewise ; so has the Bombay High Court in the case of Commissioner of Income Tax Vs. Union Bank of India Ltd., . The views expressed by these courts have the authority of reason and logic and we are in complete agreement with these views.

We, accordingly, answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to its costs which are assessed at Rs. 200. Counsel''s fee is assessed at the same figure.