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Judgment
The only point involved in this appeal pertains to the deduction available to the assessee u/s 80M of the Act.
The assessee is a company and is partner in the firm of M/s. Zash Traders having 35% share in the profit/loss therein. The assessment year is 1984-85 and the relevant previous year ended on 31-5-1983.
In its return of income, the assessee had claimed deduction u/s 80M of the Act on dividend aggregating to Rs. 69,747, which consists of dividend of Rs. 10,500 received from the companies directly and dividend of Rs. 59,247 received from the firm, as its share. The ITO, however, gave deduction u/s 80M of the Act on Rs. 53,614 in the following manner :-
"It is further seen that the assessee has claimed deduction u/s 80M on dividend of Rs. 69,747 which consist of dividend of Rs. 10,500 received by the assessee and dividend of Rs. 59,247 received from the firm as his share. The assessees share from the firm is declared at Rs. 93,611 and the registered tax deduction is claimed at Rs. 15,084 hence proportionate registered firms tax will be deducted from dividend u/s 80AA for the purpose of section 80M. It is further seen that the assessee has incurred expenses of Rs. 8,587 for earning the gross income of Rs. 89,133 hence proportionate expenses will be disallowed from dividend for the purpose of deduction u/s 80M i. e. the total dividend is Rs. 69,747. The proportionate expenses will be therefore Rs. 6,575, and the proportionate registered firm tax will be Rs. 9,558."
In appeal before the CIT (Appeals), it was strongly urged, on behalf of the assessee, that the ITO was not justified in deduction proportionate registered firm tax and proportionate expenses from the gross dividend of Rs. 69,747 received by the assessee. In this connection, it was stated that section 67 of the Act only stipulates apportionment of a share of profit from the firm under various heads of income in the same manner, in which the income of the firm has been determined under each head of income. However, that fact by itself, would not justify the action of the ITO in not granting deduction u/s 80M of the Act on gross dividend of Rs. 69,747 received by the assessee. It was, further, submitted that since the assessee had income under other heads, by way of share of profits from the firm, the proportionate registered firm tax and proportionate expenses should have been adjusted against such income and not against the gross dividend received by it. In his order under appeal, the CIT (Appeals) was of the view that only proportionate registered firm tax should be deducted from the dividend income and thereafter deduction u/s 80M of the Act would be available to the assessee. With a view to complete my order, I reproduce below the relevant portion of the order of the CIT (Appeals) :-
"The method of computing the share in the firm is profit u/s. 67 of the I. T. Act in the case of partner. U/s. 67(1) (a) the Income Tax, if any, payable by the R. F. in respect of the total income of the previous year has to be deducted from the total income of the firm and the balance ascertained and apportioned along with the partners. U/s. 67(2), the share of partner, in the income of a firm computed under sub-section (1) (a) shall be for the purpose of assessment be apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of the firm. Therefore, it is obvious that the income under different heads will to be computed after deducting the R. F. tax but on proportionate bases from the same. Therefore, the deduction u/s. 80M has to be computed with reference to the income by way of such dividend as computed in accordance with the provisions of the I. T. Act, and not with reference to the gross amount of such dividend income. Therefore, the Proportionate R. F. Tax will have to be deducted from the dividend earned by the appellant as a share from the R. F. Therefore, to this extent, I will uphold the order of the Income Tax Officer. However, with regard to the deduction u/s. 57 of the Act, I am of the opinion that the Income Tax Officer was not justified in deducting the same. Deduction u/s. 57 can consist of only such expenditure which are exclusively incurred for the earning of dividend income. The Income Tax Officer has failed to point out that the proportionate expenditure mentioned by him to have been incurred for the purposes of earning the dividend income was incurred for such a purpose. Hence, the appellant will be entitled to deduction u/s. 80M on dividend income of Rs. 69,747 minus Rs. 9,558 which is the proportionate R. F. Tax. Thus, the appellant will be entitled to a deduction on Rs. 60,189. The appellant, therefore, gets a deduction on Rs. 36,113 as well."
In order to better appreciate the rival contentions of the parties, the necessary data is tabulated below :-
Per Assessee
Per I.T.O.
Per CIT (A)
Share of dividend from the firm
Rs. 59,247
Rs. 59,247
Rs. 59,247
Other dividend income
Rs. 10,500
Rs. 10,500
Rs. 10,500
Rs. 69,747
Rs. 69,747
Rs. 69,747
Less :
(a) Proportionate R.F. Tax
Rs. 9,558
Rs. 9,558
(b) Proportionate expenses
Rs. 6,575
Qualifying amount for Sec. 80M relief
Rs. 69,747
Rs. 53,614
Rs. 60,189
The learned representative for the assessee, reiterated the submissions, which were made before the I. T. authorities and strongly urged that in deciding the point at issue, the I. T. authorities were not justified in considering the provisions of section 67 of the Act. According to him, the amount received by the assessee from the firm is only a share of profit. Since dividend of Rs. 59,247 was a part of such share, the assessee was entitled to deduction u/s. 80M of the Act on the entire amount of Rs. 59,247 without reducing the same by proportionate Registered Firm tax. In this connection, the highlighted the fact that for earning the said dividend income, the assessee had not incurred any expenditure, which could be deducted under the provisions of section 57 of the Act. He therefore, urged that the I. T. O. should be directed to give deduction u/s. 80M of the Act, on the entire amount of Rs. 69,747.
The learned representative for the department, on the other hand, strongly supported the action of the C. I. T. (Appeals) and submitted that no further relief is called for. He also made a reference to the decision of the Honble Calcutta High Court, in the case of Commissioner of Income Tax Vs. Andhra Metal (P.) Ltd., , wherein the implication of the insertion of section 80AA by Finance (No. 2) Act, 1980 has been considered. He, therefore, urged that I should uphold the order of the C. I. T. (Appeals).
I have carefully considered the rival submissions of the parties and I find force in the stand taken on behalf of the assessee. At this stage, it would be necessary to refer to section 67 of the Act, which stipulates the methods of computing a partners share in the income of the firm :
"67. (1) In computing the total income of an assessee who is partner of a firm, whether the net result of the computation of total income of the firm is profit or a loss, has share (whether a net profit or a net loss) shall be computed as follow :-
(a) any interest, salary, commission or other remunertaion paid to any partner in respect of the previous year, and where the firm is a registered firm or an unregistered firm assessed as a registered firm under clause (b) of section 183, the Income Tax, if any, payable by it in respect of the total income of the previous year, sale be deducted from the total income of the firm and the balance ascertained and apportioned among the partners;
(b) Where the amount appertained to the partner under clause (a) is a profit, any salary, interest, commission or other remuneration paid to the partner by the firm is respect of the previous year shall be added to that amount, and the result shall be treated as the partners share in the income of the firm;
(2) The share of a partner in the income or loss of the firm, as computed under subsection (1) shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head on income."
On a plain reading of the aforesaid provisions, it is quite apparent that the same provide for ascertaining a partners share in the income of the firm. Sub-section (2) of the said section postulates apportionment of the share of profit from the firm under various heads. However, that fact by itself, would not, in my opinion, empower the I. T. O. to deduct proportionate Registered Firm tax from assessees share of profit, which includes the income by way of dividend. The purpose of apportionment of the profit under various heads is with a view to enable the assessee to carry forward and set off to the unabsorbed business loss if any. In other words, the assessee would not be allowed to carry forward any loss other than under the head "business". In this view of the matter, I fail to appreciate as to how and why the assessees share in the dividend income from the firm could be reduced by proportionate Registered Firm tax, for the purpose of granting deduction u/s. 80M of the Act. I would, therefore, direct the I. T. O. to allow deduction u/s. 80M of the Act, as claimed by the assessee and modify the assessment accordingly.
In the result, the appeal is allowed.