JUDGMENT
M.N. Chandurkar, C.J.
1. At the instance of the Revenue, the following two questions have been referred to this court under section 256(1) of the Income-tax Act, 1961 :
“1. Whether, on the facts and in the circumstances of the case, the deduction under section 80K should be allowed on the gross dividend income before deduction of interest and brokerage or on the net dividend income ?
2. Whether, on the facts and in the circumstances of the case and having regard to the provision of section 64(1)(iii) of the Act, the Appellate Tribunal was right in deleting the assessee’s wife’s share income from the firm of M/s Sunmar Estates and Investments clubbed with the income of the assessee ?”
In the assessment for the assessment year 1973-74, the question was whether relief under section 80K of the Income-tax Act, 1961, should be granted on the net dividend income or on the gross dividend income. The Income-tax Officer had held that the relief should be granted on the basis of the net dividend income, while the Appellate Assistant Commissioner held that the relief should be granted on the gross dividend income. The Tribunal, in the appeal filed by the Revenue, followed two decisions of this court, one in Madras Auto Service v. ITO [1975] 101 ITR 589 and the other in CIT v. Madras Motor and General Insurance Company Ltd. [1975] 99 ITR 243 and held that the reliefs under sections 80K and 80L should be computed on the gross dividend income.
2. The assessee had gifted his house property at No. 3, Cathedral Road, Madras, and land appurtenant thereto to his wife on June 29, 1966. The wife continued to be the owner of the property till July 5, 1971, on which date she and her two sons formed a partnership, each having equal share in the profit and loss in the partnership business. The business of the partnership was that of acquiring, developing and holding and letting out properties and also dealing in shares and securities and acting as financiers and such other business as may be agreed upon among the partners from time to time. The capital of the partnership was to be Rs. 1,20,000 to be contributed equally by each of the three partners. The agreement of partnership also provided that the house which was gifted by the assessee to his wife was to be treated as an asset of the partnership. The account of the assessee was to be credited with a sum of Rs. 4,80,000 towards the value of the house besides the sum of Rs. 20,000 towards the value of the furniture and fittings. Out of this sum of Rs. 5,00,000, a sum of Rs. 40,000 was to be adjusted towards capital and the balance of Rs. 4,60,000 was to be credited to the loan account of the wife which was to carry interest as may be agreed. The interest on the amount credited to the loan account of the wife of the assessee amounting to Rs. 26,600 was clubbed with the assessee’s income under section 64(1)(iii) of the Income-tax Act, 1961. The Income-tax Officer also clubbed the wife’s share of profits from the firm with the income of the assessee by invoking the same provision. This clubbing of interest income with the income of the assessee was confirmed by the Appellate Assistant Commissioner. He, however, held that the share income from the partnership firm could not be clubbed with the income of the assessee. In the appeal by the Revenue, the Tribunal took the view that though the share of profits from the partnership firm had some connection with the gift made by the assessee to his wife, it did not arise as a result of the gift and since the connection between the income earned and the asset transferred by the assessee to his wife is remote and not proximate, the share of profit earned by the wife by investing the amount gifted to her by her husband in a firm as a partner cannot be included in the income of the husband. The Tribunal further took the view that the income derived by the partnership firm was not entirely due to the investment of the gifted money and several other factors operated for the earning of the income and the entire activities of the firm not only in the year of account in which the partnership deed came into existence but with reference to the subsequent years should also be taken into account. Accordingly the share of the wife in the profits of the partnership was excluded from clubbing the same with the income of the assessee. Arising out of this order of the Tribunal, the above-mentioned two questions have been referred to this court under section 256(1) of the Income-tax Act, 1961.
3. Learned counsel appearing on behalf of the Revenue has vehemently contended that undoubtedly the question as to whether for the purpose of section 80K, the deduction has to be computed with reference to the net amount of dividend or the gross amount of dividend is concluded in so far as this court is concerned by the decision of this court in Madras Auto Service v. ITO [1975] 101 ITR 589. But the learned counsel pointed out that the Supreme Court has now taken a different view in regard to the provisions of section 80M of the Income-tax Act, 1961, and has reversed the earlier decision of the Supreme Court in which the Supreme Court had, with reference to section 80M, also held that for the purpose of section 80M, the deduction must be made with reference to the gross dividend income and not the net dividend income. Therefore, according to the learned counsel, the decision in Madras Auto Service’s case [1975] 101 ITR 589, must be held to be no longer good law. A similar argument advanced on behalf of the Revenue has been considered at length by this court in an elaborate judgment in T.C. No. 1422 of 1977 decided on December 16, 1985 (CIT v. Madras Motor and General Insurance Company Ltd. [1986] 159 ITR 601). This court had referred to the decision of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 in which the Supreme Court has expressly held that Cloth Traders P. Ltd. v. Addl. CIT has not been correctly decided. Notwithstanding this later decision of the Supreme Court, this court has taken the view, and with respect we concur with that view, that the validity of the decision of this court in the Madras Auto Service’s case [1975] 101 ITR 589 does not seem to be affected.
4. In Distributors (Baroda) P. Ltd.’s case [1985] 155 ITR 120, the Supreme Court has referred to the two earlier decisions of this court in CIT v. Madras Motor and General Insurance Co. Ltd. [1975] 99 ITR 243 and Madras Auto Service’s case [1975] 101 ITR 589 and observed as follows with reference to those two decisions and two other decisions, namely, one the decision of the Calcutta High Court in CIT v. Darbhanga Marketing Co. Ltd. [1971] 80 ITR 72 and the other of the Bombay High Court in New Great Insurance Co.’s case [1973] 90 ITR 348 (p. 129 of 155 ITR) :
“We may point out that some doubt was raised on behalf of the Revenue in regard to the correctness of this view taken by the three High Courts, but we do not think it necessary to consider whether this doubt is well founded or not because we are of the view that even if the construction placed on clause (iv) of sub-section (1) of section 99 by the three High Courts were correct, it cannot necessarily lead to the conclusion that a similar construction must also be placed on section 80M which is different in material respects from clause (iv) of sub-section (1) of section 99.”
5. The judgment of the Supreme Court in Distributors (Baroda) P. Ltd.’s case [1985] 155 ITR 120 shows that that was restricted only to the construction of section 80M of the Income-tax Act, 1961, as will be clear from the following observations at page 131 :
“It is section 80M which has to be construed and this section, as we shall presently show, is materially different from section 85A. We cannot construe section 80M in the light of the interpretation placed on its predecessor section by the Bombay High Court particularly when section 80M is admittedly worded differently from its predecessor section. We must construe section 80M on its own language and arrive at its true interpretation according to the plain natural meaning of the words used by the legislature.”
6. The judgment of the Supreme Court must, therefore, be construed as dealing only with the construction of section 80M and does not create any infirmity in the view taken by this court in Madras Auto Service’s case [1975] 101 ITR 589. Apart from that, it must also be pointed out that Parliament has now introduced section 80AA and section 80AB by Finance Act 2 of 1980. Section 80AA is restricted only to “computation of deduction under section 80M” and section 80AB deals with deduction required to be made or allowed under any other section except section 80M included in Chapter VI-A of the Income-tax Act. It has to be noted that while section 80AA was with retrospective effect from April 1, 1968, section 80AB was not given such retrospective operation but came into operation only from April 1, 1981. The deduction permissible under section 80K will, therefore, be governed not by section 80AA but by section 80AB. Parliament must be deemed to be aware of the construction put on section 80K by different courts in this country and yet Parliament did not think it fit to supersede this construction by an express statutory amendment rendering those judgments ineffective retrospectively. Therefore, this court has taken the view that prior to the assessment year 1981-82, Parliament accepted the construction with regard to section 80K placed upon it by different courts. There is, therefore, no justification for not following the earlier decision of this court in Madras Auto Service’s case [1975] 101 ITR 589. Accordingly question No. 1 has to be answered in the affirmative and against the Revenue.
7. In so far as question No. 2 is concerned also, the matter is concluded by a decision of this court in CIT v. Chandappa Iyer [1976] 103 ITR 810. That was a case in which the assessee had gifted a sum of Rs. 60,000 to his wife who entered into a partnership with her son and the amount gifted was contributed as her capital to the firm, and the question was as to whether the share of the wife in the firm should be assessed in the hands of the husband. The Tribunal had held that the wife was a partner in the firm not because of her capital contribution and hence the inclusion of her share in the firm other than the interest on the sum contributed by her as capital was not justified. This view was upheld by this court and it was held that the income earned by the wife was referable to her being a member of the firm in her own right and hence was not includible in the hands of the husband. The present case is on all fours with the earlier decision of this court in Chandappa Iyer’s case [1976] 103 ITR 810. Accordingly the second question must also be answered in the affirmative and against the Revenue.
8. The two questions referred in this case are accordingly answered as follows :
Question No. 1 in the affirmative and against the Revenue.
Question No. 2 in the affirmative and against the Revenue.
9. The assessee will be entitled to his costs. Counsel’s fee Rs. 500.