Income Tax Appellate Tribunal - Chandigarh
Mahavir Spng. Mills Ltd. vs Deputy Commissioner Of Income Tax on 2 April, 2004
Equivalent citations: (2006)100TTJ(CHD)471
ORDER
M.A. Bakshi, Vice President
1. These cross-appeals, one by the assessee and other by the Department, for asst. yr. 1994-95 are directed against the order dt. 8th May, 1997, of CIT(A), Ludhiana. Both the appeals relating to asst. yr. 1994-95 are disposed of by this consolidated order for the sake of convenience.
2. Parties have been heard and record perused. The relevant facts in this case are that the assessee-company is engaged in business activity of manufacturing various types of cotton as well as acrylic yarn at its units situated at Malerkotla, Hoshiarpur and Ludhiana in Punjab and at Mandideep in Madhya Pradesh. The assessee is also having furnance division situated in Ludhiana, in which steel ingots and rolling of steel ingots of various sizes are manufactured. The said steel unit is styled as M/s Vardhman Special Steels. The AO has made assessment under Section 143(3). The assessee had appealed to the CIT(A) against several additions made by the AO. Some of the issues have been decided in favour of the assessee and some in favour of the Revenue that is how the cross-appeals have been filed by the respective parties.
3. We first take up the appeal of the assessee.
4. The first issue is relating to the disallowance of Rs. 7,322 made under Rule 6B. The issue is covered in favour of the assessee by the decision of the Tribunal for asst. yrs. 1991-92 to 1993-94 in ITA Nos. 26/1996, 867/1995, 656/Chd/1997 and ITA Nos. 155/1996, 906/1995, 711/Chd/1997, order dt. 30th July, 2003. Respectfully following the aforementioned decision of the Tribunal, we delete the disallowance made by the AO under Rule 6B.
5. The 3rd and 4th grounds of appeal are as under :
3. That the learned CIT(A) has erred in law and on the facts while sustaining the disallowance under Section 37(4) of the Act on account of guest-house expenses amounting to Rs. 3,64,213, completely ignoring the binding decision of Hon'ble Tribunal Bench, Chandigarh, in the case of Vardhman Spg. & Genl. Mills Ltd. v. IAC for the asst. yr. 1982-83 reported at (1990) 37 TTJ (Chd) 657--Ed..
4. That the learned CIT(A) has erred in law and on the facts while sustaining the disallowance of Rs. 50 lakhs donated to Banarso Devi Oswal Public Charitable Trust as revenue expenditure under Section 37 despite the fact that the sum was paid out of commercial expediency.
6. The aforementioned grounds of appeal of the assessee are dismissed as not pressed.
7. The only other ground in the appeal of the assessee is relating to deduction under Section BOM. The assessee had claimed deduction under Section BOM on the gross dividend-receipt of Rs. 65,34,792. The AO taking into account the decisions of Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. and in the case of CIT v. P.K. Jhaveri (1990) 181 ITR 79 (SC) and the decision of Rajasthan (sic-Gujarat) High Court in the case of H.K. Investments Co. (P) Ltd. v. CIT (1994) 121 CTR (Guj) 470 : (1995) 211 ITR 511 (Guj), held that proportionate administrative expenses, personal expenses and financial expenses were to be deducted out of the gross dividend for the purpose of deduction under Section 80M. The CIT(A) vide impugned order has sustained the disallowance of proportionate financial expenses, but in respect of personal expenses and administrative expenses, the learned CIT(A) has pointed out that the business of the assessee being that of manufacturing of articles and things, no expenditure was attributable to the earning of the dividend income, Whereas, the Revenue is aggrieved in exclusion of proportionate personal and administrative expenses, the assessee is aggrieved for deduction of proportionate financial expenses out of the dividend income for computation of deduction under Section 80M. Since the issue is also involved in the appeal of the Revenue, we will deal with this issue simultaneously with the appeal of the Revenue. The learned Counsel for assessee relied upon the decision of the Tribunal for asst. yrs. 1991-92 to 1993-94, wherein the issue has been decided in favour of the assessee. The decision of the Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. (supra) has also been considered by this Bench of the Tribunal in arriving at the decision in favour of the assessee. Reference has also been made to the communication on behalf of the CBDT in regard to the audit objection, wherein the Board has requested the audit department for dropping the objection on the ground that in the case of manufacturing concern, the managerial cost is solely attributable to the manufacturing activities.
8. The learned Departmental Representative for the Revenue, on the other hand, contended that the issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. (supra) as also in the case of CIT v. P.K. Jhaveri (supra). It was accordingly, pleaded that the appeal of the assessee may be dismissed and that of the Revenue may be accepted.
9. We have given our careful consideration to the rival contentions and have also perused the orders of the Tribunal and other relevant material relied upon on behalf of the parties. The AO has made the assessment under Section 143(3) vide order dt. 19th Dec., 1996. The dividend income has been assessed at Rs. 65,34,792 as disclosed. However, deduction under Chapter VI-A has been restricted to Rs. 53,52,198. The working of deduction under Section 80M has been made by the AO in the assessment order as under :
(i) Personal expenses Rs. 17.02 crores
(ii) Administrative and other expenses Rs. 7.48 crores
(iii) Financial expenses Rs. 14.47 crores
----------------
Rs. 38.97 crores
----------------
Total turnover of the assessee Rs. 3,04,19,21,266
Gross dividends earned by the assessee Rs. 61,38,672
Proportionate expenses with respect
to earning of dividends 38.97 x 61.38
------------- =Rs. 7,86,474
304.19
That is how the expenses attributable to earning of dividend income have been worked out at Rs. 7,86,474. The AO has excluded the sum of Rs. 7,86,474 from the gross dividend which gives the net dividend of Rs. 53,52,198. The said amount has been excluded from the total income of the assessee. In other words, the income computed by the AO under Section 57 on account of dividend is Rs. 53,52,198. It has been excluded from the gross total income by virtue of provisions of Section 80M.
10. The question for our consideration is,
(i) as to whether the deduction under Section 80M is permissible on the gross dividend income or the net dividend income, and
(ii) whether computation of net dividend income made by the AO is in order ?
11. In regard to the first issue, there cannot be any controversy in view of the binding decision of the Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors. (1985) 47 CTR (SC) 349 Even the coordinate Bench of this Tribunal in the case of Hero Cycles Ltd. v. Asstt. CIT in ITA No. 340/Chd/1995 reported at (2004) 90 TTJ (Old) 732--Ed. and in the case of Greatway Ltd. v. Asstt. CIT in ITA No. 1230/Chd/1996 has not doubted the well-settled proposition of law that deduction under Section 80M is permissible with reference to net income from dividends computed in accordance with the provisions of the Act. Thus, we hold that deduction under Section 80M is not permissible with reference to the gross dividend income but with reference to the net dividend income.
12. The next issue that arises for consideration is as to what is the net dividend income assessable under the provisions of IT Act, 1961, that qualifies for deduction under Section 80M. A perusal of the assessment order reveals that the AO has not computed the net dividend income under Section 56/57 separately but deduction under Section 80M has been calculated. The assessee has included the gross dividend in the receipts but computation under Section 56/57 has not been given. The Hon'ble Supreme Court in the case of Brook Bond & Co. Ltd. v. CIT (1986) 57 CTR (SC) 25 : (1986) 162 ITR 373 (SC) held as under :
Held, (i) that the mere circumstance that the appellant had shown the dividend income under the head 'Income from other sources' in its returns could not in law decide the nature of the dividend income. It had to be determined from the evidence whether, having regard to the true nature and character of the income, it could be described as income from business, even though it fell for computation under another head.
So, however, it is open to us to examine the correctness of the determination of the dividend income by the AO out of the gross total income.
13. The assessee is a company mainly engaged in the business of manufacturing of articles and things. Substantial investment has also been made in equities from which dividend income has been derived. Deduction on account of interest/financial charges has been claimed by the assessee in the P&L a/c. The question for consideration is as to whether the financial charges attributable to the investment in securities/shares are to be taken into account for determination of net dividend income. It would be relevant to refer to provisions of Section 57 of the IT Act, 1961. The said section permits deduction in computing the income from other sources. Apart from specified expenses, the expenditure not being the capital expenditure laid down or expended wholly or exclusively for the purpose of making or earning such income, is also permissible as a deduction,
14. It is often stated that in the case of a business, money is borrowed from financial institutions for the purpose of business and any interest paid on such borrowings is permissible as a deduction under Section 36(1)(iii). One can possibly have no quarrel with the proposition of law in this regard, which is well-settled. If the money has been borrowed for purposes of business and the same has also been utilised for purposes of business, the interest paid on such borrowings cannot but be expenditure incurred for purposes business. In such cases where the dividend income is part of the business income such as in share trading business, the money utilised for purchase of equities/securities for purposes of business would fall within the category of the money utilisation for purposes of business and the same will qualify for deduction under Section 36(1)(iii). The next issue that arises for consideration is about the quantum of deduction on account of dividend included in the business income. The deduction under Chapter VI-A is permissible out of the income included in the gross total income. In a case where the dividend income forms part of business income, the gross total income from business includes the net dividend income as well. In such a case, it cannot be said that the gross dividend included in the gross receipts, is the amount included in the gross total income in comparison to the net dividend income. The principle is supported by the decision of the Hon'ble Supreme Court in the case of Brooke Bond & Co. Ltd. (supra) where it was held as under :
It is a cardinal principle of the law relating to income-tax that income-tax is a single charge on the total income of an assessee. For the purpose of computation, the statute recognises different; classes of income which it classifies under different heads of income. For each head of income, the statute has provided the mode of computing the quantum of such income. The mode of computation varies with the nature or the class of such income, for the deductions permissible under the law in computing the income under each head bear a particular relevance to the nature of the income. The statute operates on the principle that it is the net income under each head which should be considered as a component of the total income. The statute permits specified deductions from gross receipts in order to. compute the net income. The net income under the different heads is then pooled together to constitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and of unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, i.e., the quantum of income which is assessed to tax.
It is evident from the above decision of the Supreme Court that the net income from dividend shall have to be worked out on the basis of other receipts of business income and dividend vis-a-vis the total expenditure that will give the extent of dividend income included in the gross total income. In this case the dividend income is not claimed to be business income. Therefore, the above proposition is not applicable.
15. However, in some cases, such as in the case of assessee, the dividend income may not be part of the business income. The dividend income in the case of the assessee is "income from other sources". The question for consideration, therefore, is as to whether in working out the dividend income, the interest paid on borrowed money and utilised for earning of dividend income would -fall within the category of money borrowed and utilised for the purposes of business of the assessee. When it is admitted that the borrowed money has been utilised for making investment in securities, shares, etc. not forming the business activities of the assessee, it cannot be said that the interest attributable to the investment for non-business purposes would qualify for deduction under Section 36(1)(iii). Therefore, the deduction on account of interest on such borrowings is permissible only under Section 57. That being so, the interest attributable to such borrowings shall have to be excluded from the gross dividend in working out the income from dividend assessable under the head "Income from other sources". In the case of CIT v. P.K. Jhaveri (supra), the Hon'ble Supreme Court decided the following question of law against the assessee :
Held, that deduction under Section 80K of the IT Act, 1961, was allowable to the assessee only on the amount after deduction of the interest paid on moneys borrowed specifically for investment in the shares and not on the gross amount received.
In other words, it has been held that the interest paid on borrowed money was to be deducted in computing the dividend income. Since the assessee has not given details of the borrowings utilised for purposes of acquisition of shares, securities, etc., the AO has attributed proportionate interest to the investments in equities/securities.
We have carefully gone through the decision of the Supreme Court in the case of CIT v. United General Trust (P) Ltd. (supra).
16. The learned Counsel for the assessee contended that no disallowance is warranted in this case on account of financial charges insofar as the assessee has not invested borrowed money for the purchase of shares. It was, however, suggested that the AO may be directed to consider the issue, afresh in accordance with law after considering the claim of the assessee that the borrowed money was not utilised for the purchase of shares. We have elsewhere pointed out that in working out deduction under Section 80M, the interest paid on borrowed money utilised for acquisition of shares has got to be deducted. So, however, if the assessee has not utilised the borrowed money but has utilised its own capital for the purchase of shares, then proportionate disallowance on account of financial charges will not be justified. Let the AO consider this issue afresh after giving reasonable opportunity of being heard to the assessee. It will be for the assessee to establish that the borrowed money was not invested for the purchase of shares. In the event of failure of the assessee to establish the same, the AO would be at liberty to disallow the interest on proportionate basis. It is, however, clarified that the proportionate disallowance shall be resorted to only if the assesses fails to establish that the borrowed money was not utilised for investment in shares.
17. The only other issue that remains for consideration is as to whether proportionate expenses out of personal expenses, administrative and other expenses have rightly been excluded by the AO in working out the net dividend income for the purpose of deduction under Section 80M. As per the decision of the Tribunal in the case of Hero Cycles Ltd. v. Asstt. CIT in ITA No. 340/Chd/1995 (supra) and in the case of Greatway Ltd. v. Asstt. CIT in ITA No. 1230/Chd/1996 (supra), "the decision of the Supreme Court in the case of CIT v. United General Trust Ltd. (supra) is not an authority for the proposition that the proportionate management expenses are to be deducted for computing the deduction under Section 80M". We have carefully gone through the decision of the Supreme Court in the case of CIT v. United General Trust Ltd. (supra). On careful reading of the decision of the Supreme Court in the case of United General Trust Ltd. (supra), we find that the aforementioned observation of the Bench is evidently contrary to the said decision of the Hon'ble Supreme Court. For purposes of appreciating the decision, the headnotes of the decision are reproduced hereunder :
From the decision of the Bombay High Court in CIT v. United General Trust (P) Ltd. (1979) 119 ITR 664 (Bom), refusing to call for the statement of case on the question whether the assessee would be entitled to the deduction under Section 80M of the IT Act, 1961, on the gross dividend received from a domestic company before deduction of the proportionate management expenses, the Department preferred an appeal to the Supreme Court. The Supreme Court allowed the appeal and deeming the Department's application under Section 256(2) to have been allowed and a reference made, answered the question in favour of the Department, viz., to the effect that the proportionate management expenses had to be deducted from the gross dividend for the purpose of the relief under Section 80M. (Underlining, italicized in print, is ours) It seems that the learned Members of the Bench have been misled by reading only the decision of the Hon'ble Supreme Court which is as under;
Both counsel for the Revenue and the assessee are agreed that the only question which was sought to be raised by the Revenue, but which was not allowed by the High Court is concluded against the assessee and in favour of the Revenue by the decision of this Court in Distributors (Baroda) (P) Ltd. v. Union of India . Indeed, the same result follows from Section 80AA introduced by the Finance (No. 2) Act, 1980, with retrospective effect from 1st April, 1968.
If one reads the decision of the Supreme Court without the context in which it was rendered, the observation of the (Chandigarh) Bench may appear to be correct. But, when we read the judgment in the context in which it was rendered and the judgment of the High Court which has been upheld by the Supreme Court, it becomes abundantly clear that the issue relating to deduction of proportionate management expenses was decided by the Supreme Court in favour of the Revenue.
18. The issue had been decided by the High Court in favour of the assessee but the reference application of the Revenue was allowed and answered in favour of the Revenue by the Supreme Court. It is, therefore, evident from aforementioned decision of the Supreme Court that the issue relating to deduction of proportionate management expenses stands decided in favour of the Revenue. As rightly observed by the Bench, the decision of the Court has got to be read in the context in which it has been rendered. When we see the context in which the decision of the Supreme Court in the case of United General Trust Ltd. (supra) has been rendered, there does not remain any doubt that the issue about the deduction of proportionate management expenses stands decided in favour of the Revenue. Therefore, the decision of the co-ordinate Bench, with due respects, is contrary to the decision of the Supreme Court in the case of United General Trust Ltd. (supra) and since we are bound to follow the decision of the Supreme Court in preference to the decision of our own Bench, we, respectfully following the same, hold that in computing the deduction under Section 80M, the proportionate management expenses have got to be deducted.
19. During the course of hearing of this appeal, the learned Counsel for assessee was confronted with the aforementioned facts and was asked to make his submissions after careful study of the decision of the Supreme Court in the case of United General Trust Ltd. (supra). After going through the decision of the Supreme Court and other decisions, the learned Counsel fairly conceded that on the basis of the decision of the Hon'ble Supreme Court, some expenses out of the management expenses have got to be attributed to the earning of the dividend income. He, however, questioned the basis for calculation of the proportionate management expenses made by the A.O. It was contended that how much management expenses can be attributed to the earning of dividend income, will depend on the facts and circumstances of each case. In the present case, it was submitted that a fair estimate of such expenses may be made and deducted from the gross dividend in computing the deduction under Section 80M. A suggestion from the Bench of attributing Rs. 1 lakh on account of management expenses towards the dividend income was accepted by the learned Counsel and it was stated that the said amount may be deducted from the gross dividend. We, taking into account the facts and circumstances of the case, accept this offer and restrict the disallowance on account of management expenses to Rs. 1 lakh only.
20. In the result, the appeal of the assessee is partly allowed.