Addl. Commissioner Of Income-Tax, Delhi-I v. Seth Vineet Virmani

Leila Seth, J.:— At the instance of the Additional Commissioner of Income-tax, New Delhi, the question of law referred for our opinion under s. 256(1) of the I.T Act, 1961, is as follows:

“Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief under section 85 of the Act as it stood at the relevant time in respect of amounts of Rs. 4,494 in the first year and Rs. 9,876 for the second year received by way of dividends from a company which was entitled to relief under section 84 of the Income-tax Act?”

2. The assessee is an individual who had shares in two registered firms and was a shareholder of several companies. The assessment years in question are 1966-67 and 1967-68, the relevant previous years ending on 31st March, 1966, and 31st March, 1967, respectively. In the first year under consideration, the assessee received certain dividends amounting to Rs. 8,360. Out of this amount, a sum of Rs. 7,000 was the dividend from M/s. East Coast Flour Mills Pvt. Ltd. This company certified that an amount of Rs. 4,494 related to profits of the company which were exempt under s. 84 of the I.T Act, 1961.

3. The assessee had borrowed monies in order to acquire shares in another company called S.T Virmani & Sons Pvt. Ltd., and paid interest amounting to Rs. 12,096 in the said year for this purpose. The assessee did not receive any dividend on these shares. As a result, the net income by way of dividend was a negative figure, being a deficit of Rs. 3,736.

4. For the assessment year 1967-68, the assessee received dividends amounting to Rs. 10,500 from M/s. East Coast Floor Mills Pvt. Ltd. This company certified that an amount of Rs. 9,876 related to profits of the company which were exempt under s. 84 of the I.T Act, 1961.

5. In this year also, the assessee had paid interest amounting to Rs. 19,772 for monies borrowed in order to acquire shares in S.T Virman??? & Sons Pvt. Ltd. The assessee did not receive any dividend on thos??? shares. As a result the net income by way of dividend was a negativ??? figure, being a deficit of Rs. 9,272.

6. In these circumstances, the assessee claimed that it was entitled to relief under s. 85 of the Act in respect of the amounts of Rs. 4,494 for the assessment year 1966-67 and Rs. 9,876 for the assessment year 1967-68.

7. The ITO initially allowed the assessee's claim. However, subsequently, he reopened the assessments under s. 147 on the ground that excessive relief had been granted for both years under s. 85 and this fact came to light during the audit of the case. According to the officer, as the total dividend income of the assessee did not include any positive income from a new industrial undertaking on which rebate could be allowed under s. 85 he held that the assessee was not entitled to any relief. He, thus, deleted the relief already granted.

8. Being aggrieved, the assessee appealed to the AAC. The AAC was of the view that even if the dividend income resulted in a loss the assessee was entitled to the rebate under s. 85 and this relief should be granted. He, therefore, held that the ITO was in error in withdrawing the relief on the ground that the total income did not include dividend income. He also noted that it was wrong for the ITO to refuse relief to the assessee under s. 85 on the ground that it had been granted under s. 84 to the firm. The AAC accordingly directed the ITO to allow the rebate under s. 85 of the Act for both the years.

9. The Department thereupon filed appeals before the Income-tax Appellate Tribunal. It contended that there was no question of granting relief under s. 85 when no positive income by way of dividend was available for either of the two years. It also submitted that it was clearly not the intention of the Legislature to grant relief when the dividend income resulted in a loss and this was apparent from the subsequent amendment of the Act set out in s. 80K.

10. The assessee's contention, however, was that with regard to the dividend income on which he was entitled to the rebate under s. 85, there was a positive dividend income. It was only that the net dividend income was a loss because this included payment of interest on monies borrowed for buying shares in respect of other companies and this loss was independent of and could not jeopardise the assessee's claim in respect of dividends from the companies which were entitled to relief under s. 84 of the Act.

11. The Tribunal, on a consideration of the facts and circumstances, held that there was no warrant for clubbing the items of dividend income together in order to consider whether the assessee was entitled to any relief under s. 85 of the Act. The Tribunal observed that there was no ambiguity in the provisions of the Act as it stood at the relevant time and as the assessee had a positive total income chargeable to income-tax, the assessee would be entitled to the relief under s. 85 in respect of any dividend included in his total income which had been received by him from companies, the profits of which qualified for exemption under s. 84. In coming to this conclusion the Tribunal drew support from the decision of the Supreme Court in CIT v. South Indian Bank Ltd., [1966] 59 ITR 763 and a decision of the Bombay High Couit in CIT v. Industrial Investment Trust Co. Ltd., [1968] 67 ITR 436. Accordingly, it confirmed the order of the AAC and dismissed the department's appeal.

12. The question of law as set out above is now before us for consideration. In order to appreciate the arguments, it is necessary to examine the relevant provision.

13. Section 85, as it stood at the relevant time, reads:

“Subject to any rules that may be made by the Board in this behalf, income-tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him out of the profits and gains derived by a company from an industrial undertaking or the business of a hotel or a ship to which section 84 applies as is attributable to that part of such profits and gains on which income-tax is not payable by the company under section 84.”

14. Section 85 was deleted by Finance (No. 2) Act of 1967 with effect from 1st April, 1968, and s. 80K was inserted in its place. Both these provisions deal with deduction in respect of dividend attributable to profits and gains from new industrial undertakings or ships or hotel business. A similar provision dealing with deductions in respect of certain inter-corporate dividends is contained in s. 85A, now s. 80M.

15. These sections in Chap. VIA (earlier Chap. VII), dealing with deductions in respect of the whole or a percentage of dividend, etc., do not expressly provide that these deductions should be calculated with respect to the net amount after deducting allowable expenditure. In the absence of such an express indication, it would appear proper to calculate the deduction with reference to the gross dividend without deducting interest charges and/or allowable expenses. Section 85 speaks of “so much of any dividend paid or deemed to be paid to him……” It cannot be held to mean so much of any dividend paid or deemed to be paid minus the amount of interest borrowed for earning the same or for earning other dividends. According to us, in the present case, it would, therefore, mean the full amount of dividend paid to the assessee by a company, as pertains to the profits and gains of a new industrial undertaking, which is exempt under (s. 85) of the Act.

16. This view is supported by the decisions of the Calcutta and Bombay High Courts in CIT v. Darbhanga Marketing Co. Ltd., [1971] 80 ITR 72 (Cal), Commissioner Of Income-Tax v. New Great Insurance Co. Ltd., [1973] 90 ITR 348 and CIT v. Indore Exporting and Importing Co. Ltd., [1976] Tax LR 471. In the last of the three mentioned cases, a Division Bench of the Calcutta High Court, while dealing with s. 85 of the 1961 Act, relied on the earlier two decisions and held that the emphasis in s. 85 is on the amount of the dividend paid and not upon the receipts or income of the assessee. No argument is, therefore, possible that the exemption of the dividend from tax is subject to all deductions for expenses in earning that dividend. As such, it is clear that the full amount of the dividend paid to the assessee, which partook of the nature of (a dividend from a) new industrial undertaking would be wholly exempt from income-tax.

17. The Supreme Court in Cloth Traders (P) Ltd. v. Additional Cit, Gujarat-I, [1979] 118 ITR 243, while dealing with the question whether relief under s. 80M in respect of dividend received from a domestic company was available with reference to the actual amount of dividend received or only with reference to the net amount as computed after deducting interest charges and other allowable expenses, held that the deductions permissible under s. 80M were to be calculated with reference to the full amount of dividend derived. The Supreme Court referred to, inter alia, the decisions of the Calcutta High Court in Darbhanga Marketing Co. Ltd., [1971] 80 ITR 72 and the Bombay High Court in New Great Insurance Co. Ltd., [1973] 90 ITR 348, with approval. It held that if the gross total income included income by way of dividend from a domestic company, whatever be the quantum of such income, the condition for the applicability of s. 80M would be satisfied and the assessee would be eligible for a deduction of the whole or sixty per cent. of “such income”, as the case may be. The words “such income” did not have reference to the quantum of the income included but referred only to the category of the income included, i.e, income by way of dividend from a domestic company.

18. In the present case, however, it would appear that the position is even clearer with regard to the provisions contained in s. 85. section 85 provides for relief to the shareholder who has any dividend income paid to him out of the profits and gains of an industrial undertaking to which the provisions of s. 84 apply and he shall not be liable to pay tax on that portion of the dividend income which is attributable to that part of such profits and gains. The amount entitled to exemption is determined at the point at which it is paid or deemed to be paid to the shareholder. At that point, the amount which the company actually distributes to the shareholder, pertaining to the profits of the industrial undertaking, is the relevant amount that is entitled to the exemption. There is no question of reducing this exempted amount either by reference to the expenditure incurred in connection therewith or by reference to any expenditure or deficit in respect of any other shares or scrips under the same head or by reference to deficits under other heads of income.

19. In fact, in the present case, as has been noticed above, the assessee has not claimed any deduction by reference to any amount of expenditure incurred with respect to the dividend income in respect of which he has claimed exemption. His only submission is that this dividend should be segregated from other dividends in respect of which there is a deficit and that this dividend qualifies for exemption under s. 85 irrespective of whether there is a negative income in respect of this head. He urges that there is no justification in lumping dividends qualifying for exemption under s. 85, dividends not so qualifying and deficit in respect of shares which do not yield dividends, together.

20. There is substance in his submission. There does not appear to be any warrant for clubbing all the items of dividends together in order to consider whether the assessee is entitled to any relief. As long as the assessee has a positive total income chargeable to income-tax, it would appear to us, he is entitled to relief under s. 85 in respect of any dividend included in his total income which has been received by him from companies whose profits qualify for exemption under s. 84. Before parting with the case, we may mention that Mr. Wazir Singh appearing for the Revenue, placed considerable reliance on Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84 (SC), and also referred to a judgment of the Gujarat High Court in CIT v. Gautam Sarabhai, [1981] 129 ITR 133. Learned counsel suggested that there was a conflict between the principle enunciated in Cloth Traders (P.) Ltd., [1979] 118 ITR 243 (SC), and that outlined in Cambay Electric Supply Industrial Company Ltd. However, we do not consider it necessary to deal with this contention for the purposes of the present case. But, it is pertinent to point out that Cloth Traders (P.) Ltd. is a later judgment of a larger Bench of the Supreme Court though the earlier decision has not been considered or dealt with therein. That apart, the Gujarat High Court, in the decision referred to by Mr. Wazir Singh, has discussed the matter at some length and indicated that the two decisions of the Supreme Court deal with different situations and there is no real inconsistency. But even assuming, as contended for the Revenue, that it may be necessary to consider the respective scope of these two decisions on a future occasion, as far as the present case is concerned, it has to be decided by following Cloth Traders (P.) Ltd., [1979] 118 ITR 243 (SC). This is because the provisions interpreted therein are couched in language similar to that in issue before us, whereas the Gujarat High Court found the decision in Cambay Electric Supply Industrial Company Ltd., [1978] 113 ITR 84, more apposite in deciding the issue before it. As such, as discussed earlier, the decision in Cloth Traders (P.) Ltd. is pertinent to the provisions presently under consideration.

21. In the result, for the reasons outlined above, we answer the question in the affirmative and in favour of the assessee. As the assessee has succeeded, he would be entitled to his costs. Counsel's fee, one set, Rs. 350.