Gujarat High Court
Addl. Commissioner Of Income-Tax vs Laxmi Agents P. Ltd. on 20 December, 1975
JUDGMENT T.U. Mehta, J.
1. The main contention which is involved in this reference is whether the interest paid by the respondent-assessee on the amounts borrowed for the purpose of investment made to purchase the shares of the managed company should be allowed as business expenditure or should be allowed as deduction against the dividend income earned by the assessee from the shares so held. There are other questions also, to which we shall make reference subsequently.
2. Short facts of the case are that the respondent-assessee is a private limited company carrying on managing agency business. It works as the managing agents of M/s. Digvijay Cement Company Ltd. of Sikka. The assessment years with which we are concerned in this reference are the years 1966-67 and 1967-68. The income of the respondent-assessee during the accounting period comprised of(1)managing agency business,(2)income from trading in shares, and(3)income from other sources, i. e., dividends. It is found that during the accounting period, relevant to the assessment year 1966-67, the assessee paid interest of Rs. 2,44,505 on the borrowings made by it. The assessee has claimed this payment of interest as deduction from its business income. The assessee also claimed deduction of tax on inter-corporate dividends, contemplated by s. 85A of the I.T. Act, 1961. But the assessee claimed this deduction under s. 85A without deducting the interest paid on borrowings made for the purpose of purchasing shares because, according to assessee, the interest paid on these borrowings should be deducted from its business income.
3. During the course of the assessment, the ITO refused to deduct the interest paid on the borrowings from the assessee's business income, but deducted the same from its dividend income from shares. He, accordingly, computed the deduction contemplated by s. 85A on the dividend income reduced by the amount of interest paid on the borrowings. This view was taken by the ITO on the ground that the borrowings on which the interest was paid were mainly for the purpose of investment in shares and, therefore, there was no question of this interest being deducted from business income.
4. Being aggrieved by this decision of the ITO the assessee approached the AAC in appeal. In that appeal, it was held by the AAC that the investment made for the purpose of purchasing the shares of the managed company was for the purpose of business of managing agency and, therefore, the interest paid on borrowings was deductible from the business income and not from dividend income. In view of this finding, the assessee got deduction of tax on inter-corporate dividends as desired by it.
5. In view of the above decision given by the AAC in appeal, the department approached the Appellate Tribunal in second appeal. The Tribunal found, after referring to the balance-sheet of the assessee-company, that investments made by the assessee were all trade investments, and related to the business activities of the assessee. The Tribunal observed that it was common knowledge that the managing agents prefer to invest in shares of the managed company in order to have more and better control over it and, therefore, the so-called trade investment in the managed company had close connection with the business activity of the assessee, namely, the managing agency business. According to the Tribunal, therefore, the investment made by the assessee in the present case were not investments simpliciter but they were for the purpose of business of the assessee. In this connection, the Tribunal relied upon the decision given by this court in Distributors(Baroda)P. Ltd. v. CIT [1968] 69 ITR 614. It was further held by the Tribunal that though income from dividend is required to be assessed under a separate head, payment of interest made on the borrowings, which related to the shares of the managed company, must be allowed as business expenditure. Thus, according to the view taken by the Tribunal, the interest paid on borrowings was deductible as against the dividend income. On the question whether deduction contemplated by s. 85A should be deducted from gross dividend income, or net dividend income the Tribunal was of the view that it should be deducted from the amount of gross dividend income.
6. Being aggrieved by this decision, the revenue has preferred this reference in which the following four questions have been referred to us for our opinion :
"(1) whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income arising out of the investments made by the assessee must be held to be the income from the business of the assessee ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, the payment of interest by the assessee on amounts borrowed for purposes of investments must be allowed as business expenditure ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to tax deduction in accordance with section 85A of the Act calculated on the amount of gross dividend income and not on net amount of dividends after deducting any amount of expenses by way of interest ?
(4) Whether, on the facts and in the circumstances of the case, the income from dividend must be assessed under the head 'Income from other sources' as laid down in sections 56 and 57 ?"
7. The factual data, relevant to the contentions, which arise to be considered in this reference, as revealed from the balance-sheets found at annexs."F" & "G", is as under:
(a)For the year ended December31, 1965, the total trade investments of the assessee in shares amounted to Rs. 23,69,353 out of which the investment in the managed company was to the tune of Rs. 18,60,890. For this period the shares of the managed company held as stock-in-trade were worth Rs. 23,63,740. These figures for the next year are with slight variation.
(b) For the year ended December31, 1965, the assessee had to pay interest of Rs. 3,06,839 on account of overdraft and current accounts. As against this, it earned interest of Rs. 62,334, thus incurring the deficit of Rs. 2,44,505 in the interest account. For the next year, it had to pay interest of Rs. 2,92,048 while it received interest of Rs. 72,158, thus incurring the deficit of Rs. 1,19,890 in the interest account.
8. The contention of the revenue is that since the borrowing, on which the assessee was required to pay interest, was for the purpose of investment in shares of the managed company, the interest on these borrowings should be deducted from the dividend income received by the assessee and not from its business income. Shri Kaji contended for the revenue that income from dividend is required to be assessed under the separate head of "Other sources" as provided by s. 56(2),and if that is so, the interest, which the assessee was required to pay on the borrowing, which were made to earn this dividend income, should be deducted only under the same head, i. e., "Income from other sources", and not from the different head such as "Business".
9. As against this, Shri Patel, appearing for the assessee, contended that since the assessee has made investment in shares of the managed company only with a view to safeguard its business of managing agency, its dividend income from these shares as well as the interest paid by it on borrowings, must be assessed under the head "Profits and gains of business". In the alternative, he contended that even if income from dividend is assessed under the head "Other sources" interest paid on borrowings should be assessed under the head "Profits and gains of business" for the simple reason that these borrowings were essentially made with the ultimate object of safeguarding the managing agency business.
10. In view of these contentions, we now turn our attention to the questions, which have been referred to us by the Tribunal. The first question shows that the Tribunal is of the view that the dividend income arising from investment in shares must be held to be income from "business" and must be assessed as such. The contention of the revenue is that in view of the provisions contained in sub-s.(2)of s. 56(2) this income cannot be assessed under any head other than the head "Income from other sources", we are of the opinion that the view taken by the Tribunal on this point is not correct. We shall presently discuss how this is so.
11. Section 14 of the I.T. Act, 1961(which is hereinafter referred to as "the Act"),classifies income under six different heads, and income which is specifically chargeable under a distinct head cannot be brought to charge under a different head for the simple reason that rules for computing income and the deductions, which are permissible, vary with each of the six different heads. Therefore, the scheme of the Act is first to classify the income under different heads and then to work out the computation under each of the heads as per the provisions relating to such head and then to total up the computation so made for the purpose of arriving at the final figure of total income liable to tax. This principle is recognised in a long series of cases beginning from CIT v. Ahmuty & Co. Ltd. [1955] 27 ITR 63, wherein the High Court of Bombay has held, constructing provisions of s. 6 of the Act of 1922(which is similar to s. 14 of the Act of 1961),that dividend income received by the assessee in that case in respect of shares held by him was income from business chargeable under s. 10(of the Act of 1922)and hence the I.T. authorities could not compel the assessee to show his income under s. 12 as falling under "Other sources". This decision was given with reference to the Provisions of s. 12, as it stood before sub-s.(14)was inserted by the Finance Act, 1955, including "dividends" within "Income from other sources". However, the decision given by the High Court in this case is clear on the question that where a specific head of income is available for a particular item of income that income should be assessed only under that specific head.
12. This question has been exhaustively considered by the Supreme Court in United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688. The Supreme Court has held in this case that income from "interest on securities" falls under s. 8 of the Act and not s. 10 and, therefore, it cannot be brought under a different head of income, namely, "Profits and gains of business" under s. 10, even though the securities are held by a bank as part of its trading assets in the course of its business. At page 695 of the report, the Supreme Court is found to have made the following very pertinent observations, which are applicable to the question under our consideration. The court has said(p. 695):
"The mandatory character of section 6 is indicated by the language employed in that section and phraseology of all the sections following, i. e., 7 to 12, employing the words 'the tax shall be payable under the head...... in respect of' the different and distinct heads of income, profits and gains, 'salaries', 'interest on securities' and 'property', 'business', etc., is indicative of the intention of the Legislature in making the various heads of income, profits and gains mutually exclusive. So every item of income, whatever its source, would fall under one particular head and for the purpose of computing the income for charging of income-tax the particular section dealing with that head will have to be looked at. The various sources of income, profits and gains have been so classified that the items falling under those heads become chargeable under sections 7 to 12 according as they are income of which the source 'salaries', 'interest on securities', 'property', 'business, profession or vocation', 'other sources' or 'capital gains. Looked at thus, the contention of counsel for the revenue that under the scheme of the Act and on a true construction of these relevant sections 'interest on securities' by whomsoever and for whatever purpose held as to be taxed under section 8 and under no other section is well founded and must be sustained. It being a specific head of chargeability of tax, income from 'interest on securities', whether held as a trading asset or capital asset, would have to be taxed under section 8 and 10 of the Act.
13. Similar view is taken by the Supreme Court in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49. In that case, the appellant-company, which was incorporated with the objects of buying and developing landed properties and promoting and developing markets, purchased 10 bighas of land in the town of Calcutta and set up a market therein. The question was whether the income realised from the tenants of the shops and stalls was liable to be taxed as "business income" under s. 10 of the Indian I.T. Act of 1922, or as income from property under s. 9. The court held that the income derived by the company from shops and stalls was income received from property and fell under the specific head described in s. 9. The character of that income was not altered because it received by a company formed with the object of developing and setting up markets.
14. Proceeding further, we find that the same view is taken by the Supreme Court in the subsequent case of CIT v. Express Newspapers Ltd. [1964] 53 ITR 250. The question in that case arose with regard to s. 26(2)of the Act of 1922 and the court observed that both s. 26(2)and the proviso thereto dealt with only profits and gains of a business, profession or vocation; they did not provide for the assessment of income under any head, e. g., capital gains. In an assessment made on the successor under the proviso to s. 26(2)capital gains made by the predecessor could not be included, and, therefore, the sum of Rs. 3,94,576, which represented the capital gains of the Free Press Co., on the sale of its machinery, could not be brought to tax in the assessment of the Express Newspapers Ltd., under s. 26(2).The court further observed during the course of the judgment that the profits and gains of business and capital gains are two distinct concepts in the I.T. Act; the former arises from the activity which is called "business" and the latter accrues because capital assets are disposed of a value higher than what they cost the assessee. They are placed under different heads; they are derived from different sources; and the income is computed under different methods. The fact that the capital gains are connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profits or gains arising from the business during that year.
15. One more decision of the Supreme Court which requires to be considered in this connection is the one given by the Supreme Court in the subsequent case of Bengal and Assam Investors Ltd. v. CIT [1966] 56 ITR 547. There, on behalf of the assessee, it was submitted, as is submitted in the instant case before us, that when a company is formed for the purpose of acquiring shares and making investments and generally undertaking financial and commercial obligations and transactions and operation of all kinds, the dividend income must be computed under s. 10, because the company is formed expressly for the purpose of carrying on business and holding shares in the course of it. The court did not accept this contention and observed that, on principle, before dividend on shares can be assessed under s. 10, the assessee, be it an individual or a company or any other entity, must carry on business in respect of shares, that is to say, the assessee must deal in those shares. The court further observed that it is evident that an individual, who merely invests in shares for the purpose of earning dividend, does not carry on business. The only way he can come under s. 10 is by converting the shares into stock-in-trade, i. e., by carrying on the business of dealing in stocks and shares, as did the company in CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86(SC).
16. These decisions, therefore, conclusively show that even though the assessee has purchased the shares of the managed company for the purpose of its business of managing agency, the income received from the dividends of these shares must be classified under the specific head provided for the same. Shri Patel contended on behalf of the assessee that s. 56 of the Act does not provide a specific head for the dividend income and hence, this income should be computed under the head "Profits and gains" from business. For this contention he relied upon the generality of the provisions contained in sub-s.(1)of s. 56, but this contention is not acceptable as sub-s.(2)of s. 56 specifically provides that dividend income shall be chargeable to tax under the head "Income from other sources".
17. In this connection it should be noted that the position in law as regards the dividend income of this type was different, as held by the Bombay High Court in the decision of CIT v. Ahmuty & Co. Ltd. [1955] 27 ITR 63, before s. 12 of the Act of 1922 was amended, and sub-s.(1A)was inserted therein in the year 1955 bringing dividend income specifically under the head "Other sources".
18. There is, however, a line of decisions which take the view that the above referred classification of income under different heads is only for the limited purpose of ascertaining the figure of total income of an assessee and that once that is done, the question whether the dividend income was earned for the business purpose and if so how it should be treated for the purposes other than computation of income, should be determined on broad commercial principles. These decisions are: CIT v. Chugandas & CO. [1965] 55 ITR 17(SC),CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306(SC),CIT v. Bhavnagar Trust Corporation(P.)Ltd. [1968] 69 ITR 278(Guj)and Western States Trading Co. P. Ltd. v. CIT [1971] 80 ITR 21 (SC). We shall discuss the ratio of these ecisions while dealing with the second question referred to us. For the present, however, it would be sufficient to note that none of these decisions says anything which detracts from the ratio of the above-referred decisions in the cases of United Commercial Bank [1957] 32 ITR 688(SC),East India Housing and Land Development Trust Ltd. [1961] 42 ITR 49(SC)and Express Newspapers Ltd. [1964] 53 ITR 250(SC).
19. The Tribunal seems to have relied upon, in determining this question, the decision given by this court in Distributors(Baroda) P. Ltd. v. CIT [1968] 69 ITR 614, which is affirmed subsequently by the Supreme Court in appeal in CIT v. Distributors (Baroda) P. Ltd. [1972] 83 ITR 377. This case was decided with reference to the applicability of s. 23A of the Act of 1922, and the question, which arose for consideration of this court, was whether holding of investment shares with a view to retain managing agency, amounted to "business" within the meaning of s. 23A. This court has observed in this case as under(p. 627 of 69 ITR) :
"Now, as the finding of facet recorded by the Tribunal shows, the shares of the managed companies were held by the assessee for the purpose of safely retaining the managing agencies of the managed companies which were assets productive of income. These shares were investments made for the purpose of holding the managing agencies and they represented as it were the monies required to be invested for the purpose of holding and retaining the managing agencies. These shares were not held as part of a business activity of holding investments and it would be stretching the words to their breaking point to say in these circumstances that the assessee had the 'business' of holding investments."
20. In the appeal, which was decided by the Supreme Court, the Supreme Court took the view that if a company engages itself in two or more equally or nearly equally important business activities, then it cannot be said that the company's business consists of "wholly or mainly" in dealing in a particular activity. Both these decisions, therefore, turned on the consideration of the special provisions contained in s. 23A of the Act of 1922 and speak nothing about the head of income under which a particular income should be charged. These decisions would be helpful to the assessee on the second question, to which we shall presently come.
21. In view of these decisions, we conclude on the first and the fourth questions referred to us, that the Tribunal was not right in holding that the income arising out of the share investment made by the assessee should be held to be the income from business. In our opinion, it should be charged under the head "Other sources" as dividends, as laid down by s. 56.
22. We may now go to the second question, which refers to the view of the Tribunal that even though income from dividend has to be assessed under a separate head, payment of interest by the assessee on the amounts borrowed for share investment must be allowed as business expenditure. On this question, the contention of the revenue is that if once a particular item of income is required to be assessed under a particular head, then all admissible deductions relating to that item of income should be made from that head alone. Referring to the facts of this case, it was contended by Shri Kaji on behalf of the revenue that if dividend income from shares invested in the managed company is to be assessed under the head "Other sources", interest paid on the borrowings made for the purpose of purchasing these shares should be deducted under the same head and not under the head of business income.
23. It is true that, in ordinary course, according to general principles applicable to this question, expenditure incurred for earning income falling under a particular head should be deducted only under that head. But this general principle has to be read subject to the special provisions contained in cl.(iii)of s. 36(1) as regards deduction of interest. The relevant portion of s. 36 is as under :
"36.(1)the deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- ........
(iii)the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession."
24. This being a special provision regarding deduction of the interest amount, if a case falls within its terms, the general principles on which reliance is placed by the revenue would be of no avail to it. We shall, therefore, presently consider whether the facts of this case are covered by this special provision.
25. The main requirement of the above quoted cl.(iii)of s. 36(1) is that the interest amount which is sought to be deducted in computing business income under s. 28 should be in respect of capital which is borrowed "for the purpose of business". Therefore, if it is found in this case that the borrowings in question were made "for the purpose of business", cl.(iii)of s. 36(1) would have full application and deduction of interest amount must be made from profits and gains of business.
26. The facts of the case show and that is also the finding of the Tribunal that borrowings were made only for the purpose of the assessee's business of managing agency. The assessee invested in shares of the managed company with a view to protect its managing agency business and hence the main object of this investment was not to earn dividend, and if the borrowings were required to enable the assessee to purchase these shares, it must follow that the interest was paid on the capital borrowed for the purpose of business. If once it is established that capital was borrowed for the purpose of business, it is immaterial how that borrowed capital was applied because all that cl.(iii)of s. 36(1) requires is that borrowings, on which interest is paid, should be for the purpose of business. Two important decisions on this point are: the decision of the Supreme court in India Cements Ltd. v. CIT [1966] 60 ITR 52 and the decision of the Bombay High Court in Calico Dyeing and Printing Works v. CIT [1958] 34 ITR 265. This Bench has recently discussed this aspect of the case in CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj), wherein referring to s. 10(2)(iii)of the Act of 1922 (which is equivalent to s. 36(1)(iii) of the Act of 1961),we have observed as under(p.726) :
"Section 10(2)(iii)of the Act of 1922 allows deduction of interest on all borrowings which are made 'for the purposes of business'. The expression 'purposes of business' is comprehensive enough to cover expenditure of revenue nature as well as of capital nature because both the types of expenditures can be incurred for business purposes. Therefore, even if a borrowing is made for incurring an expenditure of capital nature, it remains the borrowing for a business purpose. If that is so, the requirements of section 10(2)(iii)of the Act of 1922 are fully satisfied and interest paid on such borrowing is entitled to deduction as revenue expenditure. The High Court of Bombay has unequivocally stated in Calico Dyeing & Printing Works [1958] 34 ITR 265(Bom)that in order to attract the provisions of section 10(2)(iii) it does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because all that the section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan, and actual application thereof in the purchase of a capital asset, seems to be on the ground that a mere transaction of borrowing does not, by itself, bring any new asset which brings that asset into existence. Since the transaction of borrowing is not the same as the transaction the Supreme Court has observed in India Cements Ltd. v. Commissioner of Income-tax [1966] 60 ITR 52(SC)that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant."
27. The principle that income falling under a specific head should be made chargeable under that head even if it is earned for business purposes is to be worked out only for the limited purpose of computing total income of an assessee. This principle is accepted by the Supreme Court in the decisions in CIT v. Chugandas and Co. [1965] 55 ITR 17(SC),CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306(SC),Western States Trading Co. P. Ltd. v. CIT [1971] 80 ITR 21(SC)and by this court in CIT v. Bhavnagar Trust Corporation(P.)Ltd. [1968] 69 ITR 278(Guj).We have made a casual reference to these decisions while discussing question No. 1. We shall now examine how the ratio of these decisions becomes helpful in providing a correct answer to question No. 2.
28. In CIT v. Chugandas and Co. [1965] 55 ITR 17(SC), the question was whether the interest on securities formed part of the assessee's business income for the purpose of the exemption from tax under s. 25(3)of the Indian I.T. Act, 1922. There the assessee-firm was a dealer in securities holding securities as its stock-in-trade and had been charged to tax under the Indian I.T. Act, 1918, in respect of business. The firm received Rs. 4,13,992 and Rs. 1,01,229 as interest on securities in the years 1946 and 1947, respectively. On June 30, 1947, the assessee-firm discontinued its business. In proceedings for assessment for 1947-48 and 1948-49, the said firm relied upon s. 25(3)of the Act of 1922, and claimed exemption of the plea that it was carrying on business before the Act of 1922 was enacted and on the business tax was charged under the provisions of the Act of 1918. The ITO held that interest earned by the firm on securities was liable to be assessed under s. 8 and not under s. 10 of the Act of 1922, and hence it was not entitled to the benefit of s. 25(3).This s. 25(3) was enacted because under the Act of 1918, tax was leviable on the income of the year of assessment, while under the Act of 1922, this basis was changed and by s. 3 of that Act charge was imposed on the income of the previous year. Therefore, with a view to make the number of assessments equal to the number of years during which the business was carried on, the Legislature enacted the exemption prescribed by s. 25(3).The question was whether this benefit was available to the assessee in the subsequent years. The court held that heads on income described in s. 6 of the Act of 1922, and further elaborated for the purposes of computation in ss. 7 to 10 and 12, 12A, 12AA and 12B were intended merely to indicate the classes of income. The business income, as observed by the court, was broken up under different heads only for the purpose of the computation of the total income and, therefore, by that breaking up, the income did not cease to be the income of the business, the different heads of income being only the classification prescribed by the Act for computation. Thus, the Supreme Court has in this case definitely held that the breaking up which is contemplated by the different heads of income is only for the purpose of computation of the total income and that being so, if a question arises for any purpose other than computation of total income, the court can look into the intrinsic nature of the income which is earned and can consider from the commercial point of view whether this income was earned for the business purpose or not.
29. Practically the same view is taken by the Supreme Court in CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306. In that case, the assessee-company, which carried on banking business, held securities as part of the trading assets of its business. For the assessment year 1949-50, it incurred a loss of Rs. 64,400 under the head "Business" and earned Rs. 8,488 as interest on securities and the net loss amounted to Rs. 55,912. For the three succeeding assessment years, the ITO allowed this loss to set off against the income under the head "Business" but refused to set it off against the income computed under the head "Interest on securities". On these facts, the court observed that the scheme of the I.T. Act was that income-tax was one tax. Section 6 of the Act of 1922 classified the taxable income under different heads for the purpose of computation of the net income of the assessee. Though for the purpose of computation of the net income interest on securities was separately classified, income by way of interest from securities did not cease to be part of income from business if securities were part of the trading assets. The court also observed that whether a particular income was part of the income from business fell to be decided not on the basis of the provisions of s. 6 but on commercial principles. As already observed by us above, this court has also taken the same view with reference to the working out of the provisions of s. 23A of the Act of 1922 in Distributors(Baroda)P. Ltd. v. CIT [1968] 69 ITR 614 (Guj) as affirmed by the Supreme Court in CIT v. Distributors(Baroda) P. Ltd. [1972] 83 ITR 377.
30. In is thus clear that even though an item of income falls under a specific head, in spite of the fact that that item is earned for the purpose of business, for purposes other than the computation of income, the commercial character of that income can be taken into account. In the case before us, the commercial character of that income becomes helpful to us in determining whether the borrowing on which the interest is paid was for the purposes of business. We therefore, conclude on the second question that the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, payment of interest by the assessee on amounts borrowed for purposes of investments must be allowed as business expenditure, and not as expenditure incurred for earning dividends. This, therefore, settles question No. 2.
31. What remains now to be considered is question No. 3 which is with reference to deduction on inter-corporate dividends contemplated by s. 85A of the Act. This question arises in view of the fact that the revenue sought to deduct interest on the borrowings as against the dividend income. Now, as we are of the opinion that this disputed amount of interest should be deducted from the business income of the assessee, strictly speaking question No. 3 does not arises for our consideration. However, since the Tribunal has taken the view that deduction contemplated by s. 85A should be from the gross dividend, we may point out that this court has held in Addl. CIT v. Cloth Traders(P.) Ltd. [1974] 97 ITR 140 that the deduction in question should be made not from the gross amount of dividend but from the net amount thereof. Therefore, if this question is required to be answered, we would say that the Tribunal was not right in holding that the assessee was entitled to tax deduction in accordance with s. 85A of the Act calculated on the amount of gross income and the not on the amount of dividend as reduced by any amount of expenditure on the same by way of interest.
32. To summarise, our answer to the first question is in the negative, i. e., in favour of the revenue and against the assessee. Our answer to question No. 2 is in the affirmative, i. e., in favour of the assessee and against the revenue. Our answer to question No. 3 is in the negative, i. e., in favour of the revenue and against the assessee and our answer to question No. 4 is that the income from dividend must be assessed under s. 56. This reference is accordingly disposed of without any order as to costs.