Gujarat High Court
Commissioner Of Income-Tax vs Sarabhai And Sons on 7 February, 1994
Equivalent citations: [1995]217ITR20(GUJ)
Author: M.B. Shah
Bench: M.B. Shah
JUDGMENT M.B. Shah, J.
1. The question which is required to be determined in the aforesaid reference is whether the assessee is entitled to relief under section 80M(1) of the Income-tax Act, 1961, on the net dividend income after or before deduction of the amount admissible under section 80K of the Income-tax Act, 1961. Hence, at the behest of learned counsel for the parties, we dispose of all these references by a common judgment.
2. In Income-tax Reference No. 375 of 1984, at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question for our opinion under section 256(1) of the Income-tax Act, 1961 :
At the instance of the Revenue :
"Where the Tribunal has not erred in law and on facts in holding that deduction under section 80M is admissible before deduction of the amount admissible under section 80K of the Income-tax Act, 1961?"
3. In Income-tax Reference Nos. 9 of 1985, 12 of 1985, 13 of 1985, 197 of 1985, 230 of 1985, 232 of 1985, 234 of 1985, 245 of 1984, 13 of 1986, 36 of 1986 and 152 of 1986, a similar question is referred by the Tribunal for our opinion. In all these references, the Tribunal has relied upon the decision of the Tribunal of the Bombay Bench in Income-tax Act Appeals Nos. 49 and 3016/(Bom) of 1981 decided on February 12, 1982, wherein it was held that, while computing the relief under section 80M(1), the net dividend income should not be reduced by the deduction allowed to the assessee under section 80K as required by section 80M(2).
4. Subsequently, the Special Bench of the Bombay Tribunal in Income-tax Appeal No. 6419/(Bom) of 1982, in the case of Jeevan Limited v. ITO, decided on November 26, 1985, had taken a contrary view. It was held, inter alia, as under :
"Therefore, in order to understand the purport and scope of section 80A it has to be borne in mind that the section as such only lays down that deduction under section 80M will have to be with reference to the income by way of dividends included in the gross total income and not with reference to the gross amount of such dividends irrespective of any provision to the contrary in section 80M. Section 80M(2) provides for reduction of the amount of income included in the gross total income by way of dividend for a different reason. This is not the subject-matter of section 80A and, therefore, such a provision is not and cannot be said to be overridden. In the above view of the matter, we are inclined to take the view that the plain meaning of section 80A is that deduction under section 80M is to be allowed on the basis of the net dividend income included in the gross total income and not the gross dividend income and if there is anything contrary to this proposition in section 80M, the same will have to be ignored."
5. In Income-tax Reference Nos. 19 of 1987, 279 of 1987, 284 of 1987, 285 of 1987, 70 of 1988, 71 of 1988, 129 of 1988, 20 of 1989, 23 of 1989, 24 of 1989, 26 of 1989, 37 of 1989, 59 of 1989, 61 of 1989, 62 of 1989, 26 of 1990, 29 of 1990, 30 of 1990 and 62 of 1991, the Tribunal, relying upon the aforesaid decision of the Special Bench of the Bombay Tribunal, allowed the appeals filed by the Revenue on this point and directed the Income-tax Officer to exclude the relief granted under section 80K from the gross dividend while working out the relief under section 80M(1) of the Act. In view of the aforesaid decision rendered by the Tribunal at the instance of the assessee, the Tribunal referred the following question in Income-tax Reference No. 19 of 1987 for our opinion :
At the instance of the assessee :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the appellant was entitled to deduction under section 80M of the Act on net dividend after deduction of the amount admissible under section 80K of the Act?"
6. In the remaining references, a similar question is referred.
7. Before appreciating the contentions raised by the learned Counsel for the parties, it would be necessary to refer to the relevant provisions of sections 80A, 80M and 80K, which are as under :
"80AA. Where any deduction is required to be allowed under section 80M in respect of any income by way of dividends from the domestic company which is included in the gross total 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."
"80M. (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) in respect of such income by way of the whole of such income dividends from a company formed and registered under the Companies Act, 1956 (1 of 1956), after the 28th day of February, 1975, and engaged exclusively or almost exclusively in the manufacture or production of any one or more of the articles or things specified in items 2 and 3, item 4 (excluding alloy, malleable and S.G. iron castings), items 7 to 15 (both inclusive), items 17 and 18, item 23 (excluding refractories) and items 24, 26, 27, 28, 29, 30 and 33 in the list in the Ninth Schedule
(b) in respect of such income by ways of sixty per cent. of such dividends other that the dividends referred income to in clause (a) (2) Where a company to which this section applies is entitled also to the deduction under section 80K, the deduction under sub-section (1) shall be allowed in respect of income by way of dividends referred to therein as reduced by the amount of the deduction under section 80K.
80K. Where the gross total income of and assessee, being -
(a) the owner of any share or shares in a company, or
(b) a person who is chargeable to tam under this Act on the income by way of dividends on any share or shares in a company owned by any other person.
includes any income by way of dividends paid or deemed to have been paid by the company in respect of such share or shares, there shall, subject to any rules that may be made by the Board in this behalf, be allowed in computing his total income, a deduction from such income by way of dividends of an amount equal to such part thereof as is attributable to the profits and gains derived by the company from an industrial undertaking or ship or the business of a hotel, on which no tax is payable by the company under this Act for any assessment year commencing prior to the 1st day of April, 1968, or in respect of which the company is entitled to a deduction under section 80J for the assessment year commencing on the 1st day April, 1968, or for any subsequent assessment year :
Provided that no deduction under this section shall be allowed in respect of any income by way of dividends which is attributable to the profits and gains derived by the company from industrial undertaking which begins to manufacture or produce articles or to operate its could storage plant or plants after the 31st day of March, 1976, or from a ship which is first brought into use after that date or from the business of a hotel which starts functioning after that date."
8. From the aforesaid relevant parts of the sections, it can be stated that -
1. Section 80M provides for deduction to a domestic company which receives any income by way of dividends from other domestic company :
2. Section 80K provides for grant of deduction in the case of assessee including companies or persons, who are having income by way of dividends from industrial undertaking, or a ship, or a business of a hotel, on which no tax is payable by the company (i.e., dividends attributable to the profits of the new industrial undertakings enjoying "tax holiday concession") : the effect of the proviso to section 80K is not required to be considered in the present references. Hence it is not dealt with.
3. Section 80K is applicable to all assessees including companies and it provides for 100 per cent. deduction on income by way of dividends received from a company which is an industrial undertaking, or a ship, or business of a hotel, on which no tax is payable by the company.
4. As provided under sub-section (1) of section 80M, where the gross total income of an assessee includes income by way of dividends, deduction shall be allowed on such income by way of dividends of an amount equal to as computed as per clauses (a) and (b) of section 80M. However, this deduction would be subject to the provisions of sub-section (2);
5. Sub-section (2) carves out an exception in the case of a company which is entitled to get deduction under section 80K as well as section 80M(1). It provides that, if a company is entitled to deduction under section 80K, then income by way of dividends shall be reduced by the amounts of deduction under section 80K and on the remaining amount, deduction as provided under section 80M(1) shall be allowed :
6. Section 80A is added by the Finance Act (No. 2) of 1980 with retrospective effect from 1st April, 1968, and it is merely an explanatory section which only provides that deduction under section 80M shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VI-A. This was inserted because of the interpretation given by the courts that gross amount of such dividends is required to be taken into consideration for computing the deduction allowable under section 80M. In substance, it provides that deduction under section 80M is to be allowed on the basis of the net dividend income included in the gross total income and not on the gross dividend income;
7. The non obstante clause "notwithstanding anything contained in that section" (under section 80M) used in section 80A would not in any way affect the provisions of sub-section (2) of section 80M, because the prior part of the sentence used in the said section "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 total income of the assessee" would mean that in a case where deduction is required to be allowed under section 80M(1), in respect of any income by way of dividends from a domestic company, which is included in the gross total income of the assessee, then what is provided in the next part would be applicable. That is to say, deduction under sub-section (1) of section 80M shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of the Income-Tax Act before making any deduction under Chapter VI-A and not with reference to the gross amount of such dividends, (i.e., dividend income without deducting expenses such as permissible under section 57). This explanation has nothing to do with the operation of sub-section (2) of section 80M. Therefore, it cannot be held that deduction under section 80M(1) is to be computed before reducing the income by way of dividends by the amount of deduction allowable under section 80K. Sub-section (2) operates only in those cases where the company is entitled to get deductions under section 80K as well as under section 80M. The bracketed portion, namely, "before making any deductions under this Chapter" used in section 80A is used only in connection with operating section 80M(1) and has nothing to do with the operation of sub-section (2) of section 80M.
9. In the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120, the Supreme Court considered sections 80M and 80A and held that, so far as section 80M(1) of the Income-tax Act is concerned, the deduction required to be allowed under that provision has 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 court further held that section 80A is merely declaratory of the law as it always was since April 1, 1968. The court further observed that it was common ground between the parties that the main object of the relief under section 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 and in order to encourage intercompany investments, the Legislature intended that this amount should not bear tax once again in the hands of the assessee either in its entirely or to a specified extent; that 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. The court has further held as under (at page 134) :
"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 section 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."
10. In the aforesaid case, the court relied upon its earlier decision in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, 91, wherein the court interpreted similar provisions of section 80E. The relevant part is as under (at page 139) :
"On reading sub-section (1), it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except section 80E; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity); and, thirdly, if there be profits and gains so attributable, deduct eight per cent. thereof from such profits and gains and then arrive at the net total income exigible to tax."
11. The court further observed that structurally there is hardly any difference between section 80E, sub-section (1), and section 80M, sub-section (1), and the reasoning which appealed to the court in the interpretation of sub-section (1) of section 80E must apply equally in the interpretation of sub-section (1) of section 80M. The court finally dismissed the writ petition challenging the constitutional validity of section 80A by holding that the said section was clarificatory in nature and would not involve imposition of any new tax burden.
12. Similarly, the Supreme Court has considered section 80AB in the case of CIT v. P. K. Jhaveri [1990] 181 ITR 79. In that case, there was a reference under section 257 of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal. The Tribunal has referred the following question to the Supreme Court for its decision at the instance of the Revenue, because the Tribunal has taken a view that for working out the relief under section 80K, gross dividend is required to be taken into consideration and not on the basis of only the net dividend, relying upon decisions of the various High Courts (at page 81) :
"Having regard to the definition of 'gross total income' under section 80B(5) whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing deduction under section 80K on the gross dividend income without taking into account deduction for interest paid on moneys borrowed specifically for investment in shares?"
13. The Supreme Court, relying upon the decisions in the cases of Cambay Electric Supply Industries Co. Ltd. [1978] 113 ITR 84 and Distributors (Baroda) P. Limited [1985] 155 ITR 120, answered the question in the negative, i.e., in favour of the Revenue and against the assessee. The court also observed that the statutory provisions have also been subsequently modified by the insertion of section 80AB with effect from April 1, 1981.
14. In view of the aforesaid two judgments, it is apparent that for granting benefit under section 80M, the net dividend is required to be taken into consideration, i.e., dividend after allowing deductions as provided under the provisions of the Income-tax Act other than Chapter VI-A. Further, as provided in sub-section (2) of section 80M, on dividend income as computed in accordance with the provisions of the Income-tax Act (gross dividend less deductions other than under Chapter VI-A), deductions under sub-section (1) shall be allowed in respect of income by way of dividend referred to therein as reduced by the amount of deduction under section 80K. Further, Parliament introduced section 80A, with retrospective effect and section 80AB so as to clarify the position of law because of the interpretation given by the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Add. CIT [1979] 118 ITR 243 that gross dividend should be taken into consideration for giving benefit. Hence, it cannot be said that section 80A has the effect of imposing any fresh tax or of changing the effect of sub-section (1) and (2) of section 80M. It is declaratory in nature of the correct position of law. Hence, it is not possible to accept the contention of learned counsel for the assessee that, because of the insertion of section 80A, while computing the relief under section 80M(1), the net dividend income should not be reduced by the deductions allowable to the assessee under section 80K, as provided in section 80M(2).
15. Learned counsel for the assessee relied upon the non obstante clause "notwithstanding anything contained in that section" (i.e., section 80M) used in section 80A for contending that section 80A would govern the provisions of sub-section (1) of section 80M and, therefore deduction under section 80M is required to be computed with reference to the income by way of net dividend without resorting to sub-section (2). In our view, this submission is totally misconceived because section 80A deals with section 80M(1) and has no bearing on sub-section (2). In the context, it would read that deductions under sub-section (1) shall be allowed in respect of income by way of such dividends as computed in accordance with the provisions of the Income-tax Act, before making any deduction under Chapter VI-A and the income by way of the said dividends would not be gross amount of such dividends before making deduction under other provisions of the Income-tax Act. Further, considering the purpose of two sub-sections, in our view, there is no jurisdiction for holding that the concept of net or gross dividend should have anything to do with the matter for reducing the quantum of dividend income for granting the benefit under section 80M. The language of section 80A and sub-sections (1) and (2) of section 80M is also clear. There is no ambiguity nor was section 80A inserted to give a different meaning to section 80M so as to make sub-section (2) of section 80M otiose or redundant. The non obstante clause "notwithstanding anything contained in this section" used in section 80A is connected only with regard to the computation of deduction by taking into consideration the income by way of such dividends as computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VI and it does not deal with any other aspect. Further, the Legislature never intended to grant doubted relief, i.e., 100 per cent. relief under section 80K and again second relief either 100 per cent. or 60 per cent. as the case may be under section 80M(1). If the contention of the assessee is accepted, then it would mean that the assessee would get deduction under section 80M(1) as well as under section 80K on the same amount of dividend income. However, in this context, learned counsel, Mr. Mehta, submitted that the Legislature has specifically used the phrase "before making any deduction under this Chapter" mentioned in brackets to indicate that section 80K(1) is to be operated without making any deduction including the deductions as provided in section 80M(2). In our view, this submission is also misconceived because the bracketed portion only clarifies what is meant "the income by way of such dividends as computed in accordance with the provisions of this Act". The said phrase is not used for governing the entire section 80M or for making sub-section (2) nugatory. In this view of the matter, we hold, that, for working out the deduction under section 80M(1) of the Act, the net dividend income after reducing the quantum of dividend income further on account of relief admissible under section 80K of the Act is to be taken into consideration.
16. In the result, the questions in all the references are answered in favour of the Revenue and against the assessee by holding that, in computing deductions allowable under sub-section (1) of section 80M, the net dividend income should be reduced by the deductions allowable to the assessee under section 80K, as provided in sub-section (2) of section 80M.
17. The references stand disposed of accordingly with no order as to costs.