Maharashtra Apex Corporation Ltd. vs The Commissioner of Income Tax

N. Kumar, J.—This reference is made by the Income Tax Appellate Tribunal in pursuance of the order dated 27th January 1997 passed in Civil Petition Nos. 564-565/1996 by this Court u/s 256(2) of the Income Tax Act 1961, (for short the Act) to consider the following question of law.

Whether on the facts and in circumstances of the case, the ITAT was justified in allowing the claim for deductions while considering the deduction u/s 80M of the Act?

The facts leading to this reference are as hereunder:

The assessee made a total investment in shares as to the value of Rs. 57,60,164/- on 31.12.1983 and Rs. 66,42,372/- on 31.12.1984. The assessee received a sum of Rs. 11,05,432/- and Rs. 8,82,208/- as divident income and claimed deduction u/s 80M of the Act. The assessing Authority deducted 10% out of the gross dividend received towards expenditure u/s 57(iii). Aggrieved by the same the assessee preferred an appeal which came to be dismissed. In the second appeal filed by the assessee before the Tribunal, the Tribunal held that the authorities were in error in deducting 10% out of the gross divident amount towards expenditure and deleted the said deduction. But it held that certain other expenditure like salary, stationary, rent, electricity, etc., must be considered to be attributable at least to certain extent to the divident income and therefore notionally it deducted 2-1/2% to the gross divident income as expenditure for the purpose of computing deductions u/s 80M. Accordingly, it modified the order. It is against this order the assessee has sought reference.

Learned Counsel appearing for the assessee Sri, S.P. Bhat, submitted that after setting aside the order of the Assessing Authority and the Appellate Authority, in so far as deduction of 10% of the gross divident income towards expenditure, the Tribunal committed a serious error in directing deduction of 2-1/2% as expenditure notionally. According to the Learned Counsel, no such notional deduction is permissible in law and therefore the question referred for our opinion is to be answered in the negative. However, the Learned Counsel appearing for the respondent supported the impugned orders.

The material on record discloses that the assessing Authority in coming to the conclusion that 10% is the expenditure incurred in securing the divident income, has taken note of the fact that the assessee had borrowed loan for its business for which it had paid interest. As the said amount borrowed got mixed up with the profit earned by the assesee, it was held that it is not possible to accept the contention of the assessee that the entire amount invested in the shares is only from the profit earned. However, the said finding recorded by the Assessing Authority which was confirmed by the First Appellate Authority was rightly set aside by the Tribunal. However, it took the view that the deduction should be notionally to the extent of 2-1/2% of the gross divident income, towards expenditures like salary, stationary, rent, electricity etc. That is not a case pleaded by any of the parties and there is no provision for grant of notional expenditure u/s 80M. In this regard, it is useful to refer to some of the judgments relied on by the Learned Counsel for the assessee.

In the case of Commissioner of Income Tax v. United Collieries Ltd. 1993 ITR 203 the Calcutta High Court has held that the relief u/s 80M is allowable only on the net divident which is arrived at after taking into account the expenditure, if any, incurred for the purpose of earning such divident and where there is no such expenditure the gross divident will be the net divident. It is pointed out that it is only actual expenditure incurred by the assessee in earning the divident income, shall be deducted from the gross divident income and there is no scope for any estimate of expenditure being made and no notional expenditure can be allowable also for the purpose of earning income unless the facts of a particular case warrant such allocation. Thus, reducing the divident income on the basis of notional expenditure was held to be illegal.

The Bombay High Court in the case of Commissioner of Income Tax v. General Insurance Corporation of India (No. 2) 2002 ITR 205, has held that the expenses incurred by the assessee on account of salary paid to the staff of the investment department was not directly relatable to the earning of divident income for the purpose of computing special deduction u/s 80M of the Act. Again in the case of Commissioner of Income Tax v. Central Bank of India 2003 ITR 264 the Bombay High Court has held that the rule of proportionality of interest and expenses was applicable to income from interest on securities and not to income from divident and the deductions contemplated by Section 80M refer to actual expenditure, whereas, deductions contemplated by Section 20(1) are estimated on proportionate expenses and interest; the deduction u/s 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred by the assessee in earning the divident and there is no scope for any estimate of expenditure being made and there was no allocation for notional expenditure unless the facts of a particular case so warranted.

Therefore, from he discussion made above, it is clear that when no expenditure is incurred by an assessee in earning the divident income, no notional expenditure could be deducted from the said income. Though the benefit u/s 80M is posed on a net income, when no expenditure is incurred in earning the divident income, the gross income would become the net income. Thus there is no scope for any estimate of expenditure being made, or any amount being deducted as notional expenditure.

It is not the case of the revenue that the assessee has actually incurred any amount, much less 2-1/2% as expenditure. Therefore, the Tribunal committed a serious error in passing the impugned order granting deduction to the extent of 2-1/2% on the basis of notional expenditure. In that view of the matter, the question of law is required to be answered in the negative against the revenue and in favour of the assessee. Accordingly, it is answered.

In terms stated above, the reference is disposed of. However, no order is made as to costs.