ORDER
B.M. Kothari, Accountant Member
1. The appellant company is a trading company which mainly deals in purchase and sale of shares, securities and other trading activities. The assessee claimed deduction under Section 80M on the gross dividend of Rs. 3,58,037 at the rate of 60% which comes to Rs. 2,14,800. The ITO observed that the deduction under Section 80M can be allowed on the net dividend income. The assessee has debited the entire expenses in the profit and loss account against the gross profit derived by it from business in shares and yarn including dividends. The net interest payment debited in the profit and loss account is Rs, 25,39,000. The borrowed money on which interest payment has been made was also utilised for acquiring the shares on which dividend was earned. No separate expenses pertaining to the dividend income was bifurcated in the profit and loss a/c for computing the business income and dividend income separately. He therefore, bifurcated the amount of net interest payment towards earnings from the business and dividend income proportionate to gross profit from business and gross dividend income. The bifurcated amount of interest expenses attributable to dividend income came to Rs. 8,75,000 but the same was limited to the amount of gross dividend at Rs. 3,58,000. Resultant figure was ‘nil’. In view of this the desired deduction under Section 80M was denied.
2. The CIT (A) observed that the decision of the Gujarat High Court in the case of CIT v. Cotton Fabrics Ltd. [1981] 131 ITR 99 followed the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243, which was subsequently overruled by the Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. [1985] 155 ITR 120. In the later judgment of the Supreme Court it has been held that the relief under Section 80M in respect of dividend receipts from domestic companies will be available only with respect to net amount of income from dividends as computed for the purpose of assessment to tax and not on the gross amount. The interest on borrowings for purchase of shares are required to be deducted for computing the net amount of dividend income. He, therefore, confirmed the action of the ITO denying the grant of deduction under Section 80M.
3. The learned counsel for the assessee contended that the company is admittedly a dealer in shares and securities and is also doing other trading activities. The profil/loss arising on trading transactions of shares and securities is assessed under the head “income from business”, whereas the dividend income is assessed under the head “income from other sources” under Sections 56 to 58 of IT Act, 1961. It was submitted that the judgment of Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra) refers only to case of in vestment in shares and securities and does not deat with a case of a dealer in shares and securities. In the said judgment, the decision of the Gujarat High Court in the case of Cotton Fabrics Ltd. (supra) was neither referred nor reversed. The decision of the Gujarat High Court in the case of Cotton Fabrics Ltd. (supra) holds good for the companies which are trading in shares and securities. The contention of the assessee is squarely covered by the aforesaid judgment of Hon’ble Gujarat High Court. He also invited our attention towards the commentary by learned authors Kanga and Palkhiwala in their book titled “The law and practice of Income-tax” at page 976 of 8th Edition. He, therefore, urged that deduction under Section 80M should be allowed on the gross amount of dividend income of Rs. 3,58,000 at the rate of 60%
4. The other two grounds mentioned in the grounds of appeal relating to addition of Rs. 5,416 being the amount of interest accrued and Rs. 1,558 added in respect of Provident Fund deducted from salary, under Section 43B were not pressed by the learned counsel in view of the smallness of the amounts involved.
5. The learned D.R. supported the order of the CIT(A) as well as the order of the ITO. It was submitted that in view of Section 80AA and in view of the judgment of the Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra), the order of CIT(A) should be confirmed.
6. We have considered the rival submissions made by the learned representatives and have also gone through the various decisions cited by the learned representatives. The contention of the assessee is squarely covered in its favour by the judgment of Gujarat High Court in the case of Cotton Fabrics Ltd. (supra). It has been held that the entire amount of dividend earned by the assessee-company from intercorporate dividends was the amount with reference to which relief under Section 80M had to be worked out. Section 80AA make no difference because no expenditure was incurred for the purpose of earning the amount of dividends. The expenditure incurred by way of payment of interest was incurred for the purpose of carrying on the business of the assessee and that had to be deducted in its entirety under Section 36(1)(iii) while computing the income of the assessee under the head ‘profits and gains from business’. The provisions of Section 80AA was introduced by the Finance (No. 2) Act, 1980 with retrospective effect from 1st April, 1968 as regards intercorporate dividends with a view to supercede the view taken by the Hon’ble Supreme Court in the case of Cloth Traders (P.) Ltd. (supra). Subsequently the judgment in the case of Cloth Traders was overruled by the Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra). The Supreme Court in the later case held that Section 80AA was mainly declaratory of the law as it always was. The relief under this Chapter has to be calculated with reference to the net amount of various incomes like dividend, etc. The Gujarat High Court in the case of Cotton Fabrics Ltd. (supra) had considered the effect of Section 80AA and thereafter came to the conclusion that where a dealer in shares borrows money for the purposes of his business of dealing in shares the entire interest on money borrowed is allowable under Section 36(1)070 in computing the business income. Therefore, despite Section 80AA the dividend is not to be reduced by any part of the proportionate amount of interest in calculating the deduction allowable under Section 80M. In view of the aforesaid judgment of the Gujarat High Court, we direct the ITO to grant relief under Section 80M on dividend income of Rs. 3,58,000 at the rate of 60%.
7. The remaining two grounds are rejected as not pressed.
8. In the result, the appeal is partly allowed.