JUDGMENT
K.C. Lahoti, J.
1. The Revenue has filed this application under Section 256(2) of the Income-tax Act, 1961 seeking a mandamus to the Tribunal for drawing up a statement of case and referring the following three questions of law for the opinion of the High Court.
1. Whether the ITAT was correct in law in holding that interest paid on loans borrowed by the assessee is not to be apportioned between the income from the business and income from dividends and that this is fully adjustable against business income only.
2. Whether the ITAT was correct in law in holding that for the purpose of deduction under Section 80M, it was the gross dividend income that should be considered, especially in view of the decision of the Supreme Court in the case of the Distributors (Baroda) Pvt Ltd v UOI 155 ITR 126
3. Whether on the facts and in the circumstances of the case, the ITAT was correct in law and on facts in confirming the order of CIT(A).”
2. The above said three questions are referable to assessment year 1987-88. An application under Sub-section (1) of Section 256 filed before the Tribunal was dismissed forming an opinion that a similar question sought to be referred for the assessment year 1985-86 and 1986-87 was also refused to be referred.
3. The relevant facts may be noticed in brief. The assessee is a limited company engaged in business of shares besides having income from dividend. For the assessment year 1987-88 the assessed filed its return showing the income of Rs. 1,17,680/-which was later on revised to Rs. 1,24,960/. The assessee claimed a deduction of Rs. 2,49,632/ under Section 80M of the Act.
4. The assessing officer noticed that the assessee apart from being engaged in the business of share dealing was also deriving income by way of transportation charges, dividends and interest received. The assessee had paid an amount of Rs. 39242/ by way of interest on the loans taken by the assessee. The assessing officer found that the interest paid was partly attributable to the earning of the dividends. The assessing officer held that an amount of Rs. 16383/ out of the interest paid was attributable to the dividend income on pro-rata basis. The assessing officer thus worked out net dividend income for the purpose of calculating deduction under Section 80M of the Act.
5. The assessee preferred an appeal before the CIT (A). On behalf of the assessee it was conceded that there was no objection to working out the dividend income by allocating the expenses on pro rata basis.
6. A further appeal was preferred to ITAT. Before the Tribunal it was contended that the deduction under Section 80M was available to be worked out on the gross dividend without reducing interest paid on borrowings and other expenses. The Tribunal relied on its own earlier order for the assessment year 1981-82 in the case of this very assessee and upheld the plea of the appellant-assessee.
7. The aggrieved Revenue sought for reference which has been refused as already stated hereinabove. The learned Senior Standing Counsel for the Revenue submitted that the view taken by the Tribunal was erroneous and runs in conflict with the law laid down by the Supreme Court in Distributors Baroda (P) Ltd v. UOI, [1985J 155 ITR 120, wherein their Lordships have held that income by way of dividend from a domestic company included in the gross total income would obviously be income computed in accordance with the provisions of the Act i.e. after deducting the interest on money borrowed for earning such income. The counsel further submitted that merely because a reference application for earlier years was refused it would not constitute resjudicata and the Revenue is not debarred from raising the issue for the year of assessment under consideration.
8. The learned counsel for the respondent- assessee submitted that whether any interest was paid for earning dividend income was a question of fact and could not be a question of law. The learned counsel for the Revenue rejoined by submitting that deduction of a part amount of interest paid by the assessee from the amount of gross dividend income by working out on pro rata basis was a point conceded on behalf of the assessee and therefore the factual finding was really in favour of the Revenue which has not been disturbed by the Tribunal. The question suggested by the Revenue was a question of law especially in view of the law laid down by the Supreme Court in the case of Distributor Baroda (P) Ltd (supra).
9. Having heard the counsel for the parties and having perused the order of assessment as also the appellate orders we are of the opinion that the question whether the deduction under Section 80M was permissible to the assessee on gross dividend income or net dividend income by working out the same by reducing the pro-rata interest paid by the assessee from the gross dividend income is certainly a question of law. At this stage, we are not expressing any opinion on the merits of the issue; we are simply forming an opinion (i) whether the question sought to be referred is a question of law, and (ii) whether it arises from the order of the Tribunal. On these two questions we find ourselves in agreement with the submission of the learned Sr Standing Counsel for the Revenue. However, the suggested question No.3 is merely inferential one depending on the answer to question No. 1 and 2.
10. The petition is allowed. The Tribunal shall draw up a statement on the facts of the case and refer questions 1 and 2 out of the three questions set out in para 1 and refer the same for the opinion of the High Court. No order as to costs.