Mehta, J.
1. The question which is involved in this reference is whether, while computing the deduction of tax on inter-corporate dividend under section 85A of the Income-tax Act, 1961, the income from dividend should be taken at its gross figure or at net figure after deducting the expenditure incurred by the concerned assessee to earn that dividend. Short facts of the case are that the respondent-assessee is a private limited company. During the course of the accounting periods relevant to the assessment years 1965-66 and 1966-67 it derived income in the form of dividends on shares of other companies. For the assessment year 1965-66, its gross dividend receipts from Indian companies amounted to Rs. 6.09,101. As against this receipt it incurred an expenditure of Rs. 23,594 in the shape of interest on borrowings made to earn these dividend. During the course of the assessment a question arose whether for the purpose of deduction contemplated by section 85A of the Income-tax Act, 1961, which is hereinafter referred to as 'the Act', average rate of tax on gross amount of Rs. 6,09,101 should be calculated or whether the said average rate of tax should be calculated on the net amount thereof after deducting Rs. 23,594, paid by way of interest on the borrowings made to earn the said dividends. Similar question also arose in regard to the next assessment year 1966-67.
2. The Income-tax Officer and the Appellate Assistant Commissioner held that for the purpose of deduction under section 85A only the net and not the gross amount of dividends should be taken into account. Being aggrieved by this decision of the Appellate Assistant Commissioner the assessee preferred an appeal to the Appellate Tribunal. The Appellate Tribunal relied upon the decision given by the Bombay High Court in Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd. and the Calcutta High Court decision in commissioner of Income-tax v. Darbhanga Marketing Co. Ltd., and came to the conclusion that for the purpose of deduction under section 85A, it is the gross dividend income received by the assessee and not the net dividend income which should be taken into account. Thus the Tribunal decided in favour of the assessee with the result that the revenue has preferred this reference. The Tribunal has referred to us the following question for our opinion :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to relief under section 85A of the Income-tax Act, 1961, in respect of the entire amount of the dividend income without deduction of interest paid on borrowings for acquiring the shares ?'
3. The question involved in this reference is purely one of law and relates to the interpretation of the provisions contained in section 85A which was on the statute book at the relevant time. A portion of this section which is relevant for the purpose of this reference is as under :
'85A. Deduction of tax on inter-corporate dividends. - Where the total income of an assessee being a company includes any income by way of dividends received by it from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, the assessee shall be entitled to a deduction from the income-tax with which it is chargeable on its total income for any assessment year of so much of the amount of income-tax calculated at the average rate of income tax on the income so included (other than any such income on which no income-tax is payable under the provisions of this Act) as exceeds an amount of twenty-five per cent. thereof : ......'
[The rest of this section is not relevant for the point under consideration.]
4. It should be noted here that the section finds its place in the scheme of the Act in Chapter VII which speaks of 'Incomes forming part of total income on which no tax is payable', and was inserted in the Act by the Finance Act of 1965, as from 1st April, 1965. By section 31 of the finance Act, 1968, the words 'received by it' found in the first part of the section have been omitted with retrospective effect. The result, therefore, is that the section should now be read omitting the words 'received by it'.
5. It is obvious that the section contemplates the deduction on the dividend income derived by a company from the shares of some other Indian company. The apparent intention of the legislature in providing for this deduction is to encourage investment by a company in shares of another company by substantially avoiding the tax burden. It is obvious that the dividend becomes liable to tax in the hands of the company which declares it. If the extent of its liability to tax is the same in the hands of the company which holds the shares, it is obvious that there would be less inducement to the companies to make investment in other companies. The legislature has, therefore, provided for the relief contemplated by the section.
6. The question, however, is what is the extent of this relief Is the relief to be calculated on the basis of the gross income of dividends or net income of dividends obtained after deducting the expenditure incurred for earning these dividend? Answer to these questions depends upon a proper interpretation of the provisions of section 85A.
7. Analysis of the section shows that it consists of two parts. The first part speaks of the conditions which make a company eligible to deduction contemplated by the section, while the second part speaks about the actual deduction and also supplies the method of calculating the same. It follows, therefore, that only that company can get deduction which becomes eligible to it under the first part. The first part contemplates the following conditions :
(1) the assessee should be a company;
(2) its 'total income' should include any income by way of dividends;
(3) these dividend should be from an Indian company or a company which has made the prescribed arrangement for declaration and payment of dividends within India.
8. A company which satisfies all these conditions becomes eligible for deduction under this section.
9. The second part of the section says that the deduction shall be from the income-tax with which the company is chargeable on its 'total income'. But still the question is how much deduction should be given. The second part provides an answer to this question by saying that the deduction should be on that amount of tax, calculated at the average rate on the dividend income included in the 'total income', which exceeds 25% of the income so included. The point to be noted is that the second part contemplates deduction of tax 'on income so included'. The words 'so included' have reference to the inclusion in the 'total income' contemplated by the above referred second condition of the first part of the section. In other words, only that tax can be deducted which could be assessed on the dividend income which is included in the 'total income' of the assessee-company. To put it differently, the said dividend income is that income which has become one of the component parts of the 'total income'. If that be so, gross dividend income can form the base of the deduction contemplated by section 85A only if it has become a component of 'total income', and not otherwise. The discussion which follows shows that it is the net dividend income and not the gross one which can become a component of 'total income'.
10. This brings us to the consideration of the question as to how 'total income' of an assessee is calculated under the Act. Clause (45) of section 2 of the Act defines the expression 'total income' as under :
''Total income' means the total amount of income referred to in section 5, computed in the manner laid down in this Act.'
11. This definition shows that the expression 'total income' means only that income which is computed in the manner provided in the Act. Section 5 to which reference is made in the above definition speaks about the scope of 'total income'. Provisions of this section are not relevant for the present purpose. We shall, therefore, go to Chapter IV which speaks about the computation of 'total income'. Section 14 which is the first section in this Chapter provides for six heads of income. Out of these six heads, the sixth head which is shown against 'F' is 'income from other sources'. It is an admitted position that dividend income received from shareholding falls under this head. We shall then go to section 56 which deals with the 6th head of income, namely, 'Income from other sources'. This section says that income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income-tax under the head 'Income from other sources', if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Sub-section (2) of this specifically refers to dividend as one of the incomes which is chargeable to income-tax under this head. Then follows section 57 which is very material for our purpose. This section 57 provides for deductions under the head 'F'. It says that income chargeable under the head 'Income from other sources' shall be computed after making the deduction mentioned therein. The deduction with which we are concerned in this case is referred to in clause (iii) thereof which is in the following terms :
'(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.'
12. This type of deduction shows that if an assessee can prove that a particular item of expenditure was laid out or expended wholly and exclusively for the purpose of earning income by was of dividend, then that expenditure should be deducted for the purpose of computing the total income of the concerned assessee. The only relevant section which now remains to be pointed out is section 66 which relates to the aggregation of income and provides how the total income of an assessee should be computed. It says that in computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII. As already noted above, the deduction with which we are concerned in this case is the deduction under Chapter VII.
13. The provisions contained in the above referred relevant section of the Act show how a 'total income' of an assessee is expected to be computed. In this computation if the dividend income is to be included under the income head 'F', then as provided by section 57(iii) any expenditure which is laid out wholly and exclusively for the purpose of earning that dividend income should first be deducted before arriving at the figure of total income. It is, therefore, evident that the dividend component of the total income is not the gross figure of the dividend received by the concerned assessee but only the net dividend which he receives after deducting the expenditure contemplated by clause (iii) of section 57. Therefore, when the second part of section 85A refers to 'income so included' in the computation of total income of the concerned assessee, it contemplates not the gross income in form of dividend but the net income and if that be so, the average rate of income-tax which is to be deducted under section 85A should be on the amount of net income of dividend received by the assessee as contended by the revenue.
14. Shri Shah, who appeared on behalf of the respondent-assessee, however, contended that the expression 'total income' which is found in the first part of section 85A does not carry the same meaning which is attributed to it by the definition clause as well as other provisions of the Act. His contention was that the first part of the section speaks of the inclusion of 'any income, by way of dividend received by the assessee' in the total income of that assessee. But since the definition of the word 'income' as given in clause (24) of section 2(1) of the Act shows that income means gross income the concept of total income which is found in the first part of section 85A is not the concept of total net income. It was submitted that the meaning of the expression 'total income' should not be confined to the definition because the use of the word 'income' by reference to dividend proves a contrary intention of the legislature. Shri Shah pointed out that if once it is believed that the expression 'total income' connotes the total gross income of the assessee then the reference to this expression in the first part of the section becomes merely descriptive and points out at a category in which the item of dividend income is included. In support of this proposition Shri Shah has relied heavily upon the two decisions on which the Appellate Tribunal has relied as well as one more decision of the Bombay High Court in Commissioner of Income-tax v. New Great Insurance Co, Ltd.
15. Before dealing with the three decisions on which Shri Shah has put reliance we find that on a plain reading of the language of section 85A, it is not possible to say that the expression 'total income' which finds its place in this section carries any meaning different from the one given in the definition clause. It is, of course, true that the definitions which are given in section 2 of the Act are subject to the context which otherwise is found in a particular section. But, so long as a contary context is not noticed by us in the section, the proper rule of construction which would guide us is that this expression should carry the same meaning as is given to it by section 2 of the Act. Therefore, the first question is whether the context in which this expression is used in section 85A suggests anything which is contrary to the definition clause. The only fact on which Shri Shah has put reliance for showing this contrary meaning is the use of the word 'income' because, according to him, the word 'income' means gross income and since gross income cannot be a component of total income it should follow that the expression 'total income' means a total of gross incomes and not of net incomes. We find that any approach of this type would be highly improper because it is based on a postulate that the meaning of the expression 'total income' is governed by the meaning of the word 'income' which is used with reference to the dividend. If once it is found that, according to the statutory provisions of the Act, gross income cannot be included in the concept of 'total income' then the meaning of the word 'income' which is used with reference to the dividend, becomes itself limited. What the first part of the section contemplates is the income which could be included in computation of the total income and, therefore, if in computation of total income, gross income derived from other sources cannot be included it would follow as a natural corollary thereto, that the word 'income' which is used with reference to the dividend means only the net income which can be comprehended by the meaning of the expression 'total income' as envisaged by the Act.
16. One strong reason which leads us to this conclusion is that the second part of the section contemplates rate of tax which is chargeable on total income. The stipulation about the rate of tax which becomes chargeable on total income is clearly suggestive of the fact that the expression 'total income' is used in this section in the same sense which is attributed to it by the definition clause of section 2.
17. Shri Shah argues that the expression 'total income' found in the section refers to mere description of items included in the 'total income' and nothing more than that. We fail to comprehend how and on what basis such a construction can be put on this expression, if once we arrive at a conclusion that the meaning which this expression carries with it is in no manner different from the meaning attributed to it by section 2. But even if it is believed that the expression 'total income' is merely a description of the items which are included in the 'total income' that situation does not help the assessee in any manner because, if once we believe that it is the net dividend income which can be included in the computation of total income, it is only that net income which can earn deduction contemplated by the second part of the section.
18. Having thus considered the submission made by Shri Shah on a bare interpretation of section 85A, we shall now proceed to consider how far the three decisions relied on by him are helpful to the assessee.
19. Before actually taking up these three decisions for our consideration it is necessary to mention briefly the legislative history behind the deduction contemplated by section 85A because, these three decisions are with reference to the different stages of this legislative history.
20. The earliest stage at which a deduction of this character was contemplated was in the year 1933 when the Income-tax Act of 1922 was in force. On 9th December, 1933, the Governor-General in Council issued a Notification No. 47 giving a deduction of this type. The relevant portion of this notification is as under :
'The Governor-General in Council is pleased to exempt from super-tax -
(i) so much of the income of any investment trust company as is derived from dividends paid by any other company which has paid or will pay super-tax in respect of the profits out of which such dividends are paid....'
21. An explanation as to what is meant by an investment trust company is attached to this notification. But for the purpose of this reference we are not concerned with the said explanation. The exemption which is granted by this notification is the one from super-tax and it related to so much of the income as was derived from dividends paid by any other company which was found to have paid super-tax in respect of the profits out of which the dividends were paid. It was this notification which is considered the High Court of Bombay in Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd., in the year 1967.
22. Then the above referred notification was replaced by section 99 of the Act. Even this section provided an exemption from super-tax and it remained in force up to 31st March, 1965. This section in so far as it is relevant for our purpose was in the following terms :
'99. Incomes not chargeable to super-tax. - (1) Super-tax shall not be payable by an assessee in respect of the following amounts which are included in his total income -......
(iv) if the assessee is a company, any dividend received by it from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India.......'
23. The provisions of this section are interpreted by the Calcutta High Court in Commissioner of Income-tax v. Darbhanga Marketing Co. Ltd. as well as by the Bombay High Court in a recent decision in Commissioner of Income-tax v. New Great Insurance Co. Ltd.
24. The last referred decision of the Bombay High Court has also considered the provisions of section 85A with which we are concerned in this reference. As already noted above, this section was put on the statute book as from April 1, 1965. The relevant portion thereof is already quoted by us in the foregoing judgment.
25. The Bombay decision given in Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd. refers to the notification quoted above and on a construction of that notification it has held that the assessee concerned was entitled to exemption from super-tax on the whole of the dividend income without deducting therefrom the proportionate expenses attributable to the same. While considering the language of this notification the court has put reliance upon the decision given by the Supreme Court in Commissioner of Income-tax v. South Indian Bank Ltd. In that case the Supreme Court has considered the notification under section 60A providing for exemption from payment of income-tax. The relevant portion of that notification was on the following terms :
'No income-tax shall be payable by an assessee on the interest receivable on certain income-tax free loans issued by the former Governments of Travancore and Cochin, provided that such interest is received within the territories of the State of Travancore-Cochin and is not brought into any interest shall, however, be included in the total income of the assessee for the purposes of section 16 of the Indian Income-tax Act, 1922.....'
26. The assessee in that case before the Supreme Court had received a sum of Rs. 44,720 towards interest in respect of tax-free securities to which the notification applied. In his assessment he claimed exemption from tax in respect of the entire amount of Rs. 44,720. The Income-tax Officer, however, deducted from the said sum a reasonable sum expended by the assessee in realising the interest. The question which arose to be considered by the Supreme Court was whether deduction made by the Income-tax Officer was proper. It was contended on behalf of the revenue that since interest on security was required to be computed under the provisions of section 8 of the Act of 1922, the income in respect of which exemption could be granted would be the income which would emerge as computed income after the process of computation of income under section 8 was applied to it. The Supreme Court negatived this contention and held that the notification was a self-contained one giving total exemption from income-tax and, therefore, there was no scope for construing the provisions of the notification with reference to section 8 of the Income-tax Act. The Bombay High Court while deciding the case of Industrial Investment Trust Co. Ltd., relied upon this decision of the Supreme Court and held that the income derived by the assessee from dividend would mean the amount received by the assessee as dividend of a specified kind and, therefore, the gross amount thereon should be taken into calculation for the purpose of giving deduction.
27. In our opinion, neither the Supreme Court's decision above referred to nor the decision given by the Bombay High Court in Industrial Investment Trust Co. Ltd. would apply to the facts of the present case. What was exempted by the notification considered by the Supreme Court was the amount of interest 'receivable' on tax-free loans issued by the Government of Travancore and Cochin. In that notification the word 'interest' was not qualified in any manner and, therefore, the Supreme Court held that the interest receivable was an unambiguous expression and it could only mean the amount of interest calculated in accordance with the terms of the securities and it could not mean interest receivable minus the amount spent in receiving the same. In the case before, us, the word 'income' is limited in its meaning inasmuch as it is the income which could be included in the computation of total income because both the first and the second parts of section 85A stipulated only that income which can enter in the computation of total income as one of its components. In our opinion, therefore, the Supreme Court's decision in South Indian Bank's case would have no application to the facts of the present case. The same can be said also about the decision given by the Bombay High Court in Industrial Investment Trust Co. Ltd., because, under Notification No. 47 which is quoted by us above, what was to be taken into account for the purpose of deduction was the income which was derived from dividends. In other words, the exemption was granted to income from dividends without any qualification. The income which was exempted by that notification was not referable to the concept of 'total income' and, therefore, the High Court of Bombay held that it would mean the amount received by the assessee-company as dividend. Therefore, even this Bombay decision cannot help the assessee in this case.
28. As for the Calcutta decision in Commissioner of Income-tax v. Darbhanga Marketing Co. Ltd. and the subsequent Bombay decision in New Great Insurance Co. the courts considered the provisions of section 99(1)(iv). Both these decisions are based on the wordings of clause (iv) which provide for the deduction of 'any dividend' received by the assessee-company. The words 'any dividend' were emphasised by the Bombay High Court in the case of New Great Insurance Co. Ltd. in the following words :
'Now it seems to us, on a plain reading of sub-clause (iv) of sub-section (1) of section 99, that the matter admits of no doubt or difficulty. The words used are 'any dividend received by it' (the assessee) and in the context in which it is used 'any dividend' must necessarily imply all dividends received by the assessee from an Indian company. The word 'dividend' is quite unqualified and it can mean only one thing, namely, the entire dividend paid to the assessee by the company which declares the dividend. It is no doubt true as was argued that when a shareholder receives a dividend warrant the figure of the gross dividend is shown and tax at the maximum rate deducted from it and it is the net dividend which the shareholder receives upon the dividend warrant, but it can hardly be said even upon that accounting that the shareholder has received only the net dividend. On the other hand, he must be held to have received the full or gross dividend even though the tax has been deducted at source. The other and perhaps the more important consideration is the word 'received' which immediately follows the word 'dividend' and it shows that the exemption is in regard to the dividend received and not in regard to the dividend as assessed or the dividend income. If a simple question were to be asked, 'which was the dividend received in the present cases by the assessee? ', the obvious answer would be that it is the gross or full amount of the dividend as declared by the Indian company which paid it to them and it is that dividend which is by the section declared to be exempt. The plain reading of the section, in our opinion, therefore, leaves no scope for argument that any amount less than the gross dividend received by the assessee qualifies for exemption under section 99.'
29. These observations show that the court's interpretation of section 99 is based mainly on the unqualified use of the words 'any dividend'. Since the court found that, so far as deduction is concerned, it was the amount of dividend received by the assessee which should be taken into account, the court held that no deduction can be made from this amount on account of expenditure incurred by the assessee to earn the same. This is also the reasoning given by the Calcutta High Court in Darbhanga Marketing Co. Ltd.
30. We find that none of these decisions would be useful to us in interpreting the language of section 85A because, as already pointed out by us above, this section limits the meaning of income received by way of dividend inasmuch as the expression 'income' is related to the concept of 'total income' which could be assessed under the provisions of the Act. It is of course true that the Bombay High Court in the case of New Great Insurance Co. Ltd. has observed that the provisions of section 85A are quite similar to the provisions contained in section 99(1)(iv). But, with due respect to the learned judges, we find ourselves unable to subscribe to this view. We have already pointed out how section 85A limits the extent of income from dividend which could be taken into consideration for the purpose of deduction inasmuch as this income must be found to have been included in the concept of 'total income' of the assessee. Clause (iv) of section 99(1) does not put any such limitation on the dividend incomes and, therefor, it is not possible to say that both the sections are similar. In that view of the matter, even the Bombay decision is not found to be of any help to us in interpreting the provisions of section 85A.
31. In view of this, we do not find it necessary to make any reference to the report of the Law Commission and the speech of the Finance Minister which were referred to us by Shri Shah on behalf of the assessee during the course of the arguments.
32. In view of this, we answer the question referred to us in the negative and in favour of the revenue. The reference is accordingly disposed of. The respondent-assessee shall bear the costs of the Commissioner in this reference.