R.V. Easwar, Judicial Member - (1.) THESE appeals by the assessee pertain to the assessment years 1986-87 and 1987-88. The assessee is a company dealing in shares. During the accounting years ended 31-3-1986 and 31-3-1987, the company sold shares to the extent of Rs. 43,55,683 and Rs. 1,22,44,509 respectively. In the profit and loss accounts for these years, the opening stock and purchase on shares were brought to the debit side and the sales and closing stock were brought to the credit side of the profit and loss accounts. The net profit as per profit and loss account was Rs. 9,40,871 and Rs. 4,88,874 respectively. The computation of the total income starts from its figures in the assessment orders. The dividends of Rs. 1,68,400 and Rs. 2,83,312 were excluded from the business income and brought to tax under the head 'Other sources'. While so doing, the Income-tax Officer estimated that an amount of Rs. 25,000 for the assessment year 1986-87 and Rs. 50,000 for the assessment year 1987-88 was referable to the earning of the dividends. Therefore, he deducted the estimated expenses from the dividend income and granted deduction under Section 80M of the Act on the balance of the dividend income. Thus, the deduction under Section 80M was reduced.
(2.) The assessee questioned this procedure in appeal before the CIT (Appeals). Though the CIT (Appeals) agreed with the assessee that the dividend income forms a substantial part of the assessee's total income, he took the view that there was justification for allocating a portion of the expenses as relating to the earning of the dividend income. He, however felt the amount estimated by the Income-tax Officer for the two years was very high. He reduced the same to 10% of the gross dividend income. In this view of the matter, he directed the Income-tax Officer to rework the deduction under Section 80M. The assessee is aggrieved and has come in appeal before us. It is pointed out that the shares were held by the assessee as its stock in trade and no expenditure can be allowed towards the earning of the dividend income. Reliance was also placed on the decision of the Calcutta High Court in the case of CIT v. New India Investment Corporation Ltd. [1978] 113 ITR 778. We have carefully perused the orders of the authorities below. We have also gone through the judgment relied upon by the assessee. In that decision, it was held that where an assessee is holding shares and securities as stock-in-trade and dividend was received by the assessee from such shares, then though the dividend is assessable under the head 'Other sources' for the purposes of the Income-tax Act, it was really the 'business income' of the assessee and the expenditure incurred by the assessee should be allowed under that head and cannot be apportioned against income arising under two different heads, namely 'business' and 'dividend'. It was further held that even if the income of the assessee was referable only to dividend, there cannot be any apportionment, as the entire expenditure would be allowable against dividend income. This decision is not of any assistance to the assessee, since it relied to the allowability of the expenses under Section 57 of the Act. The decision of the Calcutta High Court in the case of CIT v. National & Grindlays Bank Ltd. [1993] 202 ITR 559 is directly in favour of the assessee. In that decision, the High Court was concerned with the provisions of Section 80M. The facts were also identical. The Income-tax Officer in that case estimated the proportionate expenditure and interest to earn the dividend income and reduced the dividend income by the amount of estimated expenses. The deduction under Section 80M was allowed only on the net dividend after deduction of the estimated expenses. On these facts, the Calcutta High Court held the relief under Section 80M is admissible on the gross amount of dividend without deducting therefrom the proportionate expenses for earning the dividend. At page 565, Their Lordships referred to the judgment of the Gujarat High Court in the case of CIT v. Cotton Fabrics Ltd. [1981] 131 ITR 99. It was held in that judgment that though the computation of the income of the assessee is made under the head 'Other sources', the dividend income is really the 'business income' of the assessee, having arisen from the assessee's stock-in-trade. If it is really the 'business income' of the assessee, the expenses are to be allowed under Sections 30 to 37 of the Income-tax Act and for this purpose it makes no difference whether the dividend income is assessed under the head 'Business' or under the head 'Other sources'. In this view of the matter, the Gujarat High Court held that it is not possible or permissible to allocate a portion of the expenses against the income from dividend on the ground that such expenses related to the earning of the dividend income. In this view of the matter and notwithstanding the provisions of Section 80AA of the Act, it was held by the Gujarat High Court that the entire amount of dividend earned by the assessee will qualify for the relief under Section 80M of the Act. The Calcutta High Court agreed with the decision of the Gujarat High Court.
(3.) IN view of the aforesaid judgment, it is not possible to uphold the conclusion of the CIT (Appeals) that at least 10 per cent of the gross dividend should be estimated to represent the expenses relating to the earning of dividend. Applying the decision cited above, it must be held that the expenses are expenses for earning the 'business income' of the assessee and cannot be deducted from the dividend income and therefore the corresponding relief under Section 80M cannot also be proportionately reduced. Respectfully following the judgment cited above, we accept the assessee's contention and direct the INcome-tax Officer to grant relief under Section 80M of the Act on the gross dividend of Rs. 1,68,400 and Rs. 2,83,312 respectively for the assessment years 1986-87 and 1987-88. The appeals are allowed.;