1. In the course of assessment proceedings for the assessment year 1980-81, the assessee-company claimed deduction under Section 80M of the Income-tax Act, 1961 ('the Act'), in respect of the dividend income received by it from the Unit Trust of India. The ITO observed that the deduction under Section 80M was allowable in respect of the dividend declared by a domestic company. According to him, the Unit Trust of India was not a domestic company within the meaning of Section 80M. He, therefore, disallowed the claim of the assessee.
2. On appeal, the Commissioner (Appeals) confirmed the order of the ITO. While doing so, he observed as under : 3. Section 80M provides for deduction in respect of inter-corporate dividends received by a domestic company from another domestic company. Domestic company has been defined in Section 80B(2) as follows : 'domestic company' means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income ; It is evident from the definition of domestic company that prescribed arrangements for the declaration and payment of dividend should have been made in respect of its income liable to tax under the Income-tax Act. As such, even if the income from Units is to be treated as dividend income, it cannot be treated as dividend received from a domestic company as the income of the Unit Trust of India is not liable to income-tax and, therefore, the Unit Trust of India cannot be treated as a domestic company within the meaning of Section 80B(2) of the Income-tax Act, 1961. No interference with the ITO's action is called for.
3. Aggrieved by the order of the Commissioner (Appeals), the assessee has filed the present appeal.
4. After going through the record and hearing the learned representatives of the parties. I am inclined to accept this appeal.
Section 32(3) of the Unit Trust of India Act, 1963, provides as follows : (3) Subject to the foregoing sub-sections, for the purposes of the Income-tax Act, 1961 (43 of 1961),-- (a) any distribution of income received by a unit holder from the trust shall be deemed to be his income by way of dividends ; and 5. It is obvious from the section quoted above that the Unit Trust of India is a company for the purpose of the Act. That the Unit Trust of India is a 'domestic company' admits of no doubt. The argument of the Commissioner (Appeals) is that, for being a domestic company, prescribed arrangements for the declaration of payment of dividend income should have been made in respect of its income liable to tax under the Act and since income from the Unit Trust of India is not liable to income-tax, the dividend therefrom cannot be treated to be dividend from a domestic company. This argument is misconceived. The qualifying words, on which the Commissioner (Appeals) has placed reliance, relate to 'any other company' appearing in Section 80B(2).
The Unit Trust of India comes within the first part of the definition of 'domestic company' which means an Indian company. In other words, since the Unit Trust of India is an Indian company under Section 80B(2) of the 1961 Act, read with Section 32(3) of the Unit Trust of India Act, we need not go into the second part of Section 80B(2). In this view of the matter, I am of the opinion that the assessee, being a domestic company is entitled to the deduction under Section 80M in respect of the dividend income received by it from the Unit Trust of India. I, therefore, accept the claim of the assessee.