Full Judgment
The second issue reflected at ground No. (b) above is claimed by the learned counsel for the assessee to be covered in assessee's favour by the following decisions: (i) State Bank of Bikaner & Jaipur v. Dy. CIT (2000) 74 ITD 203 (Jaipur) (ii) Dy. CIT v. Catholic Syrian Bank (2004) 267 ITR (AT) 52 (Coch.) (SB) (iii) Karnataka Bank Ltd. v. Dy. CIT (IT Appeal No. 50 (Bang.) of 1997, dated 29-7-2003) The learned Departmental Representative was fair enough to concede that the issue is covered in assessee's favour, but he submitted that the deduction which is to be allowed has to be quantified within the limits prescribed under section 36(1)(viia) of the Income Tax Act, read with section 36(1)(vii). The learned Counsel for the assessee agreed that for quantification, the issue may be restored to the assessing officer.
Accordingly, this issue is restored to the assessing officer with a direction that deduction may be allowed in accordance with the decision cited above and the same may be quantified under the provisions of law referred to above.
The next issue pertains to disallowance of assessee's claim for deduction of Rs. 2,99,90,000 under section 35D of the Income Tax Act.
The relevant facts are that the assessee claimed aforesaid deduction under section 35D being 1096 of share issue expenses of Rs. 29.99 crores. The assessing officer examined this issue and pointed out to the assessee that the claim was not admissible as the appellant was not an industrial undertaking. It was claimed before the assessing officer that the assessee bank was in the nature of industrial undertaking and therefore the claim was allowable. The assessing officer did not accept this claim. He has mentioned that the phrase 'industrial undertaking' has not been defined in the Income Tax Act, but the meaning can be understood from the provisions contained under sections 80HH, 80-I and 80-J etc. Under all these provisions, deductions are allowable on profits and gains derived from the industrial undertaking and the condition is that the industrial undertaking must manufacture or produce an article or thing. The assessing officer also referred to certain judicial pronouncements in support of the conclusion drawn by him. The assessing officer has reproduced in his order, the observations made by the Karnataka High Court in the case of Shankar Construction Co. v. CIT (1991 56 Taxman 98 (Kar). These observations are as under: "The Bombay High Court in the case of CIT v. Chanda Diesels 216 ITR 639 (Bom) held that the expression 'industrial undertaking'is not defined in the Act. It would, therefore, be open to look for the meaning of this expression by referring to its definitions in sister legislations and failing that to adopt the common parlance meaning. In other words, as the Act does not define the expression 'industrial undertaking', reference to its definition in similar enactments or adoption of its meaning is inevitable.
Though the term 'industrial undertaking' is capable of wider definition, and the word 'industry' has a very large ambit, the term 'industrial undertaking' used in section 80HH(1), having regard to the requirements set out in section 80HH(2)(i), is limited to industries which manufacture or produce articles (CIT v. Essar Bulk Carriers Ltd. (1994) 145 CTR 289 (Mad.)) The Kerala High Court in the case of CIT v. Indian Resins & Polymers (1999) 235 ITR 5 (Ker) had also an occasion to deal with the issue of industrial undertaking. There is no definition of the term 'industrial undertaking' in the Income Tax Act, 1961, but, it is defined under the Wealth Tax Act, 1957. Explanation to section 5(1)(xxxi) of the Wealth Tax Act defined the term as an undertaking engaged in the business of generation or distribution or electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. There is nothing in the language of section 80HH or section 80J which would suggest that a different meaning is contemplated for the term 'industrial undertaking', when it relates to a unit engaged in manufacture or production. On the other hand the conditions to be fulfilled by the industrial undertaking as provided under sub-section (2) would indicate that a unit which is manufacturing or producing articles can be treated as an industrial undertaking without any further qualification." The learned CIT(A) approved the view adopted by the assessing officer.
The learned counsel appearing on behalf of the appellant submitted before us that the phrase 'industrial undertaking' is of a wide import, which becomes clear from the definition of this term contained at page 393 of Mitra's Legal & Commercial Dictionary. The learned Counsel invited our attention to the commentary under the head 'industrial undertaking' at page 393 of the Treatise, the relevant portion of which is reproduced below : "Industrial Undertaking - Any undertaking pertaining to a scheduled industry carried on in one or more factories by any person or authority including Government Industries (Development and Regulation) Act, 1951, section 3(d).
Industrial undertaking means any undertaking pertaining to a scheduled industry and includes an undertaking engaged in any other industry, or in any trade, business or service which may be regulated by Parliament by law, Central Industrial Security Force Act, 1968, section 2(b).
To be an industrial undertaking the work of manufacture or production should be carried on in one or more factories by any person or authority including Government. Clearly all industrial undertakings engaged in the manufacture or production of any particular item mentioned in the First Schedule would be carrying the industry mentioned in that Schedule. But a single undertaking of that nature would not be synonymous with that industry - E. Sefton & Co. v. Textile Mill Mazdoor Union AIR 1958 All. 80." The learned Counsel argued that the meaning of the phrase 'industrial undertaking' given under section 80HH etc. cannot be applied while dealing with the assessee's claim under section 35D. It is pointed out that the assessee bank is providing financial services and therefore it is a service industry and also an industrial undertaking.
The learned Departmental Representative strongly opposed the submissions made on behalf of the assessee and supported the orders of the revenue authorities. It is argued that when the term has not been specifically defined in the Income Tax Act, the meaning attributed to such term in various other sections of the Income Tax Act must be adopted and there is no need to travel to the meaning given by the learned authors of the Legal & Commercial Dictionary.
We have given a careful consideration to the rival submissions and have gone through the facts. The relevant provisions of section 35D may be reproduced below: "35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31-3-1970, any expenditure specified in sub-section (2), (ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation." From the above, it may be seen that deduction under section 35D is available in respect of a specific expenditure incurred by the assessee before commencement of business. Deduction is also available after the commencement of business only in connection with the extension of the assessee's industrial undertaking or in connection with setting up of new industrial unit. The words 'industrial undertaking' or 'industrial unit' have not been defined under the Income Tax Act, but the meaning and purport of such terms can be understood by referring to various other provisions contained in the Income Tax Act. The term 'industrial undertaking'has also been used in sections 80HH and 80-I etc., which entitle the assessee to certain deductions if the profits and gains are derived from the industrial undertaking. In these sections, it is stipulated that the industrial undertaking must engage in manufacturing or production of an article or a thing. The assessing officer had also referred to certain judgments and the relevant portions of which have been reproduced above. A reference has been made to the Karnataka High Court decision in the case of CIT v. Indian Resins & Polyiners (1999) 235 ITR 5 (Kar), where the Hon'ble High Court observed that the term 'industrial undertaking' is defined in Wealth Tax Act for the purpose of section 5(1)(xxxi) of the Wealth Tax Act. For the above purposes, 'industrial undertaking' has been defined to be an undertaking engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing9f goods or in mining. We agree with the view adopted by the revenue authorities and with the argument of the learned Departmental Representative that if there is no specific definition of the term in the Income Tax Act, the meaning of such term for the purposes of any sections of the Income Tax Act can be understood by reference to other sections of the Income Tax Act or even provisions contained in other Direct Taxes Act like Wealth Tax Act. The assessee bank is engaged in providing financial services and in our view, it would be too far fetched to accept that the assessee bank is engaged in running or setting up an industrial undertaking. Considering the entire facts and circumstances, we hold that deduction under section 35D is not admissible to the assessee and therefore on this issue the order of the learned CIT(A) is confirmed.
The last issue pertains to deduction allowed by the assessing officer under section 80M after deducting the proportionate expenses amounting to Rs. 9,16,09,2 10 from the gross dividend received by the assessee.
The learned counsel appearing for the assessee contended that the aforesaid action on the part of the assessing officer is arbitrary and it is submitted that no expenditure is attributable to the dividend income earned by the assessee. The learned Departmental Representative supported the order of the revenue authorities.
We have considered the rival submissions and have gone through the facts. The learned CIT(A) has dealt with this issue at Paras 26 and 27 of his order, which are reproduced below: "In the ground of Appeal No. 1(h), it has been agitated that the assessing officer has erred in making disallowance of proportionate expenses in respect of dividend income to the tune of Rs. 9,16,09,210.
In view of the decision of the jurisdictional High Court in the case of Maganlal Chaganlal reported in 236 ITR 515 (SC), the disallowance of Rs. 9,16,09,210 is hereby confirmed." From the above, it is seen that the learned CIT(A) has not at all gone into the question as to whether the proportionate expenditure estimated by the assessing officer represents the actual expenditure incurred by the assessee in earning the dividend income. In our view, the expenditure which has nexus with earning of dividend income should be deducted from the gross dividend before allowing deduction under section 80M. This issue is, therefore, restored back to the assessing officer with the direction that opportunity may be allowed to the assessee for producing the details and after verifying the details actual expenditure incurred by the assessee for earning dividend income may be determined and the deduction under section 80M may be recomputed accordingly.