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Commissioner Of Income-Tax, Delhi-I v. Bharat Ram Charat Ram P. Ltd.
Structured Summary of the Opinion (D.K. Kapur, J.)
Factual and Procedural Background
There are eleven Income-tax References before the court concerning four assessment years (1966-67 to 1970-71). Some applications under section 256(1) of the Income-tax Act, 1961, were filed by the Commissioner of Income-tax and some by the assessee. Seven questions were referred to the court (questions 1–4 at the instance of the Department; questions 5–7 at the instance of the assessee). The questions concern: (i) whether premiums paid by the assessee-company on accident insurance of its directors constituted a perquisite under section 17(1); (ii) entitlement to deduction under section 35(1)(iii) for rent paid on behalf of M/s. Shri Ram Centre for Industrial Relations for assessment years 1967-68 to 1970-71; (iii) whether the assessee was an "industrial company" within section 2(7) of the Finance (No. 2) Act, 1967, and thus eligible for concessional rates; (iv) entitlement to deductions under section 80E (and later section 80-1) for the assessee's share of profits from M/s. Electrical Industries Corporation for specified assessment years; and (v–vii) the correct computation of rebates/deductions in respect of inter-corporate dividends (sections 85A, 80M and related allocation of interest), including the treatment of exempt dividends and dividends attributable to agricultural income.
Legal Issues Presented
- Whether the annual premium paid by the assessee-company on accident insurance of its directors was a perquisite within the meaning of section 17(1) of the Income-tax Act, 1961.
- Whether the assessee was entitled to deduction under section 35(1)(iii) of the Income-tax Act, 1961, for rent paid on behalf of M/s. Shri Ram Centre for Industrial Relations (assessment years 1967-68 to 1970-71).
- Whether the assessee-company was an "industrial company" within the meaning of section 2(7) of the Finance (No. 2) Act, 1967, and therefore entitled to be assessed at concessional rates.
- Whether the assessee was entitled to deduction under section 80E (and section 80-1) in respect of its share of profits derived from the firm M/s. Electrical Industries Corporation (assessment years 1967-68 and 1968-69 as applicable).
- Whether rebates/deductions (section 85A for 1967-68 and section 80M for 1968-69 to 1970-71) in respect of intercorporate dividend should be computed on the net dividend (i.e., after deducting interest allocable to dividend income) rather than the gross dividend.
- If net dividend is required (question 5 answered negatively), whether any part of the interest paid is in law allocable to dividend income.
- Whether, for assessment year 1967-68, the rebate under section 85A was to be computed on the net dividend by deducting interest relatable to dividend income but excluding deduction of (a) exempt dividend and (b) dividend ascribable to agricultural income.
Arguments of the Parties
Department's (Commissioner/I.T. Officer) Position
- For question 1: The Income-tax Officer treated the accident insurance premium paid by the assessee-company for its five directors as a perquisite for those directors when computing deductions under sections 40(c) and 40A.
- For question 2: Learned counsel for the Department submitted that the wording of section 35(1)(iii) requires that the sum must be "paid to the institution" to be used for research, and in the present case the payment was not made directly to the institution but to a creditor; additionally, it was argued that the payment in this instance was for rent and not for research.
- For questions 5 and 7: The Commissioner submitted that, under section 85A as it then stood, exempted dividend and dividend attributable to agricultural income should also be deducted (i.e., treated as part of amounts to be considered), and that interest paid on borrowings to acquire shares should be deducted in computing the rebate under section 85A for 1967-68 (as taken by the Income-tax Officer originally).
Assessee's Position
- For question 1: The Appellate Assistant Commissioner (and the Tribunal following higher court decisions) held that payment of accident insurance premiums was not a perquisite.
- For question 2: The assessee's position (as accepted by the Tribunal and ultimately the court) was that payment of rent (even indirectly to a creditor) produced a credit to the research institution and therefore qualified for deduction under section 35(1)(iii); also that rent paid in respect of premises used by a research institution is part of expenses incurred in carrying out research.
- For question 4: The assessee relied upon an earlier, unreported decision in its own case (Income-tax References Nos. 268–270 of 1975 and Surtax Nos. 115 and 116 of 1974) finding relief under section 80E; the court adopted that prior determination.
- For question 7: The assessee contended that interest should not be deducted (i.e., that deduction of interest from dividends was not appropriate for computing the rebate) — though the opinion notes that counsel for the assessee indicated he might not press the badly worded question.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| The Commissioner Of Income-Tax, Delhi v. Lala Shri Dhar…, [1972] 84 ITR 192 | That payment of accident insurance premiums for directors is not a perquisite within section 17(1). | The Appellate Assistant Commissioner relied on this decision; the court followed the same view and answered question No. 1 in favour of the assessee. |
| Commissioner Of Income-Tax, Delhi v. Vinay Bharat Ram, [1981] 129 ITR 128 | Endorsed the view that payment of accident insurance was not a perquisite. | The court noted this later judgment endorsed the same principle; it affirmed the Tribunal's approach in question No. 1. |
| CIT v. Associated Cement Co. Ltd., [1968] 68 ITR 478 | That a payment qualifying for deduction need not be in cash and may be made in kind (relevant to section 35(1)(iii)). | The court relied on this principle to treat rent paid (even indirectly) for the research institution as falling within section 35(1)(iii), supporting the assessee on question No. 2. |
| CIT v. Bangalore Woollen, Cotton and Silk Mills Co. Ltd., [1973] 91 ITR 166 | Same principle as above: payments need not be in cash to qualify for deduction under relevant provisions. | The court relied on this authority alongside Associated Cement to uphold the Tribunal's allowance of deduction under section 35(1)(iii) for rent paid on behalf of the research institution. |
| Cloth Traders (P) Ltd. v. Additional CIT, Gujarat-I, [1979] 118 ITR 243 | That relief (deduction) had to be given in respect of the entire dividend income irrespective of interest paid on borrowings made for acquiring shares (as applied to the assessment year 1967-68). | The court applied this Supreme Court decision to hold that for assessment year 1967-68 the entire gross intercorporate dividend had to be deducted (i.e., interest need not be deducted first); for subsequent years the statutory amendment changed the position. |
| Assessee's prior unreported decision (Income-tax References Nos. 268–270 of 1975; Surtax Nos. 115 & 116 of 1974) | Held that relief was available under section 80E in respect of profits attributable to specified items in the Fifth Schedule. | The court adopted that earlier determination in answering question No. 4 in favour of the assessee for the applicable years. |
Court's Reasoning and Analysis
The court proceeded question by question, applying statutory definitions, prior decisions, and the effect of later statutory amendments exactly as described in the opinion:
- Question 1 (accident insurance premium as perquisite): The Income-tax Officer had treated such payments as perquisites for the five directors. The Appellate Assistant Commissioner and the Tribunal followed the decision in The Commissioner Of Income-Tax, Delhi v. Lala Shri Dhar… and the later judgment in Commissioner Of Income-Tax, Delhi v. Vinay Bharat Ram, holding that accident insurance payments were not perquisites. The court found no reason to differ and affirmed the Tribunal's view, answering question No. 1 in the assessee's favour.
- Question 2 (deduction under section 35(1)(iii) for rent paid on behalf of a research institution): The court considered authorities (CIT v. Associated Cement Co. Ltd. and CIT v. Bangalore Woollen...) establishing that qualifying payments need not be in cash and can be in kind. The Department argued that the statute required payment to the institution and that the present payment was for rent and not research. The court rejected those contentions, reasoning that an indirect payment to a creditor still results in a credit to the institution; rent incurred in maintaining premises for research is inherently an expense towards research and increases funds available for research. On this basis the Tribunal's allowance was upheld and question No. 2 was answered in the assessee's favour.
- Question 3 (whether the company is an "industrial company" under section 2(7) of the Finance (No. 2) Act, 1967): The court examined the statutory definition (a company is deemed an industrial company if income from manufacture exceeds 50%). The Tribunal had found at least 51% of the income derived from the partnership concerned with manufacture (super-enamelled copper wire). The court held that partnership-derived income counts for the purpose of the definition and found no error in the Tribunal's conclusion. Question No. 3 was answered in the affirmative for the assessee.
- Question 4 (application of section 80E / section 80-1 to profits from the firm M/s. Electrical Industries Corporation): The court noted an earlier unreported favorable decision in the assessee's own case for 1965-66 and adopted that decision. It reviewed the statutory history: section 80E (inserted by the Finance Act, 1966) allowed a deduction for profits attributable to priority industries listed in the Fifth Schedule; section 80E was replaced by section 80-1 (Finance (No. 2) Act, 1967) with the same substance; section 80-1 was later omitted by the Finance Act, 1972. The court concluded that the profits attributable to manufacture of items in the Fifth Schedule qualified for the deduction and answered question No. 4 in the assessee's favour.
- Question 5 (treatment of intercorporate dividend — gross or net for deduction): The court applied the Supreme Court's decision in Cloth Traders (P) Ltd. v. Additional CIT, which held that the entire dividend income should be allowed irrespective of interest paid for acquiring shares. However, the court also recognized a retrospective amendment (introduction of section 80AA effective from April 1, 1968) which required that, for years covered by that provision, interest paid for borrowing to acquire shares must be deducted from dividend income before allowing the deduction. Because section 80AA's retrospective effect only reached back to April 1, 1968, the court held that for assessment year 1967-68 the gross dividend must be deducted (per Cloth Traders), but for assessment years 1968-69 to 1970-71 only the net dividend (after deducting interest in accordance with section 80AA) could be deducted. Thus, the Tribunal's finding in favour of net dividend deduction was upheld only for 1968-69 to 1970-71.
- Question 6 (whether any part of the interest was allocable to dividend income): The court treated this as a question of fact dependent on the amount of interest actually paid and its allocation under section 80AA. The Tribunal was directed to apply section 80AA in determining the allocable interest for assessment years 1968-69 to 1970-71. No further legal refinement was made in the opinion beyond requiring factual application of the statutory provision.
- Question 7 (composite/badly worded question concerning section 85A for 1967-68 — treatment of interest, exempt dividend, and agricultural dividend): The court described the question as badly worded and noted that counsel for the assessee was prepared not to press it. The court reconstructed the issues from the statement of case: originally the Income-tax Officer excluded gross dividend from deduction under section 85A but deducted interest and also excluded certain exempt dividends and dividends attributable to agricultural income; the Appellate Assistant Commissioner and the Tribunal had allowed deduction of the net dividend (after deducting interest). The court applied Cloth Traders for assessment year 1967-68 and concluded that for that year the entire gross intercorporate dividend must be deducted under section 85A, which by the court's reading includes exempted dividend and dividend from agricultural income. Therefore for 1967-68 the gross dividend (including exempt and agricultural-source dividends) was to be deducted; for other years the statutory changes (section 80AA etc.) control.
Holding and Implications
Core Rulings:
- Question 1: Answered in the affirmative in favour of the assessee — payment of accident insurance premium for directors is not a perquisite under section 17(1).
- Question 2: Answered in the affirmative in favour of the assessee — rent paid on behalf of a research institution qualified for deduction under section 35(1)(iii), even if paid indirectly to a creditor.
- Question 3: Answered in the affirmative in favour of the assessee — the company qualified as an "industrial company" where over 50% of income derived from manufacture (including manufacture via partnership).
- Question 4: Answered in the affirmative in favour of the assessee — profits attributable to items in the Fifth Schedule qualified for deduction under section 80E (and section 80-1 where applicable).
- Question 5: Mixed holding: For assessment year 1967-68 the gross intercorporate dividend must be deducted (per the Supreme Court's Cloth Traders decision). For assessment years 1968-69 to 1970-71 deduction is to be computed on the net dividend (i.e., after deduction of interest allocable under section 80AA).
- Question 6: A factual question to be determined under section 80AA — the Tribunal must allocate interest in accordance with that statutory provision for the years 1968-69 to 1970-71.
- Question 7: For assessment year 1967-68 the court held that the entire gross intercorporate dividend was to be deducted under section 85A (this includes exempt dividend and dividend ascribable to agricultural income) consistent with Cloth Traders.
Implications: The immediate consequence is the resolution of the seven referred questions in the specified manner above, producing benefits to the assessee on most points and setting how deductions are to be computed for the relevant assessment years. The court explicitly noted that most points were covered by previous decisions and therefore left the parties to bear their own costs. The opinion does not purport to create any novel or independent precedent beyond applying established authorities and the relevant statutory amendments described in the text.
Result: All seven questions were answered as set out above; parties to bear their own costs.
D.K Kapur, J.:— There are 11 Income-tax References before this court relating to four assessment years 1966-67 to 1970-71. Some of the applications under section 256(1) of the Income-tax Act, 1961, were at the instance of the Commissioner of Income-tax and some at the instance of the assessee. Out of the seven questions referred to us, questions Nos. 1 to 4 are at the instance of the Department and questions Nos. 5 to 7 are at the instance of the assessee. The questions are as follows:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the annual premium paid by the assessee-company on the accident insurance of its directors was not their perquisite within the meaning of the term used in section 17(1) of the Income-tax Act, 1961?
2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction under section 35(1)(iii) of the Income-tax Act, 1961, on account of rent paid by it on behalf of M/s. Shri Ram Centre for Industrial Relations in the accounting years relevant to the assessment years 1967-68 to 1970-71?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company was an ‘industrial company’ within the meaning of section 2(7) of the Finance (No. 2) Act, 1967, and was, therefore, entitled to be assessed at concessional rates?
4. Whether, on the facts and in the circumstances of the case, and on a proper appreciation of the entries against items Nos. 7 and 24 in the list of articles specified in the Fifth Schedule to the Income-tax Act, 1961, the assessee was entitled to deduction under section 80E of the Income-tax Act, 1961, for the assessment year 1967-68 and section 80-1 for the assessment year 1968-69, in respect of its share of profits derived from the firm, M/s. Electrical Industries Corporation?
5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in respect of intercorporate dividend earned by the assessee-company from other domestic companies, the rebate under section 85A of the Income-tax Act, 1961, for the assessment year 1967-68 and deduction under section 80M for the assessment years 1968-69 to 1970-71, was to be computed on the basis of the net amount of dividend arrived at, by deducting, from the gross amount of such intercorporate dividend, the interest allocable to the income earned by way of dividend?
6. If the answer to question No. 5 is in the negative, whether any part of the interest was in law allocable to the income earned by way of dividend?
7. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the rebate admissible under section 85A of the Income-tax Act, 1961, for the assessment year 1967-68, was to be computed on the basis of the net amount of dividend arrived at by deducting from the intercorparate dividend received by the assessee-company from other domestic companies, the interest relatable to such dividend income, but deducting neither the dividend exempt from tax nor the dividend ascribable to agricultural income?”
2. It would be convenient to deal with these questions one by one. The first question relates to the insurance premium paid by the assessee-company in respect of the accident insurance of its five directors. These payments were treated as perquisite to those five directors by the Income-tax Officer for computation of the deductions permissible under section 40(c) and section 40A of the Act. The Appellate Assistant Commissioner followed the judgment of the Delhi High Court in The Commissioner Of Income-Tax, Delhi… v. Lala Shri Dhar…, [1972] 84 ITR 192, to hold that the payment of accident insurance was not a perquisite. The same view has also been endorsed in a later judgment of this court in Commissioner Of Income-Tax, Delhi v. Vinay Bharat Ram, [1981] 129 ITR 128. The Tribunal merely followed this court's view. We see no reason to differ from the same and accordingly question No. 1 is answered in the affirmative, in favour of the assessee and against the Department. Now, turning to question No. 2, we have to notice that the amount of deduction which was claimed was on account of rent paid on behalf of M/s. Shri Ram Centre for Industrial Relations in the four assessment years in question. The Bombay High Court and the Mysore High Court have held in CIT v. Associated Cement Co. Ltd., [1968] 68 ITR 478 and CIT v. Bangalore Woollen, Cotton and Silk Mills Co. Ltd., [1973] 91 ITR 166, that the payment need not be in cash and may be in kind. Learned counsel for the Department urges that the wording of section 35(1)(iii) shows that the sum in question has to be paid to the institution in question to be used for research in social science or statistical research, etc., and, in this case, the payment is not to the institution. We find little difference between the payment made directly to the institution or indirectly to a creditor of the institution. In each case, the payment results in a credit to the institution concerned. However, learned counsel submits that the payment is for rent and not for research. We do not find any force in this contention. An institution being concerned in research has also to have a building and has to incur expenditure in retaining that building. So, any payments made towards the rent would be payments towards the research. In any event, to the extent that the rent has been paid, additional funds would be available to the institution for carrying on research. So, from whatever angle it is looked at, the eventual result is additional research by the institution concerned. Any funds paid to a body connected with research have necessarily to be spent by that body in furtherance of that research. Retaining the building in which the research is to be carried on or getting additional funds for research, are all exepenses incurred in research, and not otherwise. So, we uphold the decision of the Tribunal and answer the question referred to us in the affirmative, in favour of the assessees and against the Department.
3. Question No. 3 above is concerned with whether the assessee is an “industrial company” within the meaning of section 2(7)(d) of the Finance (No. 2) Act of 1967. In fact, a similar provision is to be found in all the Finance Acts for the subsequent periods also. The real point is, whether the lower rate of tax is to be charged from the assessee as an “industrial company—
4. The Tribunal in the course of its decision stated that this question was common for assessment years 1967-68 and 1970-71, and had depended on whether income derived by the assessee from a partnership with M/s. Electrical Industries Corporation was to be used as a qualification. We have examined the definition and find that a company is deemed to be an “industrial company” if its income from manufacture is more than 50 per cent. As the finding is that at least 51 per Cent, of the income was from the partnership which was concerned with the manufacture of superenamelled copper wire, we find that there is no - error, in the conclusion of the Tribunal and we accordingly answer question No. 3 referred to us in the affirmative on the ground that the company was an “industrial company” even if the said 51 per cent, or more of the income came from a manufacture in partnership. Whether that income came from a partnership or not makes no difference.
5. Question No. 4 is concerned with the application of section 80e and section 80-1 to the profits derived from the firm, M/s. Electrical Industries Corporation. We have been shown the unreported judgment of the assessee's own case for the assessment year 1965-66, which is Income-tax References Nos. 268 to 270 of 1975 and Surtax Nos. 115 and 116 of 1974. In that case also, it was held that relief was available under section 80E.
6. We would not only adopt that decision, but would also say that section 80E was repealed and re-enacted as section. 80-1. The history of this enactment is that section 80E was inserted by the Finance Act of 1966 and then that section was replaced by section 80-1 with effect from April 1, 1968, by the Finance (No. 2) Act, 1967. This section was itself omitted by the Finance Act, 1972. The prevision was for allowing a deduction in respect of profits and gains attributable to certain priority industries. In the provision as it originally stood, i.e, section 80E, it was provided that if the total income included profits and gains attributable to the business of generation or distribution of electricity or any other form of power or the construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there was to be allowed a deduction of eight per cent. There was a finding that part of the profits of the assessee in this case was attributable to the manufacture or production of articles which were to be found in the list contained in the Fifth Schedule, and it would follow that the deduction had to be allowed. This was the conclusion in the previous case, though perhaps not expressed in this way. We think that the same position held true for the assessment year 1967-68 under section 80E. Now, turning to section 80-1 as re-enacted, the provision was that the deduction would be available for profits and gains attributable to priority industries. Section 80B defined “priority industry” as 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. So, section 80-1 was the same as section 80E. Later on, by the Finance Act of 1968, there was a subsequent change with which we are not concerned. The position, therefore, in 1968-69 was the same as in 1967-68. Accordingly, following the aforementioned judgment, we come to the conclusion that this question has to be answered in the affirmative, in favour of the assessee and against the Department.
7. It is now necessary to turn to question No. 5. The decision of this question is in favour of the assessee according to the Supreme Court's decision in Cloth Traders (P) Ltd. v. Additional Cit, Gujarat-I, [1979] 118 ITR 243. The answer given by the Supreme Court was that relief had to be given in respect of the entire dividend income irrespective of interest paid on borrowings made for acquiring shares. However, there has been an amendment in the Income-tax Act with retrospective effect by the introduction of section 80AA with effect from April 1, 1968. This provision permits the deduction to be allowed not with respect to the gross amount of the dividend, but in respect of the dividend as paid in accordance with the provisions of this Act, i.e, the interest, if any, paid for money borrowed to purchase the shares, has first to be deducted from the dividend income and then only is the deduction to be made. It is the net dividend which is to be deducted and not the gross dividend. This amendment is retrospective only up to April 1, 1968, and, therefore, does not cover the assessment year 1967-68. In that year, the entire amount of gross dividend has to be deducted. But, in the assessment years 1968-69 to 1970-71, the net dividend could only be deducted. The question has, therefore, to be answered in the negative or 1967-68 and in the affirmative for 1968-69 to 1970-71. In other words the Tribunal's finding that the net amount of dividend was to be deducted's upheld only for the years 1968-69 to 1970-71.
8. Question No. 6 is a corollary to question No. 5 and this seems to be a question of fact dependent on the amount of interest actually paid by the assessee in respect of the borrowed capital in accordance with the terms of section 80AA. As the point is one covered by the provisions of section 80AA, the Tribunal has merely to give effect to that provision for the assessment years 1968-69 to 1970-71. It is now necessary to refer to question No. 7. This question is extremely badly worded and counsel for the assessee was even ready to say that he did not press this question. However, the discussion in the statement of case seems to show that this is a composite question covering the submission of the Commissioner of Income-tax that exempted dividend and dividend attributable to agriculture had also to be deducted under section 85A as well as the assessee's contention that interest was not to be deducted. This is a question that is put forward by both the Department is well as the assessee. The question which arose in the assessment year 1967-68 was that the Income-tax Officer held that the gross dividend was not to be deducted under section 85A of the Act as it then stood, but the interest on money borrowed for purchasing the shares in question had to be deducted and also exempted dividend amounting to Rs. 1,516 had to be deducted as well as Rs. 2,652 which was the dividend attributable to agricultural income. This view was reversed by the Appellate Assistant Commissioner to the extent that the entire net dividend had to be deducted under section 85A after deducting from the gross dividend interest attributable to borrowed capital employed for purchasing the shares. This was the view upheld by the Tribunal. As observed by us already in answer to question No. 5 as far as the assessment year 1967-68 is concerned, the judgment of the Supreme Court in Cloth Traders' case, [1979] 118 ITR 243, has to apply and, therefore, the entire gross dividend has to be deducted. By gross dividend is meant the entire dividend received by the company as intercorporate dividend. This would include exempted dividend as well as dividend received from agricultural income. This would be our answer to question No. 7.
9. In the result, all the seven questions have been answered as above. As most of the points involved are covered by previous decisions, we would leave the parties to bear their own costs.
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