1. This appeal by the assessee is directed against the order passed by the Commissioner of Income-tax, Tamilnadu-I, Madras under Section 263 of the Income-tax Act, 1961.
2. The two-day delay in the filing of the appeal is condoned after hearing both the sides.
3. The assessment for the assessment year 1985-86 was initially made on 28-1-1986. In the said assessment the Assessing Officer allowed the assessee deduction under Section 80M of the Income-tax Act at 60 per cent of the dividend income of Rs. 1,84,820. Subsequently, the Commissioner of Income-tax, invoking the powers vested in him by and under Section 263 of the Act, called for and examined the assessment records of the assessee, and found that the assessment order for the assessment year 1985-86 was erroneous in that it was prejudicial to the interests of the revenue. According to him, the assessee was entitled to deduction under Section 80M at 60 per cent not of the entirety of the dividend income of Rs. 1,84,820 but only of Rs. 1,34,102, being the resultant figure obtained by setting against the dividend income of Rs. 1,84,820, the unabsorbed depreciation of Rs. 50,712 relating to earlier years. He, therefore, put the assessee on notice of his intention to pass a suitable order under Section 263 of the Act.
4. The assessee responded by pointing out that for purposes of computing the deduction admissible under Section 80M, only the expenditure incurred in earning the dividend income could be deducted and not any other item. In this regard, reliance was placed not only on the Supreme Court case of Distributors (Baroda)(P.) Ltd. v. Union of India [1985] 155 ITR 120, but also a C.B.D.T. Circular dated 15-4-1971.
5. The aforesaid arguments did not find favour with the Commissioner.
According to the Commissioner, deduction under Section 80M was available to the assessee only on the net figure of Rs. 1,34,102. In this regard the following considerations weighed with him: (i) Section 80AA stipulates that 'before making any deduction under Section 80M falling under Chapter VIA, the total income (sic) has to be computed taking into account all the provisions of the Act other than Chapter VIA deductions. In other words, the income from dividends, which qualifies for deduction under Section 80M, should be computed in accordance with the provisions of the Income-tax Act but before making any deduction under Chapter VIA'.
(ii) "'In accordance with the provisions of this Act' will mean all the provisions contained in the Act, which include Section 57, that is, expenses incurred wholly and exclusively for the purpose of earning the dividend income, Section 71, that is, set off of loss from one head against income under another head and Section 32(2) read with Section 72(2), that is, adding unabsorbed depreciation of earlier years to the amounts of depreciation to be allowed for the following previous year and deeming the resultant figure as the allowance for that previous year and setting off the same against the other incomes, that is to say, against incomes other than business income, as per Supreme Court's decision in the case of CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555".
Therefore, "any income from dividend included in the gross total income as computed under the Act, which is the amount eligible for consideration of deduction under Section 80M will be only the amount of dividend income after set off of unabsorbed depreciation".
(iii) The C.B.D.T. Circular referred to and relied upon by the assessee's representative "was issued prior to the introduction of Section 80AA with retrospective effect from 1-4-1968 by the Finance (No. 2) Act, 1980. Further, after such introduction of Section 80AA with retrospective effect from 1-4-1968, the Board had issued instructions bringing out the correct legal position viz. that before allowing deduction under Section 80M, the gross total income should be computed in accordance with the other provisions in the Act except Chapter VIA and with reference to the resultant amount of dividend that is included in such gross total income only, deduction under Section 80M should be allowed".
6. In view of the foregoing, therefore, he rejected the contention of the assessee and passed the impugned order in revision, directing the Assessing Officer to modify the assessment by allowing deduction under Section 80M with reference to the net dividend arrived at after setting off the unabsorbed depreciation of earlier years.
8. On hearing the rival submissions, we consider that the assessee is entitled to succeed.
9. During the relevant previous year the assessee received aggregate dividend income of Rs. 3,41,200. It had paid aggregate interest of Rs. 1,56,380 on the moneys borrowed by it for purposes of purchasing the shares in question. Thus, the assessee had disclosed a taxable dividend income of Rs. 1,84,820 under the head 'Other sources'.
10. The Assessing Officer computed the deduction admissible under Section 80M by taking the sum of Rs. 1,84,820 as the base. According to the Commissioner, however, the proper method was first to set off the unabsorbed depreciation relating to earlier years of Rs. 50,712 against the dividend income of Rs. 1,84,820 and thereafter to calculate the deduction admissible to the assessee under Section 80M with reference to the resultant figure of Rs. 1,34,102, 11. The question that arises for consideration is whether the view taken by the Commissioner is sustainable in law.
12. At the outset, we may notice the scheme of the Act relating to the Computation of total income in general, and that of Chapter VIA in particular. Under the scheme of the Act, income-tax is chargeable, at the rate or rates prescribed, in accordance with and subject to the provisions of the Act in respect of the total income of the previous year, or previous years, as the case may be, for every person. In matters relating to the computation of total income we have, ignoring those provisions of the Act which are not relevant to the issue on hand, Section 10, which identifies incomes that are not to be included in the total income. As has been pointed out by Chief Justice Chagla in the Bombay High Court case of CAT v. N.M. Raiji [1949] 17 ITR 180 : The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total income. Not only is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate.
13. We then have Section 14, which stipulates that for purposes of charge of income-tax and computation of total income, all income shall be classified under the six heads listed therein. We then have Sections 15 to 17, which deal with computation of income under the head 'Salaries'. Sections 18 to 21 deal with computation of income under the head 'Interest on securities"; and so on.
14. In the case before us we are concerned with dividend income, which is an item of income chargeable to tax under the head 'Income from other sources'. Here, Sections 57 to 59 dealing with computation of income under the head 'Income from other sources' come into play. Here, we are particularly concerned with the provisions of Section 57(i), which stipulates that in the case of dividends, deduction will be allowed in respect of 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; and Section 57(iii), which stipulates that deduction will also be admissible in respect of any "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". It will at once be clear that for purposes of computing the income by way of dividend, income by way of dividend taxable under 'Income from other sources', the nature and extent of the deduction are limited.
15. Once the income chargeable under the six heads listed in Section 14 are computed, the other provisions of the Act contained in Chapter V (Income of other persons included in assessee's total income), and Chapter VI (Aggregation of income and set off or carry forward of loss) come into play for purposes of computing the total income of the assessee.
16. We then have Chapter VIA, which deals with deductions to be made in computing the total income of an assessee. This Chapter has been incorporated into the Act with a view to achieving the objective of State policy in diverse fields.
Through the provisions contained in this Chapter Parliament has accorded favoured treatment to certain types of (i) expenditure and (ii) income. The provisions of Sections 80C to 80G (both inclusive) falling under the heading "B - Deduction in respect of certain payments" relate to specified items of expenditure; and those of Sections 80M to 80TT (both inclusive) falling under the heading "C - Deduction in respect of certain income" deal with certain items of income.
17. Having identified the items of expenditure/income which qualify for favoured treatment, Chapter VIA has laid down the conditions which must be fulfilled. Quite a few of the Sections lay down the pre-conditions which must be satisfied before the benefit of the favoured treatment could be claimed. For example, Section 80J, which deals with "Deductions in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases," has, under Sub-sections (4), (5) and (6) laid down the pre-conditions which must be satisfied.
18. The Chapter has also specified the upper limit of the aggregate deduction available to an assessee. Section 80A(2) stipulates that the aggregate amount of deductions under Chapter VI shall not, in any case, exceed the gross total income, and Section 80B(5) defines gross total income as the total income computed in accordance with the provisions of the Act, before making any deduction under Chapter VIA or under Section 280-O.19. The scheme of Chapter VIA thus is first to identify the types of expenditure/income which are eligible for favoured treatment; secondly to lay down the mode and mechanics of computing the deduction admissible; thirdly to lay down the pre-conditions which must be satisfied in order to be eligible for favoured treatment; and lastly to limit the aggregate amount of deduction admissible under that Chapter to the gross total income of the assessee as defined under Section 80B(5).
20. The scheme of the Chapter, if we may say so with respect, has been lucidly summarised by the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. The Supreme Court said: What Section 80A Sub-section (1), requires is that, first the total income of the assessee must be computed in accordance with the provisions of the Act without taking into account the deductions required to be made under Chapter VIA or under Section 280-O and then from the gross total income thus computed, the deductions specified in Sections 80C to 80W must be made in order to arrive at the total income. But Sub-section (2) of Section 80A provides that the aggregate amount of the deductions required to be made under Chapter VIA shall not exceed the gross total income of the assessee so that the total income arrived at after making the deductions specified in Sections 80C to 80W from the gross total income can never be a minus or negative figure.
The Calcutta High Court also took a similar view in the case of National Engg. Industries Ltd. v. CIT [1978] 113 ITR 252.
21. The scheme of the Act in matters relating to the computation of the total income of the assessee may now be summarised as follows: (ii) Secondly, incomes which by virtue of the provisions of Chapter III do not form part of the income of the assessee must be excluded.
(iii) Thirdly, the taxable income of the assessee must be computed in accordance with the provisions of the Act and classified under the six heads listed under Section 14.
(iv) Fourthly, the provisions of Chapter V of the Act dealing with income of other persons which are to be included in the assessee's total income will have to be given effect to.
(v) Thereafter the provisions of Chapter VI relating to aggregation of income and set off or carry forward of loss must be applied.
At this stage we get what Section 8013(5) calls "gross total income".
(vii) The resultant figure is the total income of the assessee which is chargeable to tax.
22. From the foregoing analysis of the scheme of the Act in matters relating to computation of the total income of the assessee, the following principles can be deduced: (a) Total income as computed in accordance with the provisions of the Act is the aggregate of the incomes computed under the six heads listed in Section 14 and in accordance with the respective provisions of the Act, as increased or, as the case may be, decreased, in accordance with the other provisions of the Act.
(b) The computation of the gross total income (within the meaning of Section 80B(5) of the Act) of the assessee marks the penultimate stage of computing the assessee's taxable income.
(c) The exercise of ascertaining the assessee's income under the six heads listed in Section 14 comes first. By the same token, it is separate and distinct from the exercise of ascertaining both the gross total income (within the meaning of Section 80B(5) of the Act) and the total income of the assessee.
Thus, when Section 2(45) of the Act defines the term "total income" to mean "the total income referred to in Section 5 computed in the manner laid down in this Act", it refers to the situation in (a) above.
23. Similarly, when Sections 80J/80-I/80HH talks of "any profits and gains derived from an industrial undertaking", it talks of profits and gains derived from an industrial undertaking computed in the manner laid down in the Act, that is to say, in accordance with the provisions of Sections 28 to 43A which deal with "profits and gains of business or profession".
Again, when Section 80AA talks of total income "computed in accordance with the provisions of this Act", it is clearly referring to total income computed in accordance with the provisions of Section 57(1) or 57(3).
In all the aforesaid cases the accent is on the computation of income under one or more of the six heads listed in Section 14 and in accordance with the provisions of the Act governing such computation.
Stated differently, the said Sections refer to the ascertainment of assessee's income under the six heads listed in Section 14, which, as pointed out earlier, is the first step in the process of computing the assessee's total income. Given the scheme of the Act, there is no warrant to confuse the first step with the subsequent steps, namely the determination of the gross total income and the determination of the total income of the assessee.
24. We may now notice Section 80M, which deals with the deduction admissible in respect of intercorporate dividends. To be eligible for deduction under Section 80M, it must be shown first that the assessee is a domestic company; and secondly, that the gross total income of the assessee includes any income by way of dividend from domestic company/ companies.
25. The question whether the term "income by way of dividend from a domestic company" appearing in the said section referred to gross dividend or dividend net of the deductions admissible under Section 57 of the Act was the subject-matter of controversy.
26. In the case of Cloth Traders (P.) Ltd. {supra) the Supreme Court held that the term was merely descriptive of the nature of income and was not indicative of the quantum of income and that, consequently, Section 80M deduction must be calculated with reference to the gross dividend.
27. Immediately on the handing down by the Supreme Court of the ruling in the case of Cloth Traders (P.) Ltd. (supra). Parliament, by Section 12 of the Finance (No. 2) Act, 1980, introduced in the Income-tax Act, 1961 Section 80AA with retrospective effect from April 1, 1968 - the date when Section 80M was originally enacted. In the case of Distributors (Barodaj (P.) Ltd. (supra), the constitutional validity of the retro-active amendment was challenged before the Supreme Court. A Five-Judge Bench of the apex court held that given the "structure, language and content" of Section 80M, the focus of the section was on the quantum of the dividend income included in the gross total income of the assessee-company. In this regard, the Supreme Court ruled: "Income by way of dividend from a domestic company included in the gross total income would therefore obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on moneys borrowed for earning such income". Accordingly, the Supreme Court dismissed the writ petition.
28. We may now examine the question whether there is anything in Section 80AA of the Act to lend support to the view taken by the Commissioner.
29. According to the Commissioner, the term "income by way of dividend as computed in accordance with the provisions of this Act (before making any deduction under this Chapter)" is the statutory warrant for the proposition that, for purposes of computing the deduction admissible under Section 80M, the unabsorbed depreciation relating to earlier years must first be set off against the dividend income. We are unable to agree. As we see it, on a plain grammatical interpretation, the aforesaid term refers only to the computation of dividend income in accordance with the provisions of Sections 57(1) and 57(3) of the Act.
For a fact, the very Supreme Court ruling to the effect that the said term is indicative of the quantum of dividend income supports the aforesaid view of ours.
30. Nor does Section 80M contain anything even remotely supporting the view taken by the CIT. True, Section 80M talks of the gross total income of an assessee which is a domestic company. Even so, this is merely for purposes of stipulating that in order to be eligible to the deduction available under that section, the assessee must show that inter-corporate dividend income is included in its gross total income.
31. The computation of the deduction under Section 80M is controlled by the specific provisions of Section 80AA; and, as pointed out earlier, those provisions merely stipulate that the deduction under Section 80M shall be computed with reference to the "income by way of such dividend as computed in accordance with the provisions of tills Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividend". The underlined portion contains the key to the interpretation of Section 80AA. As pointed out earlier, as soon as the decision of the Supreme Court in Cloth Traders (P.) Ltd. 's case (supra) was given, Parliament introduced Section 80AA with retrospective effect, clearly with a view to indicating that the said decision did not reflect the true intention of the Legislature. Thus, the sole purpose of Section 80AA was to make it clear that the deduction would be calculated not with reference to gross amount of inter-corporate dividend, but with reference to inter-corporate dividend net of the deductions admissible under Sections 57(1) and 57(3). We are unable to read anything more into Section 80AA.32. We may now notice the Supreme Court case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 which will clarify the position. That was a case concerning the provisions of Section 80E of the Act. Under the said section certain companies were entitled to deduction in respect of profits and gains from specified industries.
Section 80E(1) stipulated: 80E. Deduction in respect of profits and gains from specified industries in the case of certain companies.--(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent, thereof, in computing the total income of the company.
In that context two inter-related questions arose for consideration.
The first was whether Section 41(2) profits could be taken into reckoning for purposes of computing the deduction admissible under the section. The second question was whether the unabsorbed depreciation and development rebate brought forward from earlier years could be first adjusted against the profits of the industrial undertaking and the deduction admissible under Section 80E computed thereafter with reference to the resultant figure. The department's case was Section 41(2) profit being nothing but deemed income, they cannot be taken into reckoning for purposes of computing the deduction admissible to the assessee under Section 80E. On the second issue the assessee's case was that the deduction admissible under Section 80E must be calculated with reference to the profits of the industrial undertaking without reducing such profits by the unabsorbed depreciation and'development rebate carried forward from the earlier years, On a consideration of the scheme of the Act in general, and that of Section 80E in particular, the Supreme Court held as follows: (i) In Section 80E(1) the expression "total income" is followed by the words "as computed in accordance with the other provisions of this Act"; and the mandate of these words clearly negatives the argument that the expression "total income" has been used in the sense of commercial profits.
(ii) The expression "total income" has been defined in Section 2(45) of the Act as meaning "the total income referred to in Section 5, computed in the manner laid down in the Act;" and when this definition has been furnished by the Act itself, the expression as appearing in Section 80E(1) must, in the absence of anything in the context suggesting to the contrary, be construed in accordance with this definition.
(iii) Consequently, the profits and gains from specified industries must be computed in accordance with Sections 30 to 43A of the Act.
(iv) It should, therefore, follow first that Section 41 (2) profits must be taken into account for purposes of computing the deduction under Section 80E(1) of the Act. Secondly, by the same token, unabsorbed development rebate and unabsorbed depreciation must first be deducted from the profits and gains of the industrial undertaking and the provisions of Section 80E applied thereafter.
In view of the foregoing, therefore, the Supreme Court dismissed both the departmental and the assessee's appeals.
The significance of the said case lies in the fact that the said case is an authority for the proposition that the profits and gains from specified industries referred to in Section 80E must be computed in accordance with the provisions of the Act governing the computation of business income.
33. As has been pointed out by the Supreme Court in the case of Distributors (Baroda)(P.) Ltd. (supra), the reasoning which prevailed with the Supreme Court in placing a particular interpretation of Section 80E(1) in the case of Cambay Electric Supply Industrial Co.
Ltd. (supra) would equally be applicable to the interpretation of Section 80M(1). What is more, we also have Section 80AA, which, as pointed out earlier, was introduced for the specific, and indeed limited, purpose of making the Legislative intent clear, namely that the deduction admissible under Section 80M would have to be calculated not with reference to the gross dividend, but with reference to the dividend net of the deductions admissible under Sections 57(1) and 57(3) of the Act. Thus, in any view of the matter, there is no warrant for interpreting the provisions of Section 80M read with Section 80AA of the Act the way the Commissioner had done.
34. In view of the foregoing, therefore, we hold that the Commissioner was not justified in passing the impugned order in revision. We, therefore, set aside the said order in revision.