Commissioner Of Income-Tax v. Atam Ballabh Finance Pvt. Ltd.

S.B Sinha, C.J:— At the instance of the Revenue, the following questions have been referred to this court for its opinion by the Income-tax Appellate Tribunal, Delhi Bench “B”, New Delhi (hereinafter for the sake of brevity referred to as, “the Tribunal”), in terms of section 256(1) of the. Income-tax Act, 1961 (hereinafter for the sake of brevity referred to as, “the said Act”):

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in confirming the order of the Commissioner of Income-tax (Appeals) thereby directing the Income-tax Officer to adjust the deduction under section 80K/80M of the’ Income-tax Act, 1961, against the dividend income before arriving at the gross total income of the assessee?

2. Whether, on the facts and in the circumstances of the case, the directions of the Tribunal are not against the specific provisions of section 80A of the Income-tax Act?”

2. The assessment year in question is 1976–77. The assessee submitted a return showing its income at a loss of Rs. 23,612 which was computed in the following manner:

“That the assessee-company had returned its income at a loss of Rs. 23,612 computed in the following manner:

Rs. Rs. Profits as per profit and loss account 10,646 Less: (i) Dividend income for separate consideration 49,854 (ii) Income from registered firm taken in last previous year 790 50,644 (-) 39,998 Add: Income from registered firm for this previous year (as per return of the registered firm) 810 Business loss (-) 39,188 Add: Dividend income 49,854 Less: Deductions: Under section 80K: Rs. 10,914 Under section 80M (60% of Rs. 49,854-16, 914) Rs. 23,364 34,278 15,576 Business loss for the year to be carried forward in accordance with the sections 71 and 72 of the Act. (-) 23, 612.”

3. By an order dated November 23, 1979, the Assessing Officer assessed its income as Nil stating:

“Net profit as per profit and loss account 10,646 Deduction: (i) Dividend income for consideration 49,854 (ii) Income from registered firm for separate consideration 790 (iii) Preliminary expenses claimed in excess of 10 per cent, of the 2/4 per cent, of the capital employed 1,162 51,806 Business loss; (-) 41,160 Add: Share from the firm as discussed above 810 Other sources 49,854 Dividend income 50,664 (-) 41,160 9,504 Less: Deduction under section 80K/80M to the extent of profits 9,504 Assessed at Nil income Nil”

4. According to the assessee, the Assessing Officer had not granted to him the benefit of deductions under sections 80K and 80M of the said Act as a result whereof it was denied the right to carry forward the business loss as returned. An appeal was preferred against the order of assessment by the assessee and the Commissioner of Income-tax (Appeals) (in short, “the CIT(A)”), allowed the assessee's claim stating:

“2. The first ground urged in this appeal is that the Income-tax Officer erred in not allowing full deductions under sections 80K and 80M out of the dividend income and then taking the balance dividend income for setting off against the business loss as desired by the appellant. It is seen from the computation of income that the Income-tax Officer has set off the business loss from the dividend income leaving dividend income of Rs. 9,504 to which extent only deduction under section 80M has been allowed. The assessment order says nothing about the deduction under section 80K. The appellant points out that when this point had earlier arisen in the appellant's case in the assessment year 1975–76, the Appellate Assistant Commissioner had held that the appellant was entitled to full relief under sections 80K and 80M out of its dividend income and that only the balance of the dividend income could be set off against the business loss, the remaining business loss to be carried forward. The Departmental appeal against the Appellate Assistant Commissioner's order was dismissed by the Tribunal vide their order dated October 27, 1979. Respite this past history it is surprising that the Income-tax Officer has furnished in following his old method of computation though the assessment order is dated November 23, 1979, without saying anything about the order of the Appellate Assistant Commissioner or of the Tribunal for the assessment year 1975–76. In the absence of any material to the contrary I am unable to take a view different from the one taken by the appellate authorities in the assessment year 1975–76. Accordingly, the Income-tax Officer is directed to recompute the appellant's income for the year under appeal as directed by the Appellate Assistant Commissioner and the Tribunal for the assessment year 1975–76.”

5. The Department preferred an appeal before the learned Tribunal. However, the learned Tribunal dismissed the said appeal holding that section 80AA of the said Act was not attracted.

6. Ms. Prem Lata Bansal, learned counsel appearing on behalf of the Revenue, would submit that in terms of section 72 of the said Act, the business loss could be allowed to set off only from income from other sources as was rightly held by the Assessing Officer.

7. As regard the first question, learned counsel would contend that the business loss is to be adjusted first and then only the benefit of sections 80K and 80M of the said Act can be given.

8. Sections 80K and 80M of the said Act are in the following terms:

“80K. Deduction in respect of dividends attributable to profits and gains from new industrial undertakings or ships or hotel business.—Where the gross total income of an assessee, being—

(a) the owner of any share or shares in a company, or

(b) a person who is chargeable to tax under this Act on the income by way of dividends on any share or shares in a company owned by any other person,

includes any income by way of dividends paid or deemed to have been paid by the company in respect of such share or shares, there shall, subject to any rules that may be made by the Board in this behalf, be allowed, in computing his total income, a deduction from such income by way of dividends of an amount equal to such part thereof as is attributable to the profits and gains derived by the company from an industrial undertaking or ship or the business of a hotel, on which no tax is payable by the company under this Act for any assessment year commencing prior to the 1st day of April, 1968, or in respect of which the company is entitled to a deduction under section 80J for the assessment year commencing on the 1st day of April, 1968, or for any subsequent assessment year:

Provided that no deduction under this section shall be allowed in respect of any income by way of dividends which is attributable to the profits and gains derived by the company from an industrial undertaking which begins to manufacture or produce articles or to operate its cold storage plant or plants after the 31st day of March, 1976, or from a ship which is first brought into use after that date or from the business of a hotel which starts functioning after that date.

80M. Deduction in respect of certain intercorporate dividends. —(1) Where the gross total income of a domestic company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to,—

(i) in the case of a scheduled bank or a public financial institution, or a State financial corporation or a State industrial investment corporation or a company registered under section 25 of the Companies Act, 1956 (1 of 1956), sixty per cent, of the income by way of dividends from another domestic company;

(ii) in the case of any other domestic company, so much of the amount of income by way of dividends from another domestic company as does not exceed the amount of dividend distributed by the first-mentioned domestic company on or before the due date:

Provided that where any domestic company receives any income by way of dividend from the units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), such domestic company shall, subject to the aforesaid provisions, be eligible for deduction to the extent of—

(a) four-fifths of such income in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1994;

(b) two-fifths of such income in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1995, and no deduction shall be allowed on such income in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1996, and any subsequent previous year.

(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under clause (ii) of subsection (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

(3) Where the dividend distributed is in respect of any period comprised in the previous year ending on the 31st day of March, 1990, no deduction shall be allowed in respect of such dividend.

Explanation— For the purposes of this section, the expressions—

(i) ‘scheduled bank’ means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), and which is a domestic company;

(ii) ‘public financial institution’ shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);

(iii) ‘State financial corporation’ and ‘State industrial investment corporation’ shall have the same meanings as in section 43B;

(iv) ‘due date’ means the date for furnishing the return of income under sub-section (1) of section 139.”

9. Both the questions have since been considered by the apex court in Distributors (Baroda) Pvt. Ltd. v. Union of India, [1985] 155 ITR 120, wherein upon taking into consideration the amendments of the sections made from time to time, it was held so far as section 80M(1) of the said Act is concerned, the deduction required to be allowed under that provision has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the said Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee. Section 80AA, in its retrospective operation, is merely declaratory of the law as it always was since April 1, 1968, and no complaint can be validly made against the retrospective operation of the section on the ground that it enhances the tax burden of the assessee and, therefore, infringes the fundamental right of the assessee under article 19(1)(g) of the Constitution of India.

10. In Distributors (Baroda) P. Ltd.'s case, [1985] 155 ITR 120, the apex court overruled the decision of Cloth Traders (P) Ltd. v. Additional Cit, Gujarat-I, [1979] 118 ITR 243(SC), whereupon the learned Tribunal and the Commissioner of Income-tax (Appeals) relied, stating (page 137):

“There is also one other strong indication in the language of sub-section (1) of section 80m which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the court in Cloth Traders’ case, [1979] 118 ITR 243, presumably because it was not brought to the attention of the court. The court observed in Cloth Traders’ case, [1979] 118 ITR 243, that the whole of the income by way of dividends from a domestic company or 60 per cent, of such income, as the case may be, would be deductible from the gross total income for arriving at the total income of the assessee. We are afraid this observation appears to have been made under some misapprehension, because what sub-section (1) of section 80m requires is that the deduction of the whole or a specified percentage must be made from ‘such income by way of dividends’ and not from the gross total income. sub-section (1) of section 80m provides that in computing the total income of the assessee, there shall be allowed a deduction from ‘such income by way of dividends’ of an amount equal to the whole or a specified percentage of such income. Now, when in computing the total income of the assessee, a deduction has to be made from ‘such income by way of dividends’, it is elementary that ‘such income by way of dividends’ from which deduction has to be made must be part of gross total income. It is difficult to see how the language of this part of sub-section (1) of section 80m can possibly fit in if ‘such income by way of dividends’ were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income: what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how for the purpose of computing the total income from the gross total income, any deduction should be required to be made from the full amount of the dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions of the Act which would be forming part of the gross total income. It is, therefore, clear that whatever might have been the interpretation placed on clause (iv) of sub-section (1) of section 99 and section 85A, the correctness of which is not in issue before us, so far as sub-section (1) of section 80m is concerned, the deduction required to be allowed under that provision is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee.

This view which we are taking in regard to the construction of subsection (1) of section 80M is also supported by the decision of a Bench of this court consisting of one of us, Chandrachud C.J and Tulzapurkar J., in Cambay Electric Supply Industrial Co. Ltd. v. CIT, [1978] 113 ITR 84. This decision was rendered by the court on April 11, 1978, at least a year before the decision in Cloth Traders’ case, [1979] 118 ITR 243, but, unfortunately, it appears, it was not brought to the attention of the court when Cloth Traders’ case, [1979] 118 ITR 243 was argued, because we have no doubt that if it had been cited, the court would have certainly made a reference to it in the judgment in Cloth Traders’ case, [1979] 118 ITR 243. The section which came up for consideration before the court in Cambay Electric Supply Industrial Co. Ltd.'s case, [1978] 113 ITR 84 was undoubtedly a different one, namely, section 80E, but the reasoning which prevailed with the court in placing a particular interpretation on sub-section (1) of section 80e would equally be applicable to the interpretation of sub-section (1) of section 80m.”

11. The aforesaid decision has been followed by the apex court in CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd., [1997] 224 ITR 604 stating (page 607):

“In Distributors (Baroda) Pvt. Ltd.'s case, [1985] 155 ITR 120 this court has dealt with the question whether deduction of income by way of dividends under section 80M has to be made from the income computed in accordance with the provisions of the Act, i.e, after deducting interest on monies borrowed for earning such income or from total income of dividends without so deducting the interest amount. In the earlier decision in Cloth Traders Pvt. Ltd.'s case, [1979] 118 ITR 243, a three-judge Bench of this court had held that the deduction required to be allowed under section 80M must be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, i.e, after making the deduction as provided under the Act. In the said decision in Cloth Traders Pvt. Ltd.'s case, [1979] 118 ITR 243 (SC), the court did not notice the earlier decision of a two judge Bench of the court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, wherein, in the context of section 80E, it was held that for the purpose of allowing deduction under the said provision, it was necessary to first compute the total income of the assessee in accordance with the other provisions of the Act, i.e, in accordance with all the provisions except section 80E. The decision in Cloth Traders Pvt. Ltd.'s case, [1979] 118 ITR 243(SC), has been overruled by the Constitution Bench in Distributors (Baroda) Pvt. Ltd.'s case, [1985] 155 ITR 120(SC), wherein it has been observed (at page 135):

‘The opening words describe the condition which must be fulfilled in order to attract the applicability of the provision contained in sub-section (1) of section 80m. The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company. “Gross total income” is defined in section 80B, clause (5), to mean the “total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under section 280-0”. Income by way of dividends 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. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or, in other words, forms part of the gross total income, the condition specified in the opening part of sub-section (1) of section 80m would be fulfilled and the provision enacted in that sub-section would be attracted.

12. We are unable to hold that the observations made in the judgment while construing the words ‘such income by way of dividends’ in any way detract from the above-quoted observations inasmuch as this court has clearly said (at page 136):

‘It is obvious, as a matter of plain grammar, that the words “such income by way of dividends” must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to determine what is “such income by way of dividends”, we have to ask the question: what is the income by way of dividends from a domestic company included in the gross total income and that would obviously be the income by way of dividends computed in accordance with the provisions of the Act’.”

13. Yet again in Motilal Pesticides (I) Pvt. Ltd. v. CIT, [2000] 243 ITR 26, the apex court observed (page 27):

“Both sections 80HH and 80M fall in Chapter VI-A relating to deductions to be made in computing total income. It will be seen that the language of sections 80HH and 80M is the same. It was held in Cloth Traders (P.) Ltd.'s case, [1979] 118 ITR 243(SC) that deduction is to be allowed on the gross total income and not on the net income. But then the decision in Cloth Traders (P.) Ltd.'s case, [1979] 118 ITR 243(SC) was overruled in Distributors (Baroda) P. Ltd. v. Union of India, [1985] 155 ITR 120(SC). After the decision in Cloth Traders (P.) Ltd.'s case, [1979] 118 ITR 243(SC), two sections 80AA and 80AB were introduced by the Finance (No. 2) Act, 1980. While section 80AA was to have retrospective effect with effect from April 1, 1968, section 80AB was to have operation with effect from April 1, 1981. Section 80AA had the effect of effacing the decision of this court in Cloth Traders (P.) Ltd.'s case, [1979] 118 ITR 243, which had interpreted section 80M. Section 80AB was made applicable to all the sections in Chapter VI-A except section 80M. In Distributors (Baroda) P. Ltd.'s case, [1985] 155 ITR 120(SC), however, this court specifically overturned its earlier decision in Cloth Traders (P.) Ltd.'s case, [1979] 118 ITR 243(SC) and held that deduction is to be allowed only on the net income and not on the gross income. With reference to section 80AB, this court said it was merely of a clarificatory nature and the decision of this court in Distributors (Baroda) P. Ltd.'s case, [1985] 155 ITR 120 is thus irrespective of section 80AB of the Act. The High Court, therefore, relying on the decision of this court in Distributors (Baroda) P. Ltd.'s case, [1985] 155 ITR 120 answered the question in favour of the Revenue and against the assessee.”

14. So far as question No. 2 is concerned, the Commissioner of Income-tax (Appeals) and the learned Tribunal appear to have lost sight of the definition of “gross total income”. “Gross total income” means the total income computed in accordance with the provisions of the said Act, before making any deduction under this Chapter, as contained in sub-section (5) of section 80B of the said Act. There, thus, cannot be any doubt whatsoever that while computing the income, all provisions are required to be applied and thereafter only the deductions had to be allowed.

15. Section 80AA of the said Act, as it stood then before its repeal, which provided for computation of deduction under section 80M was in the following terms:

“80AA. Computation of deduction under section 80M.— Where any deduction is required to be allowed under section 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends.”

16. The retrospective effect thereto, as noticed hereinbefore, has since been upheld in the aforementioned judgments. For the reasons aforementioned, both the questions are answered in the negative, i.e, in favour of the Revenue and against the assessee.

17. This reference is answered and disposed of accordingly without being any order as to costs.