Madras High Court
Commissioner Of Income-Tax vs Madras Motor And General Insurance Co. ... on 16 December, 1985
Equivalent citations: (1986)51CTR(MAD)71, [1986]159ITR601(MAD)
JUDGMENT
V. RAMASWAMI J. - The following three questions have been referred at the instance of the Revenue :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the benefit under sections 80K and 80M should be granted with reference to the gross dividend income without deducting proportionate management expenses ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the addition of Rs, 7,02,054 representing the appreciation in the value of share investments held by the assessee, made by the Income-tax Officer under the second part of rule 5(b) of Schedule I to the Income-tax Act, 1961 ?
3. Whether the interpretation given by the Tribunal to rule 5(b) of Schedule I to the Income-tax Act is valid and justified ?"
The second and third questions are covered by the decision in CIT v. Motor & General Insurance Co. Ltd. [1983] 140 ITR 451 (Mad) and in the light of that judgment, we have to answer these questions in the affirmative and against the Revenue, and it is answered accordingly.
Therefore, there is no need to set out the facts relating to the same.
So far as the first question is concerned, we need notice only a few facts. The assessee is a general insurance company. In respect of the assessment year 1969-70, it claimed relief both under sections 80K and 80M of the Income-tax Act, 1961. The Income-tax Officer rejected the claim. However, on appeal, the Appellate Assistant Commissioner, following the Tribunals order in respect of the same assessee for the assessment years 1963-64 and 1964-65, held that the assessee would be entitled to the rebate on the entire dividend income and not merely the net dividend income as computed under the provisions of the Act. This view was accepted by the Tribunal on further appeal. It may be mentioned, by the time the Tribunal took up the matter for consideration, the decision in CIT v. Madras Motor & General Insurance Co. Ltd. [1975] 99 ITR 243 (Mad) relating to the same assessee in respect of the assessment years 1963-64 and 1964-65 was available and, following that judgment, confirmed the view of the Appellate Assistant Commissioner. At the instance of the Revenue, the above question has been referred.
Though the question referred covers both the sections, it is necessary to deal with section 80K of the Act separately. So far as section 80M is concerned, it is now covered by the decision of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC) and in view of that judgment, we have to hold that the Appellate Tribunal was not correct in holding that the benefit under section 80M should be granted on the gross dividend income without deducting the proportionate management expenses. Accordingly the question relating to section 80M is answered in favour of the Department. The difficulty arises only in respect of the benefit under section 80K.
We may now refer to the decisions rendered with reference to the provisions in section 80K. This court dealt with the scope of this provision in Madras Auto Service v. ITO [1975] 101 ITR 589. This court was of the view that the deduction admissible under section 80K was in respect of the entire dividend received by the assessee from the new industrial undertaking and not in respect of the dividend income minus deductions allowable under the provisions of the Income-tax Act, 1961, in computing the total income. In coming to this conclusion, this court had relied on the earlier decision in CIT v. Madras Motor & General Insurance Co. Ltd. [1975] 99 ITR 243 (Mad) which related, as already stated, to the assessment years 1963-64 and 1964-65 with reference to rebate under section 99(1)(iv) of the Income-tax Act, 1961. This was on the basis that the ratio of the judgment given with reference to section 99(1)(iv) would be equally applicable in construing the provisions of section 80K of the Income-tax Act. This court noted that there were no restrictive words similar to "net dividend" in section 80A and that, therefore, the rebate could not be restricted to the net dividend. A Division Bench of the Bombay High Court considered the scope of section 85 which was the corresponding provision before section 80K was introduced in Chapter VIA, The learned Chief Justice in CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348 (Bom), who delivered the judgment after a detailed consideration of the provisions of sections 99(1)(iv), 84, 85 and 85A, with reference to section 85, held as follows (p. 361) :
"... under section 85 there can be no argument available to the Department that the dividend must be subject to all deductions for expenses incurred in earning the dividend. The emphasis is on the amount of the dividend paid and not upon any receipts or income of the assessee. In the latter case, an argument may be possible (though we have already repelled it) that it is the net receipt or net income that is contemplated but such an argument is not possible where the word used is paid. Under section 85 also, therefore, we must hold that the full amount of the dividend paid to the assessee by such Indian companies as partook of the nature of new industrial undertaking or hotel businesses would be wholly exempt from income-tax."
Another Division Bench of the Bombay High Court also took the same view as that in CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348 (Bom) with reference to the scope of section 80K in the decision appended to the decision in Dr. Ramadas M. Pai v. CIT [1978] 115 ITR 883 (Kar) in CIT v. B. M. Grover [1978] 115 ITR 885 (Bom). The Andhra Pradesh High Court also took the same view in the decision in CIT v. M. Varadarajan [1979] 119 ITR 150 and held that the dividend component of the total income that is eligible for exemption under section 80K of the Income-tax Act, 1961, is the gross dividend income of the assessee and not the net dividend income, which is arrived at after deducting the expenditure incurred in connection with earning of such income under the other provisions of the Act.
A Division Bench of the Allahabad High Court in CIT v. J. K. Bankers [1980] 124 ITR 687, also held that neither under section 80K nor under rule 20 of the Income-tax Rules, 1962, any deduction of the interest paid by the assessee on the loans raised by it for purchasing shares is permitted and that section 80K contemplated deduction of the entire dividend income provided it was attributable to the profits and gains of a company which was entitled to deduction under section 80J.
The Delhi High Court considered the provisions of section 85 of the Income-tax Act which was the predecessor to section 80K and held that the words "so much of any dividend income paid or deemed to be paid" to a shareholder cannot be held to mean so much of any dividend paid or deemed to be paid minus the amount of interest borrowed for earning the same or for earning other dividends and that the amount entitled to exemption is determined at the point of time at which it is paid or deemed to be paid to the shareholder. Therefore, there can be no question of reducing this exempt amount either by reference to the expenditure incurred in connection therewith or by reference to any expenditure or deficit in respect of any other shares or scrips under the same head or by reference to deficits under other heads of income. The proper deduction accordingly was held to be the gross amount without deducting interest charges and/or allowable expenses.
The Calcutta High Court in CIT v. Darbhanga Marketing Co. Ltd. [1971] 80 ITR 72 (Cal), construed the provisions of section 99(1)(iv) and held that the expressions "which are included in his total income" in sub-section (1) of section 99 and "Income forming part of total income" in the heading are descriptive of items included in the computation of the total income and not indicative of the quantum of the amounts included under the different items in the computation of the total income. The same interpretation was given by the same High Court with reference to the provisions of section 85 of the Act in the decision in CIT v. Indore Exporting & Importing Co. [1976] Tax LR 471 (Cal). It may be seen from these cases above referred to that though the courts have approached these questions from various angles, all the High Courts have uniformly taken the view that the words "any income by way of dividends paid or deemed to have been paid" is descriptive of the category of income and when the provision referred to a deduction "from such income by way of dividends of an amount equal to", the gross dividend received shall be deducted and not the net dividend income as determined with reference to the provision of Chapter VI-A of the Income-tax Act. These decisions have also noted the definition of "gross total income" in section 80B(5). The only other aspect which is to be referred in this connection is that in all these cases, section 85A, which corresponds to section 80M now, was considered to have used identical language and in some cases the interpretation placed on section 85A also was relied on. The Bombay High Court in CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348, held that section 85A which is now section 80M was almost in the same terms except for some minor verbal changes as in section 99(1)(iv) of the Act, and that the same interpretation was, therefore, to be placed on section 85A as in the case of section 99 (1)(iv) and in that view, following the cases decided under section 99(1)(iv), it held that under section 85A also, the assessee would be entitled to deduction of income-tax in respect of the whole of the dividend received from the Indian company.
However, the Gujarat High Court in Addl. CIT v. Cloth Traders (P.) Ltd. [1974] 97 ITR 140, differed from this view of the Bombay High Court on the interpretation of section 80M and for the various reasons mentioned therein, ultimately held that the assessee would be entitled to deduct only the net dividend income and not the gross dividend income. The assessee in that case preferred an appeal to the Supreme Court and the decision of the Supreme court is reported in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. While reversing the decision of the Gujarat High Court and holding that the deduction permissible under section 80M is to be calculated with reference to the full amount of the dividend received from the domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided for under the Act, the Supreme Court referred to the decision of this court in Madras Auto Service v. ITO [1975] 101 ITR 589, which related to the provisions of section 80K, with approval. The learned judges also referred to three of the earlier judgments of the High Courts of Bombay, Calcutta and Madras, CIT v. Darbhanga Marketing Co. Ltd. [l971] 80 ITR 72 (Cal), CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348 (Bom) and CIT v. Madras Motor & General Insurance Co. Ltd. [1975] 99 ITR 243 (Mad), respectively which dealt with cases under clause (iv) of sub-section (1) of section 99 and also approved of the interpretation placed on that provision.
While the matter stood there, Parliament intervened and by the Finance (No. 2) Act of 1980 inserted two sections, namely, sections 80AA and 80AB in Chapter VI-A of the Income-tax Act, 1961, and those provisions read as follows :
"80AA. Computation of deduction under section 80M. - Where any deduction is required to be allowed under section 80M in respect of any income by way of dividends from a domestic company which is included in the gross that income of the assessee, then, notwithstanding anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends.
80AB. Deductions to be made with referencc to the income included in the gross total income. - Where any deduction is required to be made or allowed under any section (except section 80M) included in this Chapter under the heading C - Deductions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee; then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income."
Section 80AA was given retrospective effect and it came into force with effect on and from April 1, 1968. Section 80AB, however,, was not given any retrospective operation and it came into force on April 1, 1981.
In Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC), in a writ petition under article 32 of the Constitution of India, the constitutional validity of section 80AA was questioned. One of the grounds urged was that this provision has been introduced with a view to overriding, with retrospective effect, the construction placed on section 80M by the Supreme Court in Cloth Traders case [1979] 118 ITR 243. The correctness of the decision in the Cloth Traders case was also challenged by the Revenue. In that case, the Supreme Court considered that if they did not agree with the view taken in the Cloth Traders case and hold that even before the introduction of section 80AA, section 80M on a true interpretation of its language, meant exactly what section 80AA retrospectively clarified to mean, no question of constitutional validity of section 80AA would arise, since section 80AA would then be merely declaratory of the law as it always was and would not be imposing any new tax burden with retrospective effect and they proceeded to consider as to what is the true construction of section 80M unaided by the subsequent legislative interpretation imposed upon it by the enactment of section 80AA.
Section 80M which was considered by the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 reads as follows :
"80M. Deduction in respect of certain intercorporate dividends. - (1) Where the gross total income of an assessee, being a domestic company, includes any income by way of dividends from a domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to -
(a) where the assessee is a foreign company -
(i) in respect of such income by way of dividends received by it from an Indian company which is not such a company as is referred to in section 108 and which is mainly engaged in a priority industry 80% of such income;
(ii) in respect of such income by way of dividends other than the dividends referred to in sub-clause (i) 65% of such income;
(b) where the assessee is a domestic company in respect of any such income by way of dividends 60% of such income."
The learned judges first considered the object behind the grant of relief under section 80M and observed as follows (p. 134 of 155 ITR) :
"It was common ground between the parties that the main object of the relief under s. 80M is to avoid taxation once again in the hands of the receiving company of the amount which has already borne full tax in the hands of the paying company : Vide the written submission under the heading Object of relief on intercorporate dividends filed by the learned counsel on behalf of the assessee in the course of the arguments. Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious that, in order to encourage inter-company investments, the Legislature intended that this amount should not bear tax once again in the hands of the assessee either in its entirety or to a specified extent. But the amount by way of dividend which would otherwise suffer tax in the hands of the assessee would be the amount computed in accordance with the provisions of the Act and not the full amount received from the paying company. Therefore, it is reasonable to assume that in enacting s. 80M, the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company. It is difficult to imagine any reason why the Legislature should have intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to suffer tax once again in the hands of the assessee. The Legislature could certainly be attributed with the intention to prevent double taxation but not to provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee."
On the meaning to be assigned to the words "Where the gross total income of an assessee... includes any income by way of dividends from a domestic company", the learned judges observed as follows (p. 135 of 155 ITR) :
The opening words describe the condition which must be fulfilled in order to attract the applicability of the provision contained in sub-s. (1) of s. 80M. The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company. Gross total income is defined in s. 80B, clause (5), to mean the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under s. 280-O. Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or, in other words, forms part of the gross total income, the condition specified in the opening part of sub-s. (1) of s. 80M would be fulfilled and the provision enacted in that sub-section would be attracted."
Repelling the further argument on behalf of the assessee, that the opening part of sub-section (1) of section 80M refers only to the inclusion of the category of income and not to the quantum of such income, the Supreme Court further observed as follows (p. 135 of 155 ITR) :
"This was the same argument which found favour with the court in Cloth Traders case [1979] 118 ITR 243, but on fuller consideration, we do not think it is well founded. We may assume with the court in Cloth Traders case [1979] 118 ITR 243, that the words where the gross total income of an assessee... includes any income by way of dividends from a domestic company are intended only to provide that a particular category of income, namely, income by way of dividends from a domestic company should form a component part of gross total income, irrespective of what is the quantum of the income so included but it is difficult to see how the factor of quantum can altogether be excluded when we talk of any category of income included in the gross total income. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words such income by way of dividends must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words such income by way of dividends must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to determine what is such income by way of dividends, we have to ask the question : what is the income by way of dividends from a domestic company included in the gross total income and that would obviously be the income by way of dividends computed in accordance with the provisions of the Act. It is difficult to appreciate how, when we are interpreting the words such income by way of dividends, we can make a dichotomy between the category of income by way of dividends included in the gross total income and the quantum of the income by way of dividends so included. This court observed in Cloth Traders case [1979] 118 ITR 243, that the words such income by way of dividends as a matter of plain grammar must be substituted by the words income by way of dividends from a domestic company in order to arrive at a proper construction of the section, but there is a clear fallacy in this observation, because in making the substitution, it stops short with the words income by way of dividends from a domestic company and does not go the full length to which plain grammar must dictate us to go, namely, income by way of dividends from a domestic company included in the gross total income. Otherwise, we would not be giving to the word such its full meaning and effect. The word such in the context in which it occurs can only mean that income by way of dividends from a domestic company which is included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act."
The further reasoning given by the Supreme Court for dissenting from the decision in Cloth Traders case [1979] 118 ITR 243, was as follows (p. 137 of 155 ITR) :
"... what sub-section (1) of section 80M requires is that the deduction of the whole or a specified percentage must be made from such income by way of dividends and not from the gross total income. Sub-section (1) of section 80M provides that in computing the total income of the assessee, there shall be allowed a deduction from such income by way of dividends of an amount equal to the whole or a specified percentage of such income. Now, when in computing the total income of the assessee, a deduction has to be made from such income by way of dividends, it is elementary that such income by way of dividends from which deduction has to be made must be part of gross total income. It is difficult to see how the language of this part of sub-section (1) of section 80M can possibly fit in if such income by way of dividends were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income : what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how for the purpose of computing the total income from the gross total income, any deduction should be required to be made from the full amount of the dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions the Act which would be forming part of the gross total income."
In that view, the learned Judges dissented and overruled their earlier decision in the Cloth Traders case [1979] 118 ITR 243 (SC).
Mr. Jayaraman, learned counsel for the Revenue, strongly relied on every one of these reasonings in this judgment and contended that a similar construction will have to be placed on section 80K also, since the language used in that provision is almost identical On the other hand, Mr. Swaminathan, learned counsel for the assessee, contended that the decision in Distributors (Baroda) P. Ltd. v. Union of India [1985] l55 ITR 120 (SC), related to a case under section 80M, that it only to an interpretation of section 80M and that the ratio or the reasonings of that judgment cannot be extended for interpretation of section 80K. In this connection, he referred to the statement of the Finance Minister in introducing the Finance (No. 2) Bill of 1980 and circulars issued by the Central Board of Revenue immediately after the Finance (No. 2) Act of 1980 was passed by Parliament, as also some of the decisions which pointed out the difference in language used in sections 80K and 80M in the corresponding section 85 and section 85A. In addition he pointed out that expressly while Parliament declared section 80AA as having retrospective effect from April 1, 1968, no such retrospective operation was given to the provisions of section 80AB.
In this connection we may point out that, after referring to the views taken by the High Courts on the scope of section 99(1)(iv), the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 observed at pages 129 and 130 as follows :
"But, on further reflection, we do not see how this view taken by the three High Courts in regard to the construction of clause (iv) of sub-section (1) of section 99 can assist in the interpretation of an entirely new section, namely, section 80M, which, as we shall presently point out, is different in its structure, language and content from clause (iv), sub-section (1) of section 99. We may point out that some doubt was raised on behalf of the Revenue in regard to the correctness of this view taken by the three High Courts, but we do not think it necessary to consider whether this doubt is well founded or not because we are of the view that even if the construction placed on clause (iv) of sub-section (1) of section 99 by the three High Courts were correct, it cannot necessarily lead to the conclusion that a similar construction must also be placed on section 80M which is different in material respects from clause (iv) of sub-section (1) of section 99."
Again with reference to the decision in New Great Insurance Co.s case [1973] 90 ITR 348 (Bom), which construed the provisions of section 85A, the Supreme Court made the following observations (p 131 of 155 ITR) :
"But, as we have pointed out above, it is not necessary to consider whether the construction placed on section 85A by the Bombay High Court in New Great Insurance Co.s case [1973] 90 ITR 348, is correct or not, because we are not concerned here with the interpretation of section 85A. It is section 80M which has to be construed and this section, as we shall presently show, is materially different from section 85A. We cannot construe section 80M in the light of the interpretation placed on its predecessor section by the Bombay High Court particularly when section 80M is admittedly worded differently from its predecessor section."
Again at a later part of the judgment also, the Supreme Court observed that whatever might have been the interpretation placed on clause (iv) of sub-section (1) of section 99 and section 85A, the correctness of which is not in issue before them, so far as section 80M is concerned, the deduction required to be allowed under that provision is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee. The Supreme Court, therefore, has restricted the decision to the interpretation of section 80M alone and left open the correctness of all the other decisions interpreting section 99(1)(iv), section 85, section 85A and section 80K.
New Great Insurance Cos case [1973] 90 ITR 348 (Bom), laid emphasis on the difference in section 85 and section 85A corresponding to the new sections 80K and 80M. The learned Chief Justice pointed out that where sections 85 uses the words "any dividend paid or deemed to be paid" which makes the ratio of the decision rendered under section 85A with greater force and in fact the learned Chief Justice observed that even if an argument was possible on the language used in, section 85A that the words "includes any income by way of dividend" are possible of interpreting that it referred to a net income and not gross income, such an argument not possible on the language used in section 85. We are of the view that the omission of the word "received" later are inconsequential and in fact even without those words "includes any income by way of dividends" would only mean any net income by way of dividend received by the Indian company.
In the decision of the Bombay High Court, CIT v. B. M. Grover [1978] 115 ITR 885 appended to the decision in Dr. T. Ramadas M. Pai v. CIT [1978] 115 ITR 883 (Kar), the decision of the Gujarat High Court in Cloth Traders case [1974] 97 ITR 140 was relied on with reference to a case sections 80K and 80L. The Bombay High Court observed that the language of section 85A materially differed from the provisions of sections 80K and 80L. The learned judges observed (p. 886 of 115 ITR) :
"As the observations of the Gujarat High Court indicate, considerable reliance has been placed on the second part of s. 85A which contemplates the rate of tax which is chargeable on total income. Such wording is not to be found in the two sections under our consideration (ss. 80K and 80L) which allow for a straight deduction."
The main object of section 80K is to extend the benefit given to the company under section 80J, to the shareholders and not avoidance of double taxation. It is extending the benefit of non-taxability of the income of the company under section 80J to the shareholder.
Apart from this, Parliament itself seemed to have made a difference to these provisions under sections 80K and 80M. Originally, the Finance (No. 2) Bill of 1980 proposed to introduce only one section as 80AA with effect from April 1, 1968, and the provision sought to be introduced read as follows :
"80AA. Deductions to be made with reference to the income included in the gross total income. - Where any deduction is required to be made or allowed under any section included in this Chapter under the heading C-Deductions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deductions under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income." ([1980] 123 ITR (St) 32, 39).
However, at the time when the Bill was taken up for consideration, two sections, namely, 80AA and 80AB, which we have extracted above, were sought to, be introduced, one with effect from April 1, 1968, and the other with effect from April 1, 1981. Moving the amendment and explaining the same, the Finance Minister said :
"Sir, Amendment No. 151, which I have moved really takes into account the general view expressed by a number of people in respect of the retroactive operation of section 80AA, Now, in section 80AA deductions for a number of things are given in the computation of the taxable income. The intention of Government has always been that the net income should be deducted, that is, the income minus the amount which was spent in earning that income should be eligible for that deduction. There are several clauses dealing with these deductions. One of them relates to intercorporate dividends. There are sections 80 N and 80 O and others dealing with deductions in respect of those institutions which earn an income by way of sale of technological and scientific know-how either in this country or outside and a number of other smaller items. I have taken note of the general feeling not only in the House but also in the country and I have brought forward an amendment in which only the inter-corporate dividends will be subject to retroactive operation of law. In respect of others for which I have proposed amendments, there will be no retroactive operation of the section but there will be a prospective operation. I must now explain why in respect of intercorporate dividends I have made this section as retroactive."
"Sir, you are aware that Company A borrows a lakh of rupees and invests that money in Company B. It earns dividends, let us say of Rg. 2 lakhs or earns profits of Rs. 2 lakhs. Now, company A pays interest to the Company B on the one lakh of rupees it had borrowed. On that interest on one lakh of rupees paid to the company B, company A when it is assessed is given a deduction on the amount paid as interest. Then in respect of Rs. 2 lakhs which it receives as dividend from company B, it claims a deduction for the entire Rs. 2 lakhs, not rupees 2 lakhs minus the interest which they have paid, on which they have claimed deduction. This is a sort of double benefit. That is not the intention at any time of the Government and it has been made clear that when you say income, it is net income, not the gross income. Therefore, in fairness and in equity, I have said that when one company, one corporation, makes an investment in another company, another corporation, in respect of those inter-corporate dividends, the expenses incurred in making that investment must be deducted and only the balance should be entitled to income-tax deductions as income of the company A. This nobody can object to except that it has been in the past interpreted the other way and they have claimed double benefit.
As far as the other deductions are concerned, as I have said, we will make the law prospective, for instance in section 80-O, deductions in the case of Indian companies. in respect of royalties received from someone in India, royalties in respect of concerns received from abroad -all these things will not be subject to retroactive operation of this section. Only the inter-corporate dividends will be subject to retroactive operation of the section and the rest of it will be prospective. This is one point which I wanted to make clear. If this is understood, I think, the Hon. Members may not have much objection to the amendment being accepted and withdrawing their amendments."
Again after referring to the criticism against retrospective operation, the Finance Minister said :
"The departmental view - the Governments view - that only the net is deductible, has been accepted by the High Court of Gujarat till as late as 1974. It is only when this case went up to the Supreme Court that it was reversed in 1979. I can come up only after the Supreme Court took a different decision. The departmental view, as it has always been and as it should be in every income-tax matter, is that income really means the net income, less the expenses incurred in earning that income. This you have accepted. And the Gujarat High Court confirmed it as late as in 1974. The same case went up to the Supreme Court; and it reversed it in 1979. That is why we have come now with this amendment and we make it retrospective, so that all other cases which may be pending in different areas, in different courts, in different stages and cases which have been re-opened, may be covered by this. We are not bringing in anything new, or anything drastic, as the member said. This also meets Mr. Satish Agarwals point, viz., why did the Department act after such a long time ? The department is in a great difficulty. Different Benches of Tribunals sometimes give different judgments. And immediately we cannot rush to the Legislature for amendment. We wait till some High Court decision is there. And different High Courts give different decisions. It makes it very difficult to come forward with amendment every time. When we feel that some decision will be upheld up to the Supreme Court, we wait till that. In other cases, where we think that the process will take so long, that the uncertainty will be so great, then we come forward with the amendment. In this case, it is only because the judgment of the Supreme Court was given in 1979 that we have come forward with the amendment."
It may be seen from this statement of the Finance Minister that so far as the interpretation of section 80K is concerned, they did not want to interfere with the interpretation placed by the various High Courts, at least till the assessment year 1981-82 and they wanted to apply the interpretation provision of section 80AB only prospectively with effect from April 1, 1981. There being no contrary view expressed by any of the High Courts on the scope of section 80K, we are of the view that the attitude taken by the Government in making section 80AB prospective may be interpreted as meaning that Parliament and the Government did not want to unsettle the prior position. In fact, this was the understanding of the provision by the Department also, as seen by the circular by the Central Board of Revenue where in paragraph 15.7, the Central Board had stated :
"The new section 80AB will take effect from 1st April, 1981, and will accordingly apply in relation to the assessment year 1981-82, and subsequent years. It should be carefully noted that the new section 80AB, unlike section 80AA, will not have any retrospective operation."
The learned counsel for the Revenue contended that he is neither relying on the retrospective operation of section 80AA nor on the prospective operation of section 80AB in support of his contention and that we shall have to take an independent view now on the scope of section 80K in the light of the decision in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC). We are referring to this prospective operation of section 80 AB only for the purpose of a probable inference that the Government itself did not want to disturb the decisions already rendered and they wanted to have a correct interpretation for the period from April 1, 1981, alone and not with reference to earlier assessment years.
That the statement of the Finance Minister could be relied on as an aid to the interpretation of the provisions cannot also be disputed in view of the decision in Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC). In that case, the Supreme Court observed (p. 252);
"It is true that it is dangerous and may be misleading to gather the meaning of the words used in an enactment merely from what was said by any speaker in the course of a debate in Parliament on the subject. Such a speech cannot be used to defeat or detract from a meaning which clearly emerges from a consideration of the enacting words actually used. But, in the case before us, the real meaning and purpose of the words used cannot be understood at all satisfactorily without referring to the past history of legislation on the subject and the speech of the mover of the amendment who was) undoubtedly, in the best position to explain what defect in the law the amendment had sought to remove. It was not just the speech of any member in Parliament. It was the considered statement of the Finance Minister who was proposing the amendment for a particular reason which he clearly indicated. If the reason given by him only elucidates what is also deducible from the words used in the amended provision, we do not see why we should refuse to take it into consideration as an aid to a correct interpretation."
The Supreme Court further observed :
"There is, however, a distinction between the fact that a particular statement giving the purpose of an enactment was made in Parliament, of which judicial notice can be taken as part of the proceedings, and the truth of a disputable matter of fact stated in the course of proceedings, which has to be proved aliunde, that is to say, apart from the fact that a statement about it was made in the course of proceedings in Parliament (see Jerold Lord Strickland v. Carmelo Mifsud Bonnici, AIR 1935 PC 34 and Englishman Ltd. v. Lajpat Rai [1910] ILR 37 Cal 760).
In the case before us, a reference was made merely to the fact that a certain reason was given by the Finance Minister, who proposed an amendment, for making the amendment. What we can take judicial notice of is the fact that such a statement of the reason was given in the course of such a speech. The question whether the object stated was properly expressed by the language of section 2(15) of the Act is a matter which we have to decide for ourselves as a question of law. Interpretation of a statutory provision is always a question of law on which the reasons stated by the mover of the amendment can only be used as an aid in interpretation if we think, as I do in the instant case, that it helps us considerably in understanding the meaning of the amended law. We find no bar against such a use of the speech."
In the foregoing circumstances, we have to answer the first part of the first question relation to the benefit under section 80K in the affirmative and in favour of the assessee. The assessee will be entitled to his costs. Counsels fee Rs. 500.