South Indian Bank Ltd. vs Commissioner of Income Tax

C.N. Ramachandran Nair, J.—The appellant, a scheduled bank, claimed deduction of 4/5th of the dividend income received from the Unit Trust of India under proviso (a) to Section 80M(1) of the Income Tax Act, 1961, for the assessment year 1994-95. The Assessing Officer, however, restricted the deduction to 4/5th of 60 per cent, of the dividend income from the Unit Trust by taking the view that "such income" referred to in proviso (a) above referred means 60 per cent. of the dividend income mentioned in Sub-clause (i) of Section 80M(1) of the Act. Even though the first appellate authority allowed the appeal holding that the appellant is entitled to deduction of 60 per cent, on the dividend income from the Unit Trust in terms of proviso (a) to Section 80M(1) of the Act, the Tribunal reversed the order of the first appellate authority and restored the assessment. It is against this order of the Tribunal, the assessee has filed this appeal raising two questions of law. Since the questions raised separately or together do not reflect the issue precisely, we redraft the question as follows:

Whether the assessee, a scheduled bank, is entitled to deduction of 4/5th of the dividend income received from the Unit Trust of India or only 4/5th of 60 per cent. of the dividend income from the Unit Trust of India under proviso (a) to Section 80M(1) of the Income Tax Act, for the assessment year 1994-95 ?

We have heard Sri P. Balakrishnan, counsel appearing for the appellant and Sri P. K. R. Menon, senior counsel appearing for the respondent.

Since the question raised pertains to the interpretation of Section 80M, we extract hereinbelow the said section.

80M. Deduction in respect of certain intercorporate dividends.- (1) Where the gross total income of a domestic company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to,:

(i) in the case of a scheduled bank or a public financial institution or a State Financial Corporation or a State Industrial Investment Corporation or a company registered u/s 25 of the Companies Act, 1956 (1 of 1956), sixty per cent. of the income by way of dividends from another domestic company ;

(ii) in the case of any other domestic company, so much of the amount of income by way of dividends from another domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date ;

Provided that where any domestic company receives any income by way of dividend from the units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), such domestic company shall, subject to the aforesaid provisions, be eligible for deduction to the extent of:

(a) four-fifth of such income in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1994;

(b) two-fifth of such income in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1995, and no deduction shall be allowed on such income in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1996, and any subsequent previous year.

The answer to the question above referred will depend on the meaning of "such income" as it occurs in provisos (a) and (b) above. While the contention of the assessee is that "such income" means dividend income from the Unit Trust of India, for which the main proviso is introduced by the Finance Act, 1993, with effect from April 1,1994, the senior counsel appearing for the Revenue contended that "such income" when read with "subject to the aforesaid provisions" referred to in the main provision means 60 per cent. of the dividend income received from the Unit Trust of India because the assessee is covered by Clause (i) of Section 80M(1) of the Act. The proviso which is the subject-matter of controversy in this appeal was introduced by the Finance Act, 1993, with effect from April 1, 1994. It is not in dispute that until the proviso was introduced, every domestic company was eligible for deduction u/s 80M of the Act of the full dividend income including the dividend received from the Unit Trust of India. However, scheduled banks like the appellant and the public financial institutions and Section 25 companies were entitled to deduction of only 60 per cent. of the dividend income including the dividend received from the U.T.I. The purpose of introduction of the proviso is explained in the Notes on Clauses of the Finance Bill, 1993, as follows [1993] 200 ITR 32):

Clause 16 seeks to amend Sub-section (1) of Section 80M of the Income tax Act relating to deduction in respect of certain intercorporate dividends.

The proposed amendment seeks to insert a proviso in Sub-section (1) of Section 80M so as to withdraw the deduction under that section in respect of dividend income received by a domestic company from the units of the Unit Trust of India in a phased manner. The amount of deduction shall be limited to four-fifth of such dividend income of the previous year relevant to the assessment year 1994-95. Similarly, in respect of dividend of the previous year relevant to the assessment year 1995-96, the amount of deduction allowed shall be limited to two-fifth of such dividend. No such deduction in respect of dividend income from units in any other subsequent previous year shall be allowed.

This amendment will take effect from 1st April, 1994, and will accordingly apply in relation to the assessment year 1994-95 and subsequent years.

The only question to be considered is whether "such income" referred to in provisos (a) and (b) above refers to dividend income from the Unit Trust of India or relief portion of dividend income from the Unit Trust, i.e., 60 per cent. in the case of the appellant. If the appellant''s claim is to be allowed, the appellant is entitled to deduction of 4/5th of the dividend income from the Unit Trust of India, i.e., 80 per cent. On the other hand, if the Department''s case is accepted, the appellant will only be entitled to 4/5th, i.e., 80 per cent. of the 60 per cent. of the dividend income from the Unit Trust of India. "Any income" referred to in the main proviso to the section talks of dividend income from the Unit Trust of India. Therefore, in the normal course, when "such income" is later referred to in the proviso, it would only mean dividend income from the Unit Trust of India. The question to be considered is whether the use of words "subject to the aforesaid provisions" in the main proviso makes any difference or not. The senior counsel appearing for the Revenue contended that "subject to the aforesaid provisions" refers to the limits on relief covered by Clauses (i) and (ii) of Section 80M(1) or, in other words, provisos (a) and (b) are a further restriction or limitation on the reliefs provided in Clause (i) and (ii) of the main provision. We are unable to agree with this argument because the purpose of introduction of the proviso as stated in the Explanatory Notes attached to the Finance Bill is to take away deduction for dividend income from the Unit Trust of India in a phased manner.

In the first year, 1994-95, the relief provided was up to 4/5th of the dividend income received from the Unit Trust of India. For the next year 1995-96, it was reduced to 2/5th of the dividend income received from the Unit Trust of India and thereafter, from the assessment year 1996-97 onwards, no deduction is admissible u/s 80M(1) of the Act for the dividend income received from the Unit Trust of India. As already stated, the purpose of the amendment through introduction of provisos (a) and (b) to Sub-clauses (i) and (ii) to Section 80M(1) of the Act is to abolish the deduction provided for dividend income from the Unit Trust of India in a phased manner. The purpose will not be achieved unless the proviso is taken to cover deduction pertaining to dividend income received from the Unit Trust of India. In other words, after the proviso was introduced, Sub-clauses (i) and (ii) of Section 80M(1) of the Act no longer applies to dividend income from the Unit Trust of India. If the argument of the Revenue that the limitation contained in Clause (i) of Section 80M(1) of the Act applies to the ceiling contained in Clause (a) of the proviso is accepted, then it would mean that even after the abolition of the deduction of the dividend income from the Unit Trust of India from 1996-97 onwards, the assessee will be entitled to claim deduction under Sub-clause (i), which is 60 per cent. This will defeat the very purpose of the amendment.

Therefore, we hold that the contention of the Revenue that Clause (a) to proviso is subject to the limit contained in Sub-clause (i) of Section 80M(1) is absolutely untenable. So much so, the argument of the Revenue that admissible deduction for dividend income from the Unit Trust of India for the year 1994-95 is only 4/5th of 60 per cent. of such income is rejected. We hold that the deduction under the main section available to dividend income from the Unit Trust of India is subject to the limit contained only in Clause (a) to the proviso for the year 1994-95. So the assessee is entitled to deduction of 4/5th of the dividend income received from the Unit Trust of India. For the year 1995-96, the limitation is only what is provided in Clause (b) of the proviso to Section 80M(1) of the Act.

Consequently, we allow the appeal by reversing the order of the Tribunal and restoring the order of the first appellate authority in favour of the assessee.