Dipak Misra, J.
1. The present appeal preferred Under Section 260A of the IT Act, 1961 (hereinafter referred to as 'the Act') was admitted on the following question of law :
'Whether the Tribunal was justified in its computation of gross total income for the purpose of conferral of benefit of Section 80M of the IT Act, 1961 without deducting the benefit covered Under Section 36(l)(viii) of the Act from the gross total income as provided Under Section 80B(5) ?'
2. The facts which are necessitous to be stated for the purpose of disposal of this appeal are that the assessee, M.P. Audyogik Vikas Nigam Ltd., Bhopal, (hereinafter referred to as 'the Nigam') filed its return for the asst. yr. 1989-90 on 29th Dec, 1989, disclosing total income of Rs. 2,01,98,450. The AO completed the assessment Under Section 144 of the Act by order dt. 20th Feb., 1992 and determined the total income at Rs. 3,00,00,000. The aforesaid determination was assailed in an appeal and the appellate authority set aside the order passed by the AO. Thereafter, the assessment was made Under Section 143(3) r/w Section 250 of the Act and the AO determined the total income as Rs. 2,49,89,070. It is pertinent to mention here that the IT return for the asst. yr. 1991-92 was filed on 31st Dec, 1991 disclosing the total income of Rs. 1,45,20,208. The assessment in question was completed, Under Section 143(3) of the Act vide order dt. 31st March, 1994 determining total income at Rs. 2,49,89,070. In respect of the asst. yr, 1989-90 the assessee had claimed deduction Under Section 80M of the Act at the rate of 60 per cent of the gross dividend of Rs. 32,96,000 amounting to Rs. 19,77,600. Separate deduction at the rate of 40 per cent of gross profit was also claimed Under Section 36(l)(viii) of the Act. Similarly deductions were claimed in respect of asst. yr. 1991-92.
3. As is manifest the AO did not accept the abovesaid. claims of the assessee in respect of both the years and came to hold that the assessee was not entitled to claim deduction Under Section 36(l)(viii) and Section 80M of the Act independently on the gross dividend income. The assessee being aggrieved preferred an appeal before the CIT(A) who dismissed the appeal. Being dissatisfied with the order of CIT(A) for the asst. yr. 1989-90 the assessee filed an appeal before the Income-tax Appellate Tribunal (in short 'the Tribunal'). It is relevant to state here that in respect of the asst. yr. 1991-92 the first appellate authority allowed the appeal vide order dt. 27th Oct., 1994 as a consequence of which the Department was compelled to knock at the doors of the Tribunal. The Tribunal by order dt. 3rd May, 2000, allowed the appeal of the assessee by expressing the opinion that Section 36(l)(viii) of the Act and Section 80M of the Act are independent provisions and deductions allowed Under Section 36(l)(viii) of the Act has no impact on the deductions claimed Under Section 80M and, therefore, the said deduction has to be worked out on the gross dividend income and not on the net dividend income. Quite apart from the above, the Tribunal further held that the assessee was entitled to deduction of an amount equal to 60 per cent of the income by way of dividend that includes any income received by way of dividend from any other domestic company subject to the other provisions of the Act. Being of this view, the Tribunal dismissed the appeal of the Revenue which related to the year 1991-92.
4. The centripodal question that arises for consideration has been set out as question of law which has already been reproduced above. Submission of Mr. Rohit Arya, learned counsel for the Revenue is that the Tribunal has grossly erred by treating both the provisions as independent which is not so if other provisions, namely, Sections 80AA, 14, 28 and 57 are read conjointly. It is contended by him that if the benefits are conferred as has been computed by the Tribunal that would amount to causing violence to the provisions of the Act and, therefore, the order passed by the Tribunal is liable to be set aside as it has grossly erred in computation of the benefit conferrable Under Section 80M of the Act. To buttress his submission he has placed reliance on the decision rendered in the case of Distributors (Baroda) (P) Ltd vs. Union of India JT (1985) 155 (SC) 120.
5. Mr. G.N. Purohit, learned counsel for the assessee, has commended us to the concept of total income as provided under the Act and submitted that the computation made by the Tribunal is absolutely flawless and the reasons given by the Tribunal are covered by the decisions rendered in the cases of CIT vs . M.P. Audyogik Vikas. Nigam Ltd. : [1989]178ITR177(MP) , CIT vs . Himachal Pradesh Finance Corpn. and CIT vs . General Insurance Corpn. of India : [2002]254ITR203(Bom) .
6. To appreciate the controversy it is apposite to refer to Section 36(l)(viii). The said provision reads as under :
'(viii). in respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head 'Profits and gains of business or profession' before making any deduction under this clause) carried to such reserve account :
Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital and of the general reserves of the corporation or, as the case may be, the company, no allowance under this clause shall be made in respect of such excess.
Explanation.-In this clause,-
(a) 'financial corporation' shall include a public company and a Government company;
(b) 'public company' shall have the meaning assigned to it in Section 3 of. the Companies Act, 1956 (1 of 1956);
(c) 'Government company' shall have the meaning assigned to it in Section 617 of the Companies Act, 1956 (1 of 1956);.
(d) 'infrastructure facility' shall have the meaning assigned to it in cl. (23G) of Section 10;
(e) long-term finance' means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years.'
7. In this regard the provisions engrafted under Sections 80AA and 80M being relevant are reproduced hereunder :
'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 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. Deduction in respect of certain intercorporate dividends.-(1) Where the gross total income of a domestic company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends from another domestic company as does not exceed the amount of dividend distributed by the first-mentioned domestic company on or before the due date.
(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-s. (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.
Explanation.-For the purposes of this section, the expression 'due date' means the date for furnishing the return of income under sub-s. (1) of Section 139.'
8. It is also consign to refer to Section 80B(5) which reads as under:
'(5) 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter;'
9. As has been indicated earlier that the main thrust of the matter is whether both the provisions, namely, Section 36(l)(viii) and Section 80M should be treated to be independent. In this context we may profitably refer to Circular No. 58 issued on 15th April, 1971 clarifying Section 80M of the Act. The circular is worth reproducing. It reads as under:
'A question has arisen as to whether in the case of a company where a part of the dividend income is utilised for setting off loss under any other head relief Under Section 80M of the IT Act, 1961, is to be allowed on the reduced dividend income remaining after such set off or on the total dividend income before set off.
2. In this connection, the Board are advised that the income received by an assessee-company by way of dividends is one of the components which go to make up its gross total income, which is arrived at by aggregating its income under the various heads. It would not be strictly in accordance with the language of the section to state that a certain amount which has been added in calculating the gross total income of an assessee should be considered as not being included in it merely because the computation of the total income of the assessee includes a loss.
3. Thus, in the case of an assessee being a company, where a part of the dividend income is utilised for setting off loss under any other head, relief Under Section 80M of the IT Act, 1961, is to be allowed on the dividend income before such set off subject to the overall limit imposed by Section 80A(2) of the IT Act, 1961. This is illustrated in the following example :
20, 000 Income from dividend10, 000 Business loss10, 000 Total incomeDeduction Under Section 80M @ 60 per cent of Rs. 20,000 (Rs. 12,000) but subject to the limit of total income, i.e., 10,000'.
10. In this regard we may refer with profit to the decision rendered in the case of General Insurance Corpn. of India (supra). In the said case the Division Bench of Bombay High Court while dealing with the deduction Under Section 80M held as under :
'As regards question No. 2 is concerned, the AO has held that while deductions Under Section 80M, expenses incurred on account of salary paid to staff, stamp duty, transfer fee and safe custody charges are relatable to earning of dividend. We do not find any merit. The above expenses on account of salary paid to staff are not directly relatable to earning of dividend. So also payment of stamp duty, transfer fees and safe custody are not relatable to earning of dividend. They may be relatable to acquisition of share but not to dividend being earned.'
11. At this juncture it is worthwhile to refer to the decision rendered in the case of CIT vs . Bhoruka Investments (P) Ltd. : [1992]198ITR734(Cal) wherein it has been held as under-;
'...where a part of the dividend income is utilised for setting off loss under any other head, relief Under Section 80M of the IT Act, 1961, is to be allowed on the dividend income before such set off subject to the overall limit imposed by Section 80A(2) of the IT Act, 1961. The relief Under Section 80M has to be computed on the dividend income included in the assessment but while allowing relief, the relevant consideration is what is the total income computed after setting off of loss and unabsorbed depreciation, if any. The relief must be linked with the income arrived at after taking into account the loss and depreciation. In a case, where the total income is not sufficient to allow the relief Under Section80M in entirety, relief has to be restricted to the income so arrived at. As for example, if the income from dividend is computed at Rs. 20,000 and business loss is computed at Rs. 10,000, in that event, the total income as computed after setting off of the loss would be Rs. 10,000. Although, deduction Under Section 80M at the rate of 60 per cent of Rs. 20,000 (Rs. 12,000) would be available but the actual relief cannot exceed the total income of Rs. 10,000. Accordingly, the deduction will be subject to the limit of the total income..,.'
12. In this regard it is useful to refer to the decision rendered in the case of CIT vs . Maganlal Chhaganlal (P) Ltd : [1999]236ITR456(Bom) wherein it has been held as under :
'Following the ratio of the decision of the Supreme Court in Distributors (Baroda) (P) Ltd. vs . Union of India : [1985]155ITR120(SC) , we hold that deduction Under Section 80M(l) of the Act 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, i.e., after deducting interest on monies borrowed for earning such income, and not with reference to the full amount of dividend received by the assessee.'
13. The High Court of Madras in the case of CTT vs. Chemical Holdings Ltd., (2001) 249 FTR 540 (Mad) while dealing with the concept of Section 80M in the backdrop of Section 80AA and other provisions of the statute held as under:
'We, therefore, answer the question as to whether, on the facts and circumstances of the case, relief Under Section 80M is to be granted on the gross amount of the dividend received by the assessee or on the gross amount as reduced by the interest attributable to the money borrowed for the purpose of investment and the expenditure incurred in realising the dividend income, by holding that the relief is to be given only on the net amount of the dividend, i.e., after deducting from the gross dividend the interest paid by the assessee, which is attributable to the money borrowed for the purpose of making the investment which yielded the dividend and the expenses incurred realising the dividend income.'
14. In this context it is appropriate to refer to the decision rendered in the case of M.P. Audyogik Vikas Nigam Ltd (supra) wherein the Division Bench of this Court expressed the view as under :
'Having heard learned counsel for the parties, we have come to the conclusion that this reference must be answered in 'the affirmative and against the Revenue. Clause (viii) of Section 36(1) of the Act provides for deduction on the basis of total income computed before making any deduction under Chapter VI-A of the Act. 'Total income' as defined by Section 2(45) of the Act means the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Chapter III of the Act refers to income which do not form part of total income. Chapter VI-A provides for certain deductions which are required to be made in computing total income. However, Section 36(l)(viii) of the Act provides that deduction admissible under that provision has to be calculated on the basis of total income computed before making any deduction under Chapter VI-A of the Act. In view of this provision, it would not be permissible for the assessing authority, as held in CTT vs . Bihar State Financial Corporation : [1983]142ITR518(Patna) , to find out what would be the total income after making the deduction admissible Under Section 36(l)(viii) of the Act and then limit the amount of deduction to 40 per cent of the total income, as reduced by the deduction Under Section 36(l)(viii) of the Act. In our opinion, the Tribunal was right in holding that the deduction permissible Under Section 36(l)(viii) of the Act had to be calculated on the basis of the total income of the assessee as it stood before the deduction allowable Under Section 36(l)(viii) of the Act.'
15. In this regard we may also refer with profit to the decision rendered in the case of CIT vs. Central Bank of India whereby the High Court of Bombay expressed as under:
'Deduction Under Section 80M is based on net dividend received. That point is squarely covered in the case of CIT vs . Maganlal Chhaganlal (P) Ltd. : [1999]236ITR456(Bom) in which it has been held that deduction Under Section 80M has to be calculated with reference to the amount of interest computed in accordance with the provisions of the Act after deducting interest on monies borrowed for earning such income and not with reference to the full amount of dividend received by the assessee. Therefore, the assessee was entitled to deduction Under Section 80M on the basis of net dividend.'
16. The Bench proceeded to lay down as under:
'Sec. 18 of the Act, as it stood at the relevant time, refers to computation of income by way of interest on securities, Section 19, inter alia, states that subject to provisions of Section 21, income chargeable Under Section 18 shall be computed after making deductions which are enumerated in that section. Section 20 refers to deduction from interest on securities in the case of a banking company. Section 20(2) states, inter aha, that expenses deducted Under Section 20(1) shall not form part of deductions admissible Under Section 30 to Section 37 for the purpose of computing business profits. Section 80M on the other hand comes under Chapter VI of the IT Act, Chapter VI-A refers to special deduction. As held in numerous cases by this Court, Chapter VI-A constitutes a separate code dealing with deductions to be made in computing total income. Section 80M refers to special deduction in respect of intercorporate dividend. As held by the Bombay High Court in the case of Maganlal Chhaganlal (P) Ltd. (supra), in order to compute deduction Under Section 80M, one has to compute the amount of dividend in accordance with the Act after deducting interest on monies borrowed for earning such income. The point to be noted is that deductions contemplated by Section 80M referred to actual expenditure whereas, deductions contemplated by Section 20(1) are estimated proportionate expenses and interests. Therefore, one cannot import deductions from interest on securities in the case of banking company Under Section 20(1) into the deductions contemplated by Section 80M. In the case of CIT vs . United Collieries Ltd. : [1993]203ITR857(Cal) the Calcutta High Court has held that the special deduction Under Section 80M is allowable on the net dividend which is arrived at after taking into account actual expenditure incurred by the assessee in earning the dividend income and that there was no scope or any estimate of expenditure being made and there was no scope for allocation of notional expenditure unless the facts of a particular case so warranted. In our view, Section 20(1) contains a rule of proportionality of expenses and interests and rule is based on estimation of expenditure whereas, Section 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purpose of earning such dividend unless facts of a particular case warrant otherwise. Therefore, we answer the later question in favour of the assessee bank and against the Department.'
17. We may proceed to clarify here that though the aforesaid decision was delivered in the context of inter-relationship between Section 20 and Section 80M of the Act but the observations made by the Court qua Section 80M are relevant. We say so as the said High Court expressed the view that deductions contemplated by Section 80M refer to actual expenditure whereas deductions contemplated by Section 20(1) are estimated proportionate expenses and interests. The learned Judges have further opined that deduction Under Section 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred. Under Section 36(l)(viii) a deduction is allowed by allowing creation of reserve to the extent of 40 per cent of profits and it cannot be stated by any stretch of imagination that creation of reserve would tantamount to an expenditure. It is apposite to state here that the conception of reserve finds place in the provisions of Companies Act, 1956, and the said concept ostracises any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability. In this regard it is consign to have a survey with regard to characteristics of a reserve. When the basic ingredients of reserve are taken note of it means reserve of appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Negatively put, reserves are not designed to meet any liability, contingency, commitment or diminution in the value of assets which are discernible from the balance sheet. In commercial world reserves are something which are set apart for future- use of enjoyment. On certain occasions reserve funds are shown as part of the owner's interest. Our views in this regard are fortified by the decisions rendered in the cases of Metal Box Co. of India Ltd. vs . Their Workmen : (1969)ILLJ785SC , CIT vs . Century Spg. & Mfg. Co. Ltd. : [1953]24ITR499(Bom) ; Duncan Bros. & Co. Ltd. vs . CIT : [1978]111ITR885(Cal) ; CIT vs . Eyre Smelting (P) Ltd. : [1979]118ITR857(Cal) . In view of the aforesaid enunciation of law it rings as a bell that no actual expenditure is really contemplated when anatomy of Section 36(l)(viii) is x-rayed and hence, it is inapposite to state that deduction Under Section 80M takes place after deducting the sum/quantum allowable Under Section 36(l)(viii).
18. Presently we shall proceed to scrutinise the submissions from other spectrum. It is worth mentioning here that Section 80AA remained in the statute book till 1st April, 1998. The said provision laid a postulate that any deduction which required to be allowed Under Section 80M in respect of any income by way of dividend from domestic company which is included in the gross total income of the assessee, the deduction under that section would be computed with reference to the income by way of such dividend as computed in accordance with the provision of the Act. It is relevant to state here that said section also used the words 'before making any deduction under this chapter and not with reference to the gross amount of such dividends'. Scanning the said provision in proper perspective, we do not find what had been stipulated in the said provision render any assistance to the Revenue.
19. We have referred to the aforesaid provision as Mr. Arya has given immense emphasis on the same. In our considered view what arises for consideration here is the deduction allowable Under Section 36(l)(viii). As has been indicated hereinabove many High Courts have held that specified percentage of deduction Under Section 36(l)(viii) should be given on the total income which should be worked before making any deduction under Chapter VI-A of the Act. To that effect, there is a clarificatory circular dt. 15th April, 1971. In view of the aforesaid analysis, we are of the considered opinion that the finding recorded by the Tribunal is flawless and does not deserve to be interfered with in this appeal.
20. Consequently, the appeal, being devoid of substance, stands dismissed.