- (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment years 1971-72 and 1972-73, the following two questions of law have been referred: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee company which carried on business in general insurance and was assessable under Section 44 of the Income-tax Act, 1961, was entitled to relief under Section 80M ?
(2.) "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to relief under Section 80M on the gross dividend without reducing the same by proportionate management expenses attributable to the earning of the dividend income ?" 2. The assessee, an insurance company, received dividend of Rs. 2,24,425 and claimed deduction under Section 80M on the gross dividend income. The Income-tax Officer, however, computed the proportionate managerial expenses of Rs. 1,35,025 as attributable to the earning of that income. He allowed deduction under Section 80M after deducting the proportionate managerial expenses from the gross dividend income. The assessee preferred an appeal to the Appellate Assistant Commissioner who, following the decision of the Calcutta High Court in the case of CIT v. Darbhanga Marketing Co. Ltd. [1971] 80 ITR 72, directed the Income-tax Officer to recompute the deductions under Section 80M with reference to the gross dividend income. The Department, being aggrieved, came up in appeal before the Tribunal.
(3.) It was the contention of the Department before the Tribunal that as the assessee was an insurance company, its income was computed under Section 44 of the Income-tax Act, 1961, in accordance with rules contained in the First Schedule. It was contended that as investment by an insurance company was part of its business activities, the income from dividend was income from business. According to the Department, dividend income lost its character as such after merging in the business income and Section 80M was not applicable in such a case, and that it was only the net income from dividend which was included in the total income of the assessee under Section 80M, and the assessee was entitled to deduction only on that part of the income from dividend which was included in the income of the assessee and not on the gross dividend income.;