The Commissioner of Income Tax vs The Central Bank of India

S.H. Kapadia, J.—By order dated 29/1/19981, the Tribunal has referred to this Court u/s 256(1) of the Income Tax Act, the following question of law (which has been reframed by us) concerning Assessment Year 1970-71. The Reference has been made at the instance of the Department.

The assessee is Central Bank of India. The assessee-bank claimed reliefs u/s 80M on the dividends amounting to Rs. 15,58,646/-. However, the ITO deducted Rs. 15,04,220/- from Rs. 15,58,646/- leaving a net amount of Rs. 54,426/- being the eligible amount for computation of reliefs u/s 80M. According to the ITO, the major income of the bank was falling under the head "Income from Securities" under Sections 18,19 and 20 of the Income Tax Act as it stood at the relevant time. According to the ITO, Section 20 contemplated deduction from "Interest on Securities" in the case of a Banking Company. According to the ITO, the Bank has earned income under the head "Interest on Securities" which fell u/s 18 of the Income Tax Act and since Section 20 contemplated the Rule of Proportionality of expenses and interest, the ITO broadly lifted that Rule from Section 20 and imported that Rule into computation of Net Eligible Amount as basis for computing relief u/s 80M of the Income Tax Act. Being aggrieved, the assessee went in Appeal to CIT (Appeals), which took the view that there was no warrant to allocate interests and expenses to income from dividends. That the Rule of Proportionality of interests and expenses was applicable to income from interest on security and not to income from dividends. The CIT (Appeals), therefore, directed the ITO to allow deduction u/s 80M on Rs. 15,58,646 and not on Rs. 54,426/-. This order of the CIT was confirmed by the Tribunal. Hence the Department has come by way of this Reference.

As stated above, by order dated 29/1/1981, the following question of law was referred to us for opinion. The question reads as follows:

"Whether the assessee was entitled to deduction u/s 80M on the basis of gross dividend or net dividend?"

However, before us, there is no dispute that the deduction u/s 80M is based on net dividend received. This point is squarely covered in favour of the Department by the judgment of the Bombay High Court in the case of Commissioner of Income Tax Vs. Maganlal Chhaganlal (P.) Ltd., in which it has been held that deduction u/s 80M has to be calculated with reference to the amount of interest computed in accordance with the provisions of the Act after deducting interest on monies borrowed for earning such income and not with reference to the full amount of dividend received by the assessee. Therefore, the question referred to us is answered in favour of the Department and against the assessee.

However, on facts, the question which arises for determination is quite different and which the Tribunal has failed to appreciate. That question is as follows:

"Whether the Department was entitled to import the Rule of Proportionate expenditure and interest contemplated by Section 20 of the Act as it then stood into Section 80M of the Act?"

Our answer to the later question is in favour of the assessee-bank and against the Department. The reasons are as follows:

Section 18 of the Act, as it stood at the relevant time, refers to computation of income by way of interest on securities. Section 19, inter alia, states that subject to provisions of Section 21, income chargeable u/s 18 shall be computed after making deductions which are enumerated in that Section. Section 20 refers to deduction from interest on securities in the case of a Banking Company. Section 20(2) states, inter alia, that expenses deducted u/s 20(1) shall not from part of deductions admissible u/s 30 to 37 for the purposes of computing business profits. Section 80M on the other hand comes under Chapter VI of the Income Tax Act. Chapter VIA refers to special deduction. As held in numerous cases by this Court, Chapter VIA constitutes a separate Code dealing with deductions to be made in computing total income. Section 80M refers to special deduction in respect of inter corporate dividend. As held by the Bombay High Court in the case of Maganlal Chhaganlal (supra), in order to compute deduction u/s 80M, one has to compute the amount of dividend in accordance with the Act after deducting interest on monies borrowed for earning such income. The point to be noted is that deductions contemplated by Section 80M referred to actual expenditure whereas, deductions contemplated by Section 20(1) are estimated proportionate expenses and interests. Therefore, one cannot import deductions from interest on securities in the case of a Banking Company u/s 20(1) into the deductions contemplated by Section 80M. In the case of Commissioner of Income Tax Vs. United Collieries Ltd., the Calcutta High Court has held that the special deduction u/s 80M is allowable on the net dividend which is arrived at after taking into account actual expenditure incurred by the assessee in earning the dividend income and that there was no scope for any estimate of expenditure being made and there was no scope for allocation of notional expenditure unless the facts of a particular case so warranted. In our view, Section 20(1) contains a Rule of Proportionality of expenses and interests and that Rule is based on estimation of expenditure whereas, Section 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend unless facts of a particulars case warrant otherwise. Therefore, we answer the later question in favour of the assessee-bank and against the Department.

Subject to above, Reference is disposed of with no order as to costs.