ORDER
R.L. Sangani, Judicial Member
1. This appeal by the department relates to the assessment year 1981-82.
2. The assessee is a company. The gross dividend income was Rs. 6,76,599. Expenses attributable to dividend income were Rs. 38,561. Thus the net dividend income was Rs. 6,38,038. Deduction admissible under Section 80K was Rs. 42,311. The Income-tax Officer deducted Rs. 42,311 from Rs. 6,38,038 under Section 80M(2) of the Act and on the balance of Rs. 5,95,727 he calculated deduction allowable under section 80M(1) being 60 per cent of said amount. This came to Rs. 3,67,436. He allowed this deduction under Section 80M(1) of the Act. The assessee went in appeal before the Commissioner of Income-tax (Appeals) and pleaded that calculation of 60 per cent under Section 80M(1) should have been on Rs. 6,38,038 and not on Rs. 5,95,727 in view of the provisions of Section 80AA of the Act. The assessee relied on an earlier decision of the Tribunal in some other case. The Commissioner of Income-tax (Appeals) accepted the submission of the assessee. The department is now in appeal before us and the only ground raised is that the learned Commissioner of Income-tax (Appeals) had erred in directing the Income-tax Officer to allow relief under Section 80M without deducting relief allowed under Section 80K of the Act.
3. We have heard the parties. We have examined the provisions of Sections 80M(1), 80M(2), 80K and 80AA of the Act. Sub-Section (1) of Section 80M so far as relevant for our purpose, lays down that when gross total income of a domestic company includes any income by way of dividends from a domestic company, there shall, in accordance with and subject to the provisions of Section 80M, be allowed, in computing the total income of the company, a deduction from such income by way of dividends, an amount equal to sixty per cent of such income. Sub-Section (2) of Section 80M provides that where a company to which Section 80M applies is entitled also to the deduction under Section 80K, the deduction Under Sub-Section (1) shall be allowed in respect of income by way of dividends referred to therein as reduced by the amount of deduction under Section 80K.
4. The view taken by the Supreme Court at the earlier stage was that the deduction Under Sub-Section (1) of Section 80M was to be calculated on gross dividend income and not on net dividend income vide Cloth Traders (P.) Ltd. v. Addl CIT [1979] 118 ITR 243 (SC). However, this view was subsequently rejected by the Supreme Court in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120 and it was held that on true interpretation of the words of Sub-Section (1) of Section 80M, deduction was allowable on net dividends and not gross dividends. By net dividends, what is meant is gross dividends as reduced by expenses for earning said dividends.
5. The decision of the Supreme Court in Cloth Traders (P.) Ltd.’s case (supra) was not accepted by the department. Hence Section 80AA was inserted in the Act by the Finance (No. 2) Act, 1980 and its operation was made retrospective with effect from 1-4-1968. This section laid down that 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 dividends as computed in accordance with the provisions of the Act (before making any deduction under Chapter VI) and not with reference to gross amount of such dividends.
6. A plain reading of Section 80AA indicates that object of its insertion by the Finance (No. 2) Act, 1980 was to nullify the effect of the earlier decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. (supra) wherein it was held that deduction under Section 80M(1) was to be computed with reference to gross amount of dividends and not with reference to net amount of dividends. What was made clear by Section. 80AA was that deduction under Section 80M(1) was to be computed with reference to net amount of dividends and not gross amount of dividends.
7. Now, net amount of dividend would be the income by way of dividends as computed in accordance with the provisions of the Act. In computing income by way of dividends, two types of deduction are to be made from the gross amount of dividends. The first is deduction allowable under the provisions of the Act excluding the provisions under Chapter VIA. The other is deduction under Chapter VIA. If the expression “income by way of dividends as computed in accordance with the provisions of the Act”, were to be used, the amount would be net amount after all deductions allowed under the Act including Chapter VIA. However, the intention was not to grant relief on the income as computed in accordance with the provisions of the Act including Chapter VIA. The intention was to grant relief on the income by way of dividends as computed in accordance with all the provisions of the Act excluding Chapter VIA. Hence the words used in Section 80AA are “the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter)”.
8. The learned representative of the assessee relies on the words “before making any deduction under this Chapter” in Section 80AA to contend that in computing deduction under Section 80M(1), no deduction of amount representing deduction allowed separately as deduction under Section 80K should be made from the income by way of dividends as computed in accordance with the Act in spite of the fact that in Sub-Section (2) of Section 80M there is an express provision to the following effect-
(2) When a company to which this section applies is entitled also to the deduction under Section 80K, the deduction under subsection (1) shall be allowed in respect of income by way of dividends referred to therein as reduced by the amount of deduction under Section 80K.
In other words, submission is that provisions of Sub-Section (2) of Section 80M have been rendered nugatory by the words “before making any deductions under this Chapter” in Section 80AA.
9. We are unable to accept this submission. Deduction is required to be made Under Sub-Section (1) of Section 80M. Section 80AA prescribes the manner in which the amount on which deduction Under Sub-Section (1) of Section 80M is to be calculated should be arrived at. Consequently, words “notwithstanding anything contained in that section” mean notwithstanding anything contained in Sub-Section (1). The words in Sub-Section (1) of Section 80M are “income by way of dividends”.
These words were capable of giving rise to two interpretations vis. gross amount of dividends or net amount of dividends. The Supreme Court in the case of Cloth Traders (P.) Ltd. (supra) interpreted those words as indicating gross dividends. The Parliament wanted to make it clear that those words meant “net dividends”. In order to clarify this limited aspect Section 80AA was inserted by the Finance (No. 2) Act, 1980, with retrospective effect. Subsequently, the Supreme Court itself in the case of Distributors (Baroda) (P.) Ltd. (supra) interpreted words in Sub-Section (1) of Section 80M as meaning net amount of dividends. There was no dispute even when the case of Cloth Traders (P.) Ltd. (supra) was decided that, deduction contemplated by Sub-Section (2) of Section 80M should be made from income by way of dividends in order to arrive at the amount of admissible deduction. SubSection (2) of Section 80M was an independent provision about which there was never any dispute. Consequently, there could not have been any intention to nullify the effect of said Sub-Section of Section 80AA contains clarificatory provision regarding Section 80M and clarification that was needed was only in respect of provisions in Sub-Section (1). Consequently, provisions of Sub-Section (2) of Section 80M are in no way affected by the provisions of Section 80AA. We are unable to accept the submission of the asses-see that provisions of Sub-Section (2) of Section 80M stand completely nullified by provisions in Section 80AA.
10. We may observe here that anomalous result would follow if the interpretation put forth by the representative of the assessee is accepted because in cases where entire dividend income falls in the category of dividend income referred in Section 80K, the assessee would get deduction of entire dividend income under Section 80K and an additional deduction of 60 per cent of the same dividend income as computed in accordance with the provisions of the Act. The result would be that total deduction would exceed the dividend income included in the total income. This result could not have been intended. An interpretation which leads to such a result cannot be accepted. The language of Section 80AA bears the interpretation which we have put and as such said interpretation should be preferred to one canvassed by the representative of the assessee.
11. The learned representative of the assessee has relied on an unreported old decision of the Tribunal in which it was held that provisions of Sub-Section (2) of Section 80M should be ignored in view of the provisions in Section 80AA. If this had been the only decision of the Tribunal on this point we would have been bound by it despite the contrary view which commends itself to us. However, we find that view similar to one which we have taken has been taken by the Delhi Bench of the Tribunal in Madan Mohan Lall Shriram (P.) Ltd. v. IAC [1985] 12 ITD 21 in a subsequent decision. We are in agreement with the view expressed therein. We accordingly set aside the direction given by the Commissioner of Income-tax (Appeals) and restore the computation made by the Income-tax Officer.
12. The appeal is allowed.