Bombay High Court
Commissioner Of Income-Tax vs Mahendra Sobhagchand Shah on 10 March, 1993
Equivalent citations: [1993]203ITR178(BOM)
JUDGMENT Dr. B.P. Saraf , J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the Revenue, the Income-tax Appellate Tribunal (for short, "the Tribunal"), has referred the following question of law to this court for opinion :
"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 upholding deduction under section 80K on the gross dividend income without taking into account deduction for expenses incurred for earning the same ?"
2. The assessee is an individual who carried on the business of sale and purchase of shares. In the assessment year 1974-75 (corresponding previous year being year ended on October 26, 1973), the assessee received the following income under different heads :
Rs.
Ready share income 2,49,606
Speculation business income 1,68,969
Dividend income 6,72,220
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Total 10,90,795
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3. The assessee claimed deduction on account of the following expenses incurred for the purpose of its business :
Rs.Brokerage 345
Share transfer expenses 4,066
Interest 8,23,886
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8,28,297
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4. In respect of the dividend income of Rs. 6,72,220 the assessee claimed deduction under section 80K of the Act.
5. The Income-tax Officer rejected the claim of the assessee for deduction under section 80K. He allocated the expenditure of Rs. 8,28,297 incurred by the assessee amongst the income under different heads on pro rata basis and deducted the amounts so determined in computing the income under different heads. The expenditure allocated to dividend income came to Rs. 5,10,451. This amount was deducted from the dividend income of Rs. 6,72,220 and the dividend income was thus determined at Rs. 1,61,769. The Income-tax Officer refused to allow deduction under section 80K of the Act on the ground that the income taxable under the head "Dividend" was less than the taxable dividend declared by the assessee.
6. Against the order of the Income-tax Officer, the assessee preferred an appeal before the Appellate Assistant Commissioner, the assessee challenged the method of computation of total income adopted by the Income-tax Officer. According to the assessee, bifurcation of business expenditure under different heads of income proportionately is not permissible under the Act. The Appellate Assistant Commissioner accepted the contention of the assessee and held that the view of the fact that the total expenses of Rs. 8,28,297 comprising brokerage, transfer fees and interest were incurred in course of speculation and ready business of the assessee, the income from which itself amounted to more than Rs. 4 lakhs. It was further observed that the assessee was not required to incur any of these expenses for the purpose of earning the dividend income as such. The Appellate Assistant Commissioner, therefore, held that the Income-tax Officer's method of computation of total income under these different heads dividing the total expenditure against these heads was not correct and that, in any event, the Income-tax Officer was bound to allow deduction at least in respect of the dividend income computed by him. He, therefore, allowed the appeal of the assessee and directed the Income-tax Officer to recompute the total income and allow the deduction under section 80K against the gross dividend income only. The order of the Appellate Assistant Commissioner was affirmed by the Tribunal on appeal. Hence this reference at the instance of the Revenue.
7. We have heard learned counsel for the Revenue. The contention of the Revenue is that the Income-tax Officer was justified in allocating the expenditure on pro rate basis amongst income under different heads and that deduction under section 80K of the Act is available on net dividend income and not from the gross dividend income. We have carefully considered both the submission. We, however, find it difficult to accept either of them. Firstly, allocation of business expenditure between different heads of income on prorate basis, in the absence of special circumstances which might justify doing so, is not in accordance with the scheme of the Income-tax, which specifically lays down the various deductions that are allowable in computing income under different heads. Secondly, deduction under section 80K is allowable from dividend income computed in the manner laid down in the Act. The controversy based on gross dividend income or net dividend income is, therefore, misconceived.
8. Under section 80K of the Act, from dividend income of an assessee, deduction is allowable in respect of dividend attributable to profits and gains from new industrial undertaking, etc. Section 80K, so far as relevant reads :
"Where the gross total income of an assessee..... -
includes any income by way of dividends... there shall.... 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..."
9. The expression "gross total income" has been defined in section 80B(5) of the Act to mean the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or section 280-O. Section 4 of the Act, which is the charging section, imposes income-tax upon a person in respect of his total income. Section 14 has classified income, for the purpose of tax and computation of total income, under different heads according to the character of the source. This has been done for the purpose of providing for each head separate rules for computing the amount of income. The manner of computation of income under the head "Profits and gains of business or profession" has been laid down in section 29 of the Act. Such income is to be computed in accordance with the provisions contained in sections 30 to 43A of the Act. Income from dividend, which has specifically been included in the incomes falling under the head "Income from other sources", has to be computed after making the deductions specified in section 57 of the Act. Section 57 reads :
"57. The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely :-
(i) in the case of dividends, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend on behalf of the assessee;
(ii) in the case of income of the nature referred to in clauses (ii) and (iii) of sub-section (2) of section 56, deductions so, far as may be, in accordance with the provisions of sub-clause (ii) of clause (a) and clause (c) of section 30, section 31 and sub-section (1), (1A) and (2) of section 32 and subject to the provisions of section 34 and 38;
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income :
Provided that nothing contained in clause (i) or clause (iii) shall apply in computing the income by way of dividends in the case of an assessee, being a foreign company.
Explanation. - For the purposes of this section and section 58, 'foreign company' shall have the same meaning as in section 80B."
10. Section 58 specifies the amounts which are not deductible in computing income from other sources, notwithstanding anything to the contrary contained in section 57 of the Act. It may be noted that there is a marked difference between the language of section 37(1) and section 57(iii) both of which are residuary provisions to allow deduction in respect of certain expenditure which do not fall under any of the items of expenditure specifically enumerated in the provisions of the Act. In section 37(1), the expression used is "for the purposes of the business" whereas in section 57(iii), it is "for the purpose of making or earning such income". The expression "for the purposes of business" used in section 37(i) is much wider in scope than the expression "for the purpose of earning profits". Its range is wide (see CIT v. Malayalam Plantations Ltd. . It is also well-settled that expenses attributable to income under one head cannot be deducted from income under another head. The admitted position in the instant case is that the assessee carries on the business of shares. He derived income from the said business. He also received income by way of dividend. The expenditure incurred by the assessee under the heads brokerage, share transfer expenses, interest, etc., were claimed by the assessee as expenses incurred for the purpose of its business. Such expenses are allowable as deduction in the computation of business income under section 29 read with sections 36 and 37 of the Act. Under section 36 of the Act, in computing the income under the head "Profits and gains of business or profession", the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession is an allowable deduction.
11. Section 37 is a residuary provision and allows deduction of expenditure incurred for the purpose of the business. As pointed out earlier, it is well-settled that the expression "for the purposes of the business" is wider in scope than the expression "for the purpose of earning profits". Expenditure incurred by the assessee in the instant case is for the purpose of carrying on of the business of shares. There is nothing to show that any part of it was incurred for earning dividend income. The expenditure incurred by the assessee on account of brokerage, share transfer expenses and interest evidently does not fall under either of the two clauses of section 57 of the Act, viz., clauses (i) (iii). That being so, it is not allowable as a deduction in the computation of dividend income. The Income-tax Officer, therefore, had no power to bifurcate the same on pro rata basis and deduct a part of it from the dividend income. Such an action is not in accordance with the scheme of the Act and the provisions of section 57 thereof. It is not open to the Income-tax Officer to deduct expenditure attributable to income under one head from income under another head. In that view of the matter, no part of the expenditure claimed by the assessee could have been deducted from the dividend income. If the Income-tax Officer was of the opinion that the whole of the expenditure claimed by the assessee was not allowable as a deduction in computation of business income he could have said so and restricted the deduction to an amount which is a permissible deduction. But deducting a part of it from dividend income without any material to show that it falls under either of the two clauses of section 57 of the Act is not tenable in law.
12. In view of the foregoing discussion, it is clear that the income from dividend computed in accordance with the provisions of the Act is Rs. 6,72,220 as disclosed by the assessee and not Rs. 1,61,769 as determined by the Income-tax Officer and the assessee is entitled to deduction under section 80K of the Act, if he fulfils the requirements in respect of dividend income of Rs. 6,72,220.
13. Having arrived at this conclusion, it may be expedient to observe that the question referred to us by the Tribunal is not happily worded and does not project the real controversy in the proper perspective. We, therefore, reframe the question as follows :
"Whether, on the facts and in the circumstances of the case, and having regard to the definition of 'gross total income' under section 80B(5) of the Income-tax Act, 1961, the Tribunal was justified in upholding the deduction under section 80K from the dividend income of the assessee without deducting therefrom the pro rata expenditure incurred by the assessee on brokerage, share transfer fees and interest ?"
14. In the light of the above discussion, we answer the question as reframed by us in the affirmative, that is in favour of the assessee and against the Revenue.
15. Under the facts and circumstances of the case we make no order as to costs.