Commissioner of Income Tax vs United India Insurance Co. Ltd.

Ramaswami, J.—The following three questions have been referred at the instance of the revenue :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the benefit under ss. 80K and 80M

of the IT Act, 1961, should be granted with reference to the gross dividend income without deducting proportionate management expenses ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the addition to Rs. 7,02,054,

representing the appreciation in the value of shares investments held by the assessee, made by the ITO under the second part of r. 5(b) of Sch. I to

the IT Act, 1961 ?

Whether, the interpretation given by the Tribunal to r. 5(b) of Sch. I to the IT Act, 1961, is valid and justified ?

The second and third questions are covered by the decision in COMMISSIONER OF Income Tax TAMIL NADU-I Vs. MOTOR AND

GENERAL INSURANCE CO. LTD., and in the light of that judgment, we have to answer these questions in the affirmative and against the

revenue, and it is answered accordingly. Therefore, there is no need to set out the facts relating to the same.

So far as the first question is concerned, we need notice only few facts. The assessee is a general insurance company. In respect of the asst. yr.

1969-70 they claimed relief both under ss. 80K and 80M of the IT Act, 1961 (hereinafter referred to as ''the Act''). The ITO rejected the claim.

However, on appeal, the AAC, following a Tribunal''s order in respect of the same assessee for the asst. yrs. 1963-64 and 1964-65, held that the

assessee would be entitled to the rebate on the entire dividend income and not merely the net dividend income as computed under the provisions of

the Act. This view was accepted by the Tribunal on a further appeal. It may be mentioned, by the time the Tribunal took up the matter for

consideration, the decision in Commissioner of Income Tax Vs. Madras Motor and General Insurance Co. Ltd., relating to the same assessee in

respect of the asst. yrs. 1963-64 and 1964-65 was available, and following that judgment, confirmed the view of the AAC. At the instance of the

revenue, the above question has been referred.

Though the question referred covers both the sections, it is necessary to deal with s. 80K of the Act separately. So far as s. 80M is concerned,

it is now covered by the decision of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, and in view of

that judgment, we have to hold that the Tribunal was not correct in holding that the benefit under s. 80M of the Act should be granted on the gross

dividend income without deducting the proposed management expenses. Accordingly, the question relating to s. 80M of the Act is answered in

favour of the department. The difficulty arises only in respect of the benefit under s. 80K of the Act.

We may now refer to the decision rendered with reference to the provisions in s. 80K of the Act. This court dealt with the scope of this

provision in Madras Auto Service Vs. Income Tax Officer, . This Court was of the view that the deduction admissible under s. 80K was in respect

of the entire dividend received by the assessee from the new industrial undertaking and not in respect of the dividend income minus deductions

allowable under the provisions of the Act in computing the total income. In coming to this conclusion, this Court had relied on the earlier decision in

Madras Motor can General Insurance Co. Ltd.''s case (supra) which related, as already stated, to the asst. yrs. 1963-64 and 1964-65 with

reference to a rebate under s. 99(1)(vi) of the Act. This was on the basis that the ratio of the judgment given with reference to s. 99(1)(iv) of the

Act would be equally applicable in construing the provisions of s. 80K of the Act. This Court noted that there was no restrictive words similar to

''net dividend'' in s. 80A of the Act and that, therefore, the rebate could not be restricted to the new dividend. A Division Bench of the Bombay

High Court considered the scope of s. 85 of the Act which was the corresponding provision before s. 80K of the Act was introduced in Chapter

VIA of the Act. The ld. Chief Justice in Commissioner of Income Tax Vs. New Great Insurance Co. Ltd., who delivered the judgment after a

detailed considerations of the provisions of ss. 99(1)(vi), 84, 85, and 85A of the Act with reference to s. 85, held as follows :

.... under s. 85 there can be no argument available to the department that the dividend must be subject to all deductions for expenses incurred in

earning the dividend. The emphasis is on the amount or the dividend paid and not upon any receipts of income of the assessee. In the latter case,

an argument may be possible (though we have already repelled it) that if is the net receipt or net income that is contemplated but such an argument

is not possible where the word used is ''paid''. Under s. 85 of the Act also, therefore, we must hold that the full amount of the dividend paid to the

assessee by such Indian companies as partook to the nature of new industrial undertaking or hotel business would be wholly exempt from income

tax.

Another Division Bench of the Bombay High Court also took the same view as that in New Great Insurance Co. Ltd.''s case (supra) with

reference to the scope of s. 80K in the decision appended to the decision in Dr. T. Ramadas M. Pai Vs. Commissioner of Income Tax (No. 2), .

The Andhra Pradesh High Court also took the same view in the decision in Commissioner of Income Tax Vs. M. Varadarajan, and held that the

dividend component of the total income that is eligible for exemption under s. 80K of the Act is the gross dividend income of the assessee and not

the net dividend income, which is arrived at after deducting the expenditure incurred in connection with earning of such income under the other

provisions of the Act.

A Division Bench of the Allahabad High Court in Commissioner of Income Tax Vs. J.K. Bankers, also held that neither under s. 80K of the Act

nor under rule 20 of the IT Rules, 1962 (hereinafter referred to as ''the Rules'') any deduction of the interest paid by the assessee on the loans

raised by it for purchasing shares is permitted and that s. 80K of the Act contemplated deduction of the entire dividend income provided it was

attributable to the profits and gains of a company which was entitled to deduction under s. 80J of the Act.

The Delhi High Court considered the provisions of s. 85 of the Act which was predecessor of s. 80K and held that the words ''so much of any

dividend income paid or deemed to be paid'' to a shareholder cannot be held to mean so much of any dividend paid or deemed to be paid minus

the amount of interest borrowed for earning the same of for earning other dividends and that the amount entitled to exemption is determined at the

point of time at which it is paid or deemed to be paid to the shareholder. Therefore, there can be no question of reducing this exemption amount

either by reference to the expenditure incurred in connection therewith or by reference to any expenditure or deficit in respect of any other shares

or scrips under the same head or by reference do deficits under the same head or by reference to deficits under other heads of income. The proper

deduction accordingly was held to be the gross amount without deducting interest charges and/or allowable expenses.

The Calcutta High Court in Commissioner of Income Tax Vs. Darbhanga Marketing Co. Ltd., construing the provisions of s. 99(1)(iv) of the

Act held that the expressions ''which included in his total incomes'' in sub-s. (1) of s. 99 of the Act and ''incomes forming part of total income'' in

the heading are descriptive of items included in the computation of the total income and not indicative of the quantum of the amounts included under

the different items in the computation of the total income. The same interpretation was given by the same High Court with reference to the

provisions of s. 85 of the Act in the decision in CIT v. Indore Exporting and Importing Co. Ltd. 1976 Tax LR 471 . It may be seen from these

cases above referred to that though the Courts have approached these questions from various angles, all the High Courts have uniformly taken the

view that the words ''any income by way of dividends paid or deemed to have been paid'' is descriptive of the category of income and when the

provision referred to a deduction ''from such income by way of dividends of an amount equal to'' the gross dividend received shall be deducted

and not the net dividend income as determined with reference to the provision of Chapter VIA. These decisions have also noted the definition of

''gross total income'' in s. 80B(5) of the Act. The only other aspect which is to be referred to in this connection is that in all these cases s. 85A

which corresponds to s. 80M of the Act now was considered to have used identical language and in some cases the interpretation placed on s.

85A also was relied on. The Bombay High Court in New Great Insurance Co. Ltd.''s case (supra) held that s. 85A of the Act which is now s.

80M of the Act was almost in the same terms except for some minor verbal changes as in s. 99(1)(iv) of the Act, and that the same interpretation

was, therefore, to be placed on s. 85A as in the case of s. 99(1)(iv) of the Act and in that view, following the cases decide under s. 99(1)(iv) of the

Act it held that under s. 85A of the Act also, the assessee would be entitled to deduction of Income Tax in respect of the whole of the dividend

received from the Indian company.

However, the Gujarat High Court in Additional Commissioner of Income Tax, Gujarat Vs. Cloth Traders (P.) Ltd., differed from this view of

the Bombay High Court on the interpretation of s. 80M of the Act and for various reasons mentioned therein, ultimately held that the assessee

would be entitled to deduct only the net dividend income and not the gross dividend income. The assessee in that case preferred appeal to the

Supreme Court and the decision of the Supreme Court in Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, . While

reversing the decision of the Gujarat High Court and holding that the deduction permissible under s. 80M of the Act is to be calculated with

reference to the full amount of the dividend received from the 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 for under the Act, the Supreme Court referred to the decision

of this Court in Madras Auto Service''s case (supra) which related to the provisions of s. 80K of the Act with approval. The ld. Judges also

referred to three of the earlier judgments of the Bombay, Calcutta and the Madras High Courts in Darbhanga Marketing Co. Ltd.''s case (supra)

New Great Insurance Co. Ltd.''s case (supra) and Madras Motor and General Insurance Co. Ltd.''s case (supra), respectively, which dealt with

cases under clause (iv) of sub-s. (1) of s. 99 of the Act and also approved of the interpretation placed on that provision.

While the matter stood there, the Parliament intervened and by the Finance (No. 2) Act, 1980, inserted two sections, namely, sections 80A and

80AB in Chapter VIA of the Act and those provisions read as follows :

80AA. Computation of deduction u/s 80M. - Where any deduction is required 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 dividends as computed in accordance

with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends.

80AB. Deductions to be made with reference to the income included in the gross total income. - Where any deduction is required to be made or

allowed under any section (except section 80M) included in this Chapter under the heading ''C'', deduction in respect of certain incomes'' in

respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding

anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed

in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income

of that nature which is derived or received by the assessee and which is included in his gross total income.

Section 80A was given retrospective effect and it came into force with effect on and from 1-4-1968. Section 80AB of the Act, however, was not

given any retrospective operation and it came into force on 1-4-1981.

In distributors (Baroda) (P) Ltd.''s case (supra) in a writ petition under art. 32 of the Constitution, the Constitutional validity of s. 80AA was

questioned. One of the grounds urged was that this provision has been introduced with a view to overriding, with retrospective effect, the

construction placed on s. 80M of the Act by the Supreme Court in Cloth Traders (P) Ltd.''s case (supra). The correctness of the decision in Cloth

Traders (P) Ltd.''s case (supra) was also challenged by the revenue. In the case, the Supreme Court considered that if they did not agree with the

view taken in Cloth Traders (P) Ltd.''s case (supra) and hold that even before the introduction of s. 80AA, section 80M of the Act on a true

interpretation of its language, meant exactly what s. 80AA of the Act retrospectively clarified to mean, no questions of constitutional validity of s.

80AA would arise, since s. 80AA would then be merely declaratory of the law as it always was and would not be imposing any new tax burden

with retrospective effect and they proceeded to consider as to what is the true construction of s. 80M unaided by the subsequent legislative

interpretation imposed upon it by the enactment of s. 80AA of the Act.

Section 80M which was considered by the Supreme Court in Distributors (Baroda) (P) Ltd.''s case (supra) reads as follows :

80M. Deductions in respect of certain intercorporate dividends. - (1) Where the gross total income of an assessee, being a domestic company,

includes any income by way of dividends from a domestic company, there shall, in accordance with and subject to the provisions of this section, be

allowed, in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to -

(a) where the assessee is a

foreign company -

(i) in respect of such income 80 per cent of such income;

by way of dividends received

by it from an Indian company

which is not such a company as

is referred to in section 108

and which is mainly engaged in

a priority industry.

(ii) in respect of such income by 65 per cent of such income;

way of dividends other than the

dividends referred to in

sub-clause (i)

(b) where the assessee is a domestic 60 per cent of such income.

company - in respect of any such

income by way of dividends.

The ld. Judges first considered the object behind the grant of relief u/s 80M and observed as follows :

..... It was common ground between the parties that the main object of the relief under s. 80M is to avoid taxation once again in the hands of the

receiving company of the amount which has already borne full tax in the hands of the paying company vide the written submission under the

heading ''object'' of relief on inter-corporate dividends'' filed by the learned counsel on behalf of the assessee in the course of the arguments. Now

when an amount by way of dividends is received by the assessee from the paying company, the full amount of such dividend would have suffered

tax in the assessment of the paying company and it is obvious, that, in order to encourage inter-company investments, the Legislature intended that

this amount should not bear tax once again in the hands of the assessee either in its entirely or to a specified extent. But the amount by way of

dividend which would otherwise suffer tax in the hands of the assessee would be the amount computed in accordance with the provisions of the

Act and not the full amount received from the paying company. Therefore, it is reasonable to assume that in enacting s. 80M of the Act, the

Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with

reference to the full amount of dividend received from the paying company. It is difficult to imagine any reason why the Legislature should have

intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to

suffer tax once again in the hands of the assessee. The Legislature could certainly be attributed with intention to prevent double taxation but not to

provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of

the assessee ......

On the meaning to be assigned to the words ''Where the gross total income of an assessee .... includes any income by way of dividends from a

domestic company'' the ld. Judges observed as follows :

..... The opening words describe the condition which must be fulfilled in order to attract the applicability of the provision contained in sub-s. (1) of

s. 80M of the Act. The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company.

''Gross total income'' is defined in s. 80B, clause (5), to mean the ''total income computed in accordance with the provisions of the Act before

making any deduction under Chapter VIA or under s. 80-O''. Income by way of dividends 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. If income by way of dividends from a domestic company computed in accordance with the provisions of the

Act is included in the gross total income, or in other words, forms part of the gross total income, the condition specified in the opening part of sub-

s. (1) of s. 80M of the Act would be fulfilled and the provision enacted in that sub-section would be attracted.

Repelling the further argument on behalf of the assessee, that the opening part of sub-s. (1) of s. 80M of the Act refers only to the inclusion of the

category of income and not to the quantum of such income, the Supreme Court further observed as follows :

.... This was the same argument which found favour with the Court in Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax ,

Gujarat-I, , but on fuller consideration, we do not think it is well founded. We may assume with the Court in Cloth Trader''s case (supra), that the

words ''where the gross total income of an assessee ....... includes any income by way of dividends from a domestic company'' are intended only to

provide that a particular category of income, namely, income by way of dividends from a domestic company should form a component part of

gross total income, irrespective of what is the quantum of the income so included but it is difficult to see how the factor of quantum can altogether

be excluded when we talk of any category of income included in the gross total income. What is included in the gross total income in such a case is

a particular quantum of income belonging to the specified category. Therefore, the words ''such income by way of dividends'' must be referable not

only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of

plain grammar, that the words ''such income by way of dividends'' must have reference to the income by way of dividends mentioned earlier and

that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to

determine what is ''such income by way of dividend''s, we have to ask the question : what is the income by way of dividends from a domestic

company included in the gross total income and that would obviously be the income by way of dividends computed in accordance with the

provisions of the Act. It is difficult to appreciate how, when we are interpreting the words ''such income by way of dividend''s, we can make a

dichotomy between the category of income by way of dividends included in the gross total income and the quantum of the income by way of

dividends so included. This Court observed in Cloth Tra er''s case (supra), that the words ''such income by way of dividends'' as a matter of plain

grammar must be substituted by the words ''income by way of dividends from a domestic company'' in order to arrive at a proper construction of

the section, but there is a clear fallacy in this observation, because in making the substitution, it stops short with the words ''income by way of

dividends from a domestic company'' and does not go the full length to which plain grammar must dictate us to go, namely, ''income by way of

dividends from a domestic company included in the gross total income''. Otherwise, we would not be giving to the word ''such'' its full meaning and

effect. The word ''such'' in the context in which it occurs can only mean that income by way of dividends from a domestic company which is

included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the

Act.

The further reasoning given by the Supreme Court for dissenting from the decision in Cloth Trader''s (P) Ltd.''s case (supra was as follows :

...... What sub-s. (1) of s. 80M of the Act requires is that the deduction of the whole or a specified percentage must be made from ''such income

by way of dividends'' and not from the gross total income. Sub-s. (1) of s. 80M provides that in computing the total income of the assessee, there

shall be allowed a deduction from ''such income by way of dividends'' of an amount equal to the whole or specified percentage of such income.

Now, when in computing the total income of the assessee, a deduction has to be made from ''such income by way of dividends'', it is elementary

that ''such income by way of dividends'' from which deduction has to be made must be part of gross total income. It is difficult to see how the

language of this part of sub-s. (1) of s. 80M of the Act can possibly fit in if ''such income by way of dividends'' were interpreted to mean the full

amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income

: what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is

difficult to appreciate how for the purpose of computing the total income from the gross total income any deduction should be required to be made

from the full amount of the dividend. The deduction required to be made for computing the total income from the gross total income can only be

from the amount of dividend computed in accordance with the provisions of the Act which would be forming part of the gross total income ......

In the view, the ld. Judges dissented and overruled their earlier decision in Cloth Traders (P) Ltd.''s case (supra).

Mr. Jayaraman, the ld. counsel for the revenue, strongly relied on every one of these reasonings in this judgment and contended that a similar

construction will have to be placed on s. 80K of the Act also, since the language used in that provision is almost identical.

On the other hand, Mr. Swaminathan, the ld. counsel for the assessee, contended that the decision in Distributors (Baroda) (P) Ltd.''s case

(supra) related to a case under s. 80M of the Act, that it applies only to an interpretation of section 80M and that the ratio or the reasoning of that

judgment cannot be extended for interpretation of s. 80M of the Act. In this connection, he referred to the statement of the Finance Minister in

introducing the Finance (No. 2) Bill, 1980 and circulars issued by the CBDT immediately after the Finance (No. 2) Act, 1980, was passed by the

Parliament, as also some of the decisions which pointed out the difference in language used in ss. 80K and 80M in the corresponding s. 85 and s.

85A if the Act. In addition he pointed out that expressly while the Parliament declared s. 80AA as having retrospective effect with effect from 1-4-

1968, no such retrospective effect from 1-4-1968, no such retrospective operation was given to the provisions of s. 80AB of the Act.

In this connection we may point out that after referring to the views taken by the High Courts on the scope of s. 99(1)(iv) of the Act the

Supreme Court in Distributors (Baroda) (P) Ltd.''s case (supra) observed as follows :

.... But, on further reflection, we do not see how this view taken by the three High Courts in regard to the construction of clause (iv) of sub-s. (1)

of s. 99 of the Act entirely new section, namely, s. 80M which, as we shall presently point out, is different in its structure, language and content

from clause (iv), sub-s. (1) of s. 99 of the Act. We may point out that some doubt was raised on behalf of the revenue in regard to the correctness

of this view taken by the three High Courts, but we do not think it necessary to consider whether this doubt is well founded or not because we are

of the view that even if the construction placed on clause (iv) of sub-s. (1) of s. 99 of the Act by the three High Courts were correct, it cannot

necessarily lead to the conclusion that a similar construction must also be placed on s. 80M which is different in material respects from clause (iv)

of sub-s. (1) of s. 99 of the Act ....

Again with reference to the decision in New Great Insurance Co. Ltd.''s case (supra) which construed the provisions of s. 85A of the Act, the

Supreme Court made the following observations :

.... But, as we have pointed out above, it is necessary to consider whether the construction placed on s. 85A of the Act by the Bombay High

Court in Commissioner of Income Tax Vs. New Great Insurance Co. Ltd., is correct or not, because we are not concerned here with the

interpretation of s. 85A of the Act. It is s. 80M which has to be construed and this section, as we shall presently show, is materially different from

s. 85A. We cannot construe s. 80M in the light of the interpretation placed on its predecessor section by the Bombay High Court particularly when

s. 80M of the Act is admittedly worded differently from its predecessor section .....

Again at a later part of the judgment also, the Supreme Court observed that whatever might have been the interpretation placed on clause (iv) of

sub-s. (1) of s. 99 and s. 85A, the correctness of which is not in issue before them, so far as s. 80M of the Act is concerned, the deduction

required to be allowed under that the provision is liable 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 and not with reference to the full amount of dividend received by the assessee. The

Supreme Court, therefore, has restricted the decision to the interpretation of s. 80M of the Act alone and left open the correctness of all the other

decisions interpreting s. 99(1)(iv), s. 85, s. 85A and s. 80K of the Act.

New Great Insurance Co. Ltd.''s case (supra) laid emphasis on the different in s. 85 and s. 85A corresponding to the new ss. 80K and 80M of the

Act. The ld. Chief Justice pointed out that where s. 85 uses the words ''any dividend paid or deemed to be paid'' which makes the ratio of the

decision rendered under s. 85A of the Act with greater force and in fact the ld. the Act with greater force and in fact the ld. Chief Justice observed

that even if an argument was possible on the language used in s. 85A was possible on the language used in s. 85A that the words ''includes any

income by way of dividend'' are possible of interpreting that it referred to a net income and not gross income, such an argument is not possible on

the language used in s. 85 of the Act. We are of the view that the omission of the word ''received'' later are inconsequential and in fact even without

those words ''includes any income by way of dividend received by the Indian company.

In the decision of the Bombay High Court, appended to the decision in Dr. T. Ramdas M. Pai''s case (supra), the decision of the Gujarat High

Court in Cloth Traders (P.) Ltd.''s case (supra), was relied on with reference to a case under ss. 80K and 80L of the Act. The Bombay High

Court in observed that the language of s. 85A materially differed from the provisions of ss. 80K and 80L of the Act. The ld. Judges observed :

.... As the observations of the Gujarat High Court indicate, considerable reliance has been placed on the second part of s. 85A of the Act which is

chargeable on total income. Such wording is not to be found in the two sections under our consideration two sections under our consideration (ss.

80K and 80L) which allow for a straight deduction.

The main object of s. 80 of the Act is to extend the benefit given to the company under s. 80J, to the shareholders and not avoidance of double

taxation. It is extending the benefit of non-taxability of the income of the company under s. 80J to the shareholder.

Apart from this, the Parliament itself seemed to have made a difference to these provisions under ss. 80K and 80M of the Act. Originally, the

Finance (No. 2) Bill, 1980 proposed to introduce only one section 80AA with effect from 1-4-1968 and the provision sought to be introduced

reads as follows :

80AA. Deductions to be made with reference to the income in the gross total income - Where any deduction is required to be made or allowed

under any section included in this Chapter under the heading ''C''. - Deductions in respect of certain incomes'' in respect of any income of the

nature specified in that section which is included in the gross total income which is included in the gross total income of the assessee, then,

notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that

nature as computed in accordance with the provisions of this Act (before taking any deductions under this Chapter) shall alone be deemed to be

the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.

However, at the time when the Bill was taken up for consideration, two sections, namely, 80AA and 80AB, which we have extracted above, were

sought to be introduced, one with effect from 1-4-1968 and the other with effect from 1-4-1981. Moving the amendment and explaining the same

the Finance Minister said :

Sir, Amendment No. 151, which I have moved really takes into account the general view expressed by a number of people in respect of the

retro-active operation of s. 80AA of the Act. Now, in s. 80AA deductions for a number of things are given in the computation of the taxable

income. The intention of Government has always been that the net income should be deducted, that is, the income minus the amount which was

spent in earning that income should be eligible for that deduction. There are several clauses dealing with these deductions. One of them relates to

inter-corporate dividends. There are ss. 80''N'' and 80''O'' and others dealing with deductions in respect of those institutions which earn an income

by way of sale of technological and scientific know-how either in this country or outside and a number of other smaller items. I have taken note of

the general feeling not only in the House but also in the country and I have brought forward an amendment in which only the inter-corporate

dividends will be subject to retro-active operation of law. In respect of others for which I have proposed amendments, there will be no retro-active

operation of the section but there will be a prospective operation. I must now explain why in respect of inter-corporate dividends I have made this

section as retro-active.

Sir, you are aware that company ''A'' borrows a lakh of rupees and invests that money in company ''B''. It earns dividends, let us say of Rs. 2

lakhs or earns profits of Rs. 2 lakhs. Now, company ''A'' pays interest to the company ''B'' on the one lakh of rupees it borrowed. On that interest

on one lakh of rupees paid to the company ''B'', company ''A'' when it is assessed is given a deduction on the amount paid as interest. Then in

respect of Rs. 2 lakhs which it receives as dividend from company ''B'', it claims a deduction for the entire Rs. 2 lakhs, not Rs. 2 lakhs minus the

interest which they have paid, on which they have claimed deduction. This is a sort of double benefit. That is not the intention at any time of the

Government and it has been made clear that when you say ''income'', it is net income, not the gross income. Therefore, in fairness and in equity, I

have said that when one company, one corporation, makes an investment in another company, another corporation, in respect of those inter-

corporate dividends, the expenses incurred in making that investment must be deducted and only the balance should be entitled to Income Tax

deductions as income of the company ''A''. This nobody can object to except that it has been in the past interpreted the other way and they have

claimed double benefit.

As far as the other deductions are concerned, as I have said, we will make the law prospective, for instance in s. 80 of the Act, deductions in case

of Indian companies in respect of royalties in respect of concerns received from abroad-all these things will not be subject to retro-active operation

of this section. Only the inter-corporate dividends will be subject to retro-active operation of the section and the rest of it will be prospective. This

is one point which I wanted to make clear. If this is understood, I think, the Hon. Members may not have much objection to the amendment being

accepted and withdrawing their amendments.

Again after referring to the criticism against retrospective operation, the Finance Minister said :

The departmental view - the Government''s view - that only the ''net'' is deductible, has been accepted by the High Court of Gujarat till as late as

1974. It is only when this case went up to the Supreme Court that it was reversed in 1979. I can come up only after the Supreme Court took a

different decision. The departmental view, as it has always been and as it should be in every Income Tax matter, is that income really means the net

income, less the expenses incurred in earning that income. This you have accepted. And the Gujarat High Court confirmed it as late as in 1974.

The same case went up to the Supreme Court; and it reversed it in 1979. That is why we have come now with this amendment and we make it

retrospective, so that all other cases which may be pending in different areas, in different courts, in different stages and cases which have been

reopened, may be covered by this. We are not bringing in anything new, or anything drastic, as the member said. This also meets Mr. Satish

Agarwal''s point, viz., why did the department act after such long time ? The department is in a great difficulty. Different Benches of Tribunals

sometimes give different judgment. And immediately we cannot rush to the Legislature for amendment. We wait till some High Court decision is

there. And different High Courts give different decisions. It makes it very difficult to come forward with amendment every time. When we feel that

some decision will be upheld up to the Supreme Court, we wait till that. In other cases, where we think that the process will take so long, that the

uncertainly will be so great, then we come forward with the amendment. In this case, it is only because the judgment of case, it is only because the

judgment of the Supreme court was given in 1979 that we have come forward with the amendment.

It may be seen from this statement of Minister that so far as interpretation on s. 80K of the Act is concerned, they did not want to interfere with the

interpretation placed by the various High Courts at least till the asst. yr. 1981-82 and they wanted to apply interpretation provision of section

80AB only prospectively with effect from 1-4-1981. There being no contrary view expressed by any of the High Courts on the scope of s. 80K of

the Act, we are of the view that the attitude taken by the Government in making s. 80AB of the Act prospective may be interpreted as meaning

that the Parliament and the Government did not want to unsettle the prior position. In fact, this was the understanding of the provision by the

department also, as seen by the circular by the CBDT where in paragraph 15.7, the CBDT had stated :

The new section 80AB will take effect from April 1, 1981, and will accordingly apply in relation to the asst. yr. 1981-82, and subsequent years. It

should be carefully noted that the new s. 80AB unlike s. 80AA, will not have any retrospective operation.

The ld. counsel for the revenue contended that he is neither relying on the retrospective operation of s. 80AA of the Act nor on the prospective

operation of s. 80AB of the Act in support of his contention and that we shall have to take an independent view now on the scope of s. 80K of the

Act in the light of the decision in Distributors (Baroda) (P) Ltd.''s case (supra).

We are referring to this prospective operation of s. 80AB of the Act only for the purpose of a probable inference that the Government itself

did not want to disturb the decisions already rendered and they wanted to have a correct interpretation for the period from 1-4-1981 alone and

not with reference to earlier assessment years.

That the statement of the Finance Minister could be relied on as an aid to the interpretation of the provisions cannot also be disputed in view of the

decision in The Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, . In that case the Supreme Court observed :

It is true that it is dangerous and may be misleading to gather the meaning of the words used in an enactment merely from what was said by any

speaker in the course of a debate in Parliament on the subject. Such a speech cannot be used to defeat or detract from a meaning which clearly

emerges from a consideration of the enacting words actually used. But, in the case before us, the real meaning and purpose of the words used

cannot be understood at all satisfactorily without referring to the past history of legislation on the subject and the speech of the mover of the

amendment who was, undoubtedly, in the best position to explain what defect in the law the amendment had sought to remove. It was not just the

speech of any member in Parliament. It was the considered statement of the Finance Minister who was proposing the amendment for a particular

reason which he clearly indicated. If the reason given by him only elucidates what is also deducible from the words used in the amended provision,

we do not see why we should refuse to take it into consideration as an aid to a correct interpretation ....

The Supreme Court further observed :

...... There is, however, a distinction between the fact that a particular statement giving the purpose of an enactment was made in Parliament, of

which judicial notice can be taken as part of the proceedings, and the truth of the disputable matter of fact stated in the course of proceedings,

which has to be proved aliunde, that is to say, apart from the fact that a statement about it was made in the course of proceedings in Parliament

(see AIR 1935 34 (Privy Council) and Englishman Ltd. v. Lajpat Rai ILR (1910) 37 Cal 760.

In the case before us, a reference was made merely to the fact that a certain reason was given by the finance Minister, who proposed an

amendment, for making the amendment. What we can take judicial notice of is the fact that such a statement of the reason was given in the course

of such a speech. The question whether the object stated was properly expressed by the language of s. 2(15) of the Act is a matter which we have

to decide for ourselves as a question of law. Interpretation of a statutory provision is always a question of law on which the reasons stated by the

mover of the amendment can only be used as an aid in interpretation if we think, as I do in the instant case, that it helps us considerably in

understanding the meaning of the amended law. We find no bar against such a use of the speech"".

In the foregoing circumstances, we have to answer the first part of the first question relating to the benefit u/s 80K in the affirmative and in

favour of the assessee. The assessee will be entitled to his costs. Counsel''s fee Rs. 500.