JUDGMENT
S.H. Kapadia, J.
1. Department has come by way of above two references under Section 256(1) of the IT Act for our opinion on the following questions for the asst. yrs. 1976-77, 1977-78, 1978-79 and 1980-81. These two references raise common questions of law and fact and, therefore, they are disposed of by this common judgment. For the sake of convenience, however, we reproduce hereinbelow the facts in IT Ref. No. 414 of 1988.
Facts
2. Assessee is SBI. It carries on business as stipulated under Section 32 of State Bank of India Act, 1955. When UTI was set up under the Unit trust of India Act, 1963, initial contribution was sought from RBI, IDBI, LIC, SBI, etc., The initial capital of UTI was Rs. 5 crores. SBI was the initial contributor to the extent of Rs 75 lakhs. A certificate of contribution was also issued by UTI on 6th April, 1964. During the asst. yr. 1976-77, UTI distributed its income and in the course of distribution, SBI received Rs. 442. According to SBI, this amount was received as dividend whereas, according to Department, Rs. 442 represented interest. According to the assessee, Rs. 442 was dividend and, consequently, assessee was entitled to deduction under Section 80M of the IT Act. On this issue, two questions arise for determination:
(1) Whether the Tribunal was right in holding that the amount received from UTI was dividend ?
(2) Whether the Tribunal was right in law in holding that the income received by the assessee from UTI was entitled to deduction under Section 80M of the IT Act?
Arguments
3. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department, contended that Section 2(22) of the IT Act defines “dividend” to include distribution by a company of accumulated profits, whether capitalised or not. He further contended that SBI was a contributory to the capital of the trust under the UTI Act and SBI was not a unit-holder under that Act. Mr. Desai contended that, under the Act, there was a dichotomy between income received by a contributory and income received by a unit-holder. He contended that, in this case, SBI received Rs. 442 as and by way of interest and not as and by way of dividend. He contended that, under the Act, income and expenses were separately allocable qua initial contributors on one hand and unit-holders, on the other hand. He contended that under Section 22 of the UTI Act, there was a difference between the initial capital and the unit capital of a scheme. That, under Section 25 of the Act, interest and other expenses were allocable initial capital-wise and unit capital-wise. Mr. Desai further contended that Section 25A dealt with distribution of income under which income allocated to initial capital was distributable amongst the contributories in proportion to their respective contributions whereas, income allocated to the unit capital relating to the unit scheme was distributable to the unit-holders under that unit scheme. Mr. Desai relied upon Section 32(3) of the UTI Act which states that for the purposes of IT Act, distribution of income received by a unit-holder from UTI shall be deemed to be his income by way of dividend and that the trust shall be deemed to be a company. Reading Section 32(3), with Section 25A(2), it was urged that distribution of income to the unit-holders was deemed to be a dividend whereas, distribution of income to the initial contributors has not been deemed to be dividend for IT Act. According to the learned counsel, therefore, the intention of the legislature was very clear, namely, that distributable income to the unit-holder alone was to be treated as dividend under the IT Act. Consequently, income distributable to initial contributors is not dividend :
4. Mr. Andhyarujina, learned senior counsel appearing on behalf of SBI-assessee, contended that SBI, RBI, IDBI, etc., were the initial contributors to the capital of UTI in their own right. That, their position was similar to a shareholder. That, SBI was holding a position similar to a promoter of a company. That, UTI, however, was a trust. That, the initial capital of UTI was Rs. 5 cores and SBI contributed Rs. 75 lakhs thereto. That, after debiting interest on borrowings and expenses, net profits were arrived at and, thereafter, there was allocation under P&L Appropriation a/c below the line. In other words, after debiting interest on borrowings and other expenses to the P&L a/c, the surplus was allocated to initial contributors and to the unit-holders. He contended that this is the scheme under Section 25A of the Act. Therefore, the income received by the initial contributor was dividend because that income came into the hands of the contributor after interest and other expenses were debited and after allocation under P&L Appropriation a/c. Mr. Andhyarujina next contended that Section 32(3) of the UTI Act, was introduced by the legislature as a deeming provision out of abundant caution. He contended that Section 32(3) of the UTI Act was applicable only to unit-holders and not to initial contributors and because of that distinction, the legislature introduced Section 32(3) which states that income distribution to the unit-holders will constitute dividend for the purposes of UTI Act. Mr. Andhyarujina contended that Rs. 442 cannot be interest. He contended that there is a basic difference between interest and dividend. That, dividend is variable whereas interest is fixed. Lastly, he contended that in this case, on payment of dividend, UTI deducts TDS and issues a certificate. The certificate is also produced before us. It is taken on record and marked ‘X’. He, therefore, contended that the income received by SBI was dividend and not interest and, therefore, assessee was entitled to benefit of Section 80M of the IT Act.
Findings
5. In order to decide this matter, we have to discuss the scheme of the Unit trust of India Act, 1963. Section 2(b) defines “contributing institution” to mean institution which contributes to the initial capital of the trust under Section 4 of the Act. SBI is a contributor. Section 2(1) defines the word “trust” to mean Unit trust of India established under Section 3 of the Act. Section 2(n) defines “unit” to mean a unit issued under a Unit Scheme. Section 2(o) defines “unit capital” to mean total face value of the units sold under a Unit Scheme. Section 2(q) defines “unit holder” to mean a person recognized by the trust as the holder of a unit certificate under a unit scheme. Section 4 refers to initial capital of the trust. It states that initial capital of the trust was Rs. 5 crores divided in the form of certificates and contributed in the manner provided therein. Section 4(1)(c), inter alia, states that SBI has contributed Rs. 75 lakhs to the initial capital of the trust. Section 8 refers to rights and liabilities of the contributors. Section 21 refers to framing of a Unit Scheme. Section 22 comes under Chapter-V which deals with allocation and distribution of income. Section 22 indicates as to what constitutes capital of the trust. It refers to capital of the trust in relation to first Unit Scheme and it also refers to capital of the trust in relation to subsequent Unit Scheme. Section 22(1) refers to capital of the trust in relation to the first Unit Scheme to consist of initial capital and unit capital of the first Unit Scheme whereas, Section 22(2) refers to capital of the trust in relation to subsequent Unit Scheme to consist of the unit capital of that scheme and reserves created for that scheme. Section 23 refers to income of the trust in relation to the first Unit Scheme and the income of the trust in relation to subsequent Unit Scheme. Section 25 refers to allocation of interest and other expenses.
Section 25A deals with distribution of income. For the sake of convenience, we hereby quote Section 25A(1) and (2) r/w Section 32(3).
Section 25A(1) and (2)
“25A. Distribution of income–(1) The income allocated to the initial capital in any year reduced by the interest and the amount of other expenses charged for that year to the initial capital may be distributed in the prescribed manner among the contributing institutions in each case in proportion to their respective contributions.
(2) The income allocated in any year to the unit capital relating to the unit scheme reduced by the interest and the amount of other expenses charged for that year to such unit capital may, but not less than ninety per cent, of such income so reduced, shall be distributed in respect of that year to the unit holders under that unit scheme:
Provided that in relation to any year in which the trust has declared a dividend of not less than ten per cent on the unit capital the requirement as to distribution of not less than ninety per cent of such income in such year as so reduced shall not apply.”
Section 32(3)
“32. Income-tax and other taxes–
(1)……………………
(2)……………….,…
(3) Subject to the foregoing sub-sections for the purposes of the IT Act, 1961 (43 of 1961),
(a) any distribution of income received by a unit-holder from the trust shall be deemed to be his income by way of dividends; and
(b) the trust shall be deemed to be a company.”
6. The conspectus of the above sections show that the initial capital of the trust was Rs. 5 cores which was subscribed to by RBI, LIC, SBI, etc. Under the Act, there is a dichotomy between initial contributors and unit-holders [see Section 2(b) vis-a-vis Section 2(q)]. Similarly, under Section 22(1), the composition of the capital of the trust for the first Unit Scheme is different from composition of the capital of the trust qua subsequent Unit Scheme under Section 22(2). Similarly, under Section 23, income for the trust in relation to the first Unit Scheme is different from income of the trust in relation to subsequent Unit Scheme. Similarly, allocation of interest and other expenses is also segregated under Section 25 of the Act. However, when it comes to distribution of income the income allocated to the unit capital of a Unit Scheme is distributable to the unit-holders as a dividend and, similarly, the income allocated to the initial capital is distributable amongst the contributors as dividend. There is no difference in the language of Section 25A(1) and Section 25A(2) quoted above. Therefore, when it comes to distribution of income, the dichotomy between unit capital and initial capital gets dissolved under the Act. Therefore, we do not find any merit in the argument advanced on behalf of the Department that income allocated to the unit capital is dividend but unit (income) allocated to the initial capital is interest. Section 32(3) contains a deeming provision. It states that any distribution of income received by a unit-holder from the trust shall be deemed to be dividend and the trust shall be deemed to be a company. This section is introduced in the Act out of abundant caution. But for Section 32(3), it was possible for the unit-holder to argue that the income received by him was not dividend as he was a unit-holder and not a shareholder. Therefore, Section 32(3) has been introduced in the statute. SBI is an initial contributor in its own rights. Its position was very similar to a shareholder/promoter of a company. Therefore, the income receivable by initial contributor was dividend and, therefore, the, legislature, in its wisdom, did not deem it fit to enact any deeming provision similar to Section 32(3) which is applicable only to unit-holders because the Government apprehended an argument only from unit-holders that they were not shareholders and, therefore, the section was introduced to plug the loophole and to discount the argument of the unit-holder on receipt of income by way of distribution. In the circumstances, we are of the view that the income received from UTI was dividend and, therefore, the assessee was entitled to the benefit of Section BOM of the IT Act.
In the circumstances, we answer the above two questions in the affirmative i.e., in favour of the assessee and against the Department.
7. The next question which arises for determination in this case is as follows :
“Whether the Tribunal was right in holding that an amount of Rs. 2,34,05,457 credited to the suspense account was not taxable in the assessment year in question ?”
Answer
In view of the judgment of the Supreme Court in the case of UCO Bank v. CIT and in view of the judgment of the Supreme Court in the case of United Commercial Bank v. CIT (1999) 240 ITR 355 (SC), the question is answered in the affirmative i.e., in favour of the assessee and against the Department. 8. The next question which arises for determination is as follows :
“Whether the Tribunal was right in holding that the amount of Rs. 2,34,05,457 credited to the interest suspense account was taxable in the assessment year in question ?”
Answer
In view of the judgment of the Supreme Court in the case of UCO Bank (supra) and in view of the judgment of the Bombay High Court in the case of American Express International Banking Corporation v. CIT (2002) 258 ITR 601 (Bom) at p. 618, the question is answered in the affirmative i.e., in favour of the assessee-bank and against the Department.
9. The next question on which our opinion is sought is as follows :
“Whether the Tribunal was justified in holding that subsidy given by SBI to subsidiary branches was revenue expenditure and, therefore, allowable as business deduction ?”
Answer
In view of our judgment in the case of CIT v. State Bank of India decided on 12th March, 2003, vide IT Ref. No. 201 of 1995, we answer the question in the affirmative i.e., in favour of SBI assessee and against the Department.
10. Accordingly, both the above references are disposed of with no order as to costs.