Full Judgment Text
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PETITIONER:
CLOTH TRADERS (P) LTD., ETC.
Vs.
RESPONDENT:
ADDL. COMMR. OF INCOME TAX, GUJARAT-I,ETC.
DATE OF JUDGMENT04/05/1979
BENCH:
BHAGWATI, P.N.
BENCH:
BHAGWATI, P.N.
DESAI, D.A.
KOSHAL, A.D.
CITATION:
1979 AIR 1691 1979 SCR (3) 984
1979 SCC (3) 538
CITATOR INFO :
O 1985 SC1585 (1,TO,8,10,12,13,16,TO,18,19,2
RF 1992 SC 803 (21)
ACT:
Income Tax Act, 1961 (43 of 1961)-Sections 85A & 80M-
Whether rebate of imcome tax admissible on the amount of
divident received by the assessee company from an Indian
company or whether confined only to divident income as
computed under the Act after making the deduction on the
interest paid on borrowings for making the investments.
HEADNOTE:
The earliest provision granting exemption of super-tax
in respect of intercorporate dividends was made as far back
as 9th December, 1933 in a Notification issued by the
Governor General in Council and it provided as follows:
"The Governor General in Council is pleased to exempt
from super-tax.
(i) so much of the income of any investment trust
company as is derived from dividend paid by any other
company which has paid or will pay super-tax in respect of
the profits, out of which such dividends are paid."
This Notification was followed by a provision of a
similar kind granting exemption from super-tax in respect of
certain specified categories of inter corporate dividends
introduced as s. 56A in the Indian Income Tax Act, 1922.
When this Act was repealed and the present Act enacted with
effect from 1st April, 1962 s. 99, sub-section (1) was
introduced in the present Act exempting certain categories
of income from super-tax and one of such categories was that
set out in cl. (iv). Section 99, sub-section (i) cl. (iv)
read as follows:
"99(1) Super Tax shall not be payable by any
assessee in respect of the following amounts which are
included in his total income-
(iv) if the assessee is a company, any dividend
received by it from an Indian Company, subject to the
provisions contained in the Fifth Schedule."
This provision continued to be in force upto 31st
March, 1965 subject to a minor inconsequential amendment
made by Finance Act, 1964, but by an amendment made by
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Finance Act 10 of 1965, the provision was omitted and
Chapter VI-A and s. 85A were introduced in the present Act
with effect from 1st April, 1965. Chapter VIA comprised ss.
80A to 80D providing for certain specified deductions to be
made in computing total income while s. 85A provided for
deduction of tax on inter-corporate dividends.
The original Chapter VIA and certain other sections
including s. 85A were deleted from the present Act by
Finance (No.2) Act, 1967 with effect from 1st April, 1968
and replaced by a new Chapter VIA which contains a
fasciculus of sections from s. 80A to s. 80VV. Section 80A,
sub-section (1) provides that
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in computing the total income of an assessee there shall be
allowed from his gross total income, in accordance with and
subject to the provisions of Chapter VIA, the deductions
specified in s. 80C to s. 80VV and sub-section (2) of that
section imposes a ceiling on such deductions by enacting
that the aggregate amount of such deductions shall not, in
any case, exceed the gross total income of the assessee. The
expression "gross total income" is defined in cl. (5) of s.
80B to mean the total income computed in accordance with the
provisions of the Act before making any deduction under
Chapter VIA or under s. 280. O Section 80M is the new
section which corresponds to the repealed s. 85A and it
provides for deduction in respect of certain categories of
inter-corporate dividends. There were several amendments
made subsequently in this section but they relate primarily
to the percentage of the income to be allowed as a
deduction.
One amendment that was made by Finance Act, 1968, was
that the words "received by it" occurring in sub-section (1)
of s. 80M were omitted with effect from 1st April, 1968. The
Finance Act of 1968 also provided in sub-section (2) and (3)
of s. 31 that notwithstanding the omission of s. 99, sub-
section (1), cl. (iv) and s. 85A, the provisions of these
sections shall have and be deemed always to have effect,
subject to the modification that the words "received by it"
in the opening part of these sections were deleted. The net
effect of these amendments was that the words "received by
it" following upon the words "dividend" were omitted with
retrospective effect from s. 99 sub-section (1), cl. (iv)
and s. 85A and s. 80M was to be read as if the words
"received by it" were not in the opening part of that
section.
The Gujarat High Court having taken a view against the
assessees (appellants), appeals were preferred against the
judgment relating to the assessment years 1965-66 and 1966-
67 when s. 85A was in force.
In view of the conflict of opinion between the view of
the Gujarat High Court, and the view taken by the Bombay,
Madras and Calcutta High Courts, the Income Tax Appellate
Tribunal, referred similar matters under s. 257 of the Act
to this Court.
In the appeals and references before this Court, the
question was whether on a true interpretation of Sections
85A and 80M of the Income Tax Act, 1961, rebate of income
tax is admissible on the actual amount of dividend received
by an assessee, being a company, from an Indian company, or
it is confined only to the dividend income as computed in
accordance with the provisions of the Act, that is after
making the deductions specified in s. 57 including
deductions of the interest paid on borrowings for making the
investments.
Allowing the appeals and answering the questions
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referred by the Tribunal in favour of the assessees:
^
HELD: 1. The assessees are entitled to relief under s.
85A for the assessment years 1965-66, 1966-67 and 1967-68
and under s. 80M for the assessment years 1968-69 and 1969-
70 in respect of the entire amount of dividend income
without deductions of interest paid on borrowings for
acquiring the shares.
[1006 B]
2. Sections 85A and 80M were not written by the
Legislature on a clean slate, nor were they the outcome of
any new or innovative exercise of legislative judgment, but
they were preceded by similar provisions granting rebate of
super-tax or income tax on inter-corporate dividends and
these provisions as
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interpreted by the Courts throw light on the true meaning
and content on ss. 85A and 80M. [99 F].
3. It is clear from the Notes on cl. 31 which
subsequently became s. 31 of the Finance Act, 1968, that the
amendments retrospectively deleting the words "received by
it" from the opening part of s. 99, sub-section (1), cl.
(iv) and s. 85A were made with a view to widening the scope
of the relief granted under these sections, as it was felt
that the presence of these words might render these sections
inapplicable in cases where the shares to which the dividend
relates are registered in the name of a person other than
the assessee and the dividend is, therefore, received
strictly speaking, by such other person and not by the
assessee. The object of introducing these amendments was to
widen the scope of the tax relief provided under s. 99, sub-
section (1), cl. (iv) and s. 85A by making it available to
the assessee even though the shares to which the dividend
related were registered in the name of a person other than
the assessee and not to narrow it down by restricting it to
net dividend computed after making deductions allowable
under the provisions of the Act.
[998-E-G].
4. Even after the deletion of the words "received by
it", the expressions "any dividend from an Indian company"
and "any income by way of dividends from an Indian company"
occurring in the opening part of these sections continue to
mean the same thing, namely, the full amount of dividend
derived or obtained from an Indian company. The decisions of
the Bombay, Calcutta and Madras High Courts interpreting
these sections cannot, therefore, be said to be displaced by
the retrospective omission of the words "received by it."
[998 H-999 B].
5. It is clear on a plain natural construction of the
language of s. 99 sub-section (1), cl. (iv), that it grants
exemption from super-tax in respect of "any dividend from an
Indian company" and these last mentioned words cannot mean
anything else than the full amount of dividend derived from
an Indian company. They cannot obviously mean dividend from
an Indian company minus any expenses incurred in earning it,
or less any other deduction allowable under the Act. [999 C-
D].
6. The words, "the following amounts which are included
in his total income", in the opening part of s. 99, sub-
section (1) do not have any limitative effect so as to
restrict "dividend from an Indian company" in respect of
which exemption from super-tax is granted to dividend
computed in accordance with the provisions of the Act and
forming part of the total income. The exemption from super-
tax granted under s. 99 sub-section (1) is not only in
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respect of "dividend from an Indian company" referred to in
cl. (iv), but also in respect of other items of income
mentioned in clauses (i) to (iii) and (v).
[999 E].
7. The legislature clearly wanted to provide that the
different categories of income mentioned in clauses (i) to
(v) should be eligible for exemption from super-tax, only if
they are included in the total income and the Legislature
could have made such a provision separately in respect of
each category of income in the opening part of s.99 sub-
section (1), but instead of adopting such legislative
device, which would have been both inapt and inelegant, the
Legislature chose to use an omnibus expression, "the
following amounts which are included in his total income",
which would cover all the different items of income dealt
with in clauses (i) to (v). [999 F-G].
987
8. It would, therefore, seem that though the exemption
from super-tax granted under clause (iv) of sub-section (i)
of s. 99 would be applicable only if the particular item of
income namely, "dividend from an Indian company’ is included
in total income, what is exempted is "dividend from an
Indian company" which can only mean the full amount of
dividend received from an Indian company. [1000 B].
Commissioner of Income Tax, Kerala v. South India Bank
Ltd., 59 ITR 763; referred to.
9. Section 85A in its opening part by using the words
"where the total income of an asessee..... includes any
income by way of dividends, from an Indian Company", lays
down a condition for its applicability, which is that the
total income must include income by way of divdend from an
Indian company. It is only if this category of income forms
a component part of total income that the provisions enacted
in the section is attracted and the assessee becomes
entitled to rebate on income calculated with reference to
the "income so incduded". [1001 F].
10. The meaning of the section would become clear if
the words "income by way of dividends from an Indian
company", are substituted for the words "income so
included." Then it would be obvious that the rebate on
income tax is to be calculated by applying the average rate
of tax to the "income by way of dividends from an Indian
company" which can only mean the full amount of dividend
received from an Indian company. [1002 B-C].
Commissioner of Income Tax v. Indian Guarantee &
General Insurance Co Ltd., 903 ITR 348 approved.
11. There is a close similarity between s. 85A and s.
80M so far as the opening part of the two sections is
concerned, but in the latter part, there is a difference
inasmuch as s. 85A provides for calculation of rebate of
income tax on "income so included", while s. 80M provides
for deduction of the whole or part of "such income by way of
dividends". The language employed by the legislature in s.
80M leaves no doubt that the deduction, whether whole or 60
per cent, is to be calculated with reference to the entire
amount of income by way of dividends. [1002 D-E].
12. Section 80M occurs in Chapter VIA which is headed
"Deduction to be made in computing total income". The
marginal note to the section, indicates, that it provides
for deduction in respect of certain inter-corporate
dividends. [1002 F, 1003 C].
13. Section 80A sub-section (1) provides that in
computing the total income of an assessee, the deductions
specified in s. 80C to 80VV shall be made from his gross
total income, and gross total income, according to the
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definition in s. 80B, cl. (5) means the total income
computed in accordance with the provisions of the Act before
making any deduction under Chapter VIA or under s. 280.O.
What s. 80A, sub-section (1) requires is that first the
total income of the assessee must be computed in accordance
with the provisions of the Act without taking into account
the deductions required to be made under Chapter VIA or
under s. 280.O. and then from the gross total income thus
computed, the deductions specified in s. 80C to 80VV must be
made in order to arrive at the total income. But sub-section
(2) of s. 80A provides that the aggregate
988
amount of the deductions required to be made under Chapter
VIA shall not exceed the gross total income of the assessee
so that the total income arrived at after making the
deductions specified in s. 80C to 80VV from the gross total
income can never be a minus or negative figure. This
provision imposing a ceiling on the deductions which may be
made under sections 80C to 80VV clearly postulates that in a
given case the aggregate amount of these deductions may
exceed the gross total income. [1002 G-1003 B].
14. The words "where the gross total income of an
assessee....includes any income by way of dividends from a
domestic company" are intended only to provide that a
particular category of income, namely, income by way of
dividends from a domestic company should form a component
part of the gross total income. These words merely prescribe
a condition for the applicability of the section namely,
that the gross total income must include the category of
income described by the words "Income by way of dividends
from a domestic company". If the gross total income includes
this particular category of income, whatever be the quantum
of such income included, the condition would be satisfied
and the assessee would be eligible for deduction of the
whole or 60 per cent of "such income". [1003 F-G].
15. The words "such income" as a matter of plain
grammar must be substituted by the words "income by way of
dividends from a domestic company", in order to arrive at a
proper construction of the section and if that is done, it
would be obvious that the deduction is to be in respect of
the whole or 60 per cent of the "income by way of dividends
from a domestic company" which can only mean the full amount
of dividends received from a domestic company. The deduction
permissible under the section is, therefore, to be
calculated with reference to the full amount of dividends
received from a domestic company and not with reference to
the dividend income as computed in accordance with the
provisions of the Act, that is, after making deductions
provided under the Act. [1004 B-C].
16. If the Legislature was of the view that the
deduction should not be in respect of the full amount of
dividends received from a domestic company, but it should
only be in respect of the amount of dividend computed after
deducting allowable expenditure, the legislature would have
undoubtedly amended s. 80M, sub-section (1) and made its
intention quite clear. [1005 C].
17. The legislature in fact amended s. 80M several
times in respect of other matters subsequent to the decision
of the Bombay High Court in the New Great Insurance Cols
case and the decision of the Madras High Court in the Madras
Auto Service’s case, but it did not choose to amend the
lannguage employed in s. 80M, sub-section (1) for the
purpose of overriding the interpretation placed by the
courts. This indicates legislative recognition of the
interpretation placed by the Courts on s. 85A and s. 80M.
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[1005 D-E].
18. Section 80K read with rule 20, s. 80MM, s. 80N and
s. 80.O which occur in the same group of sections as s. 80M,
use the same legislative formula as s. 80M and open with the
identical words "where the gross total income of an
assessee-includes any income." It appears on a plain reading
of these sections that the deduction admissible is in
respect of the whole of the income
989
received by the assessee and not in respect of the income
computed after making the deductions provided under the Act.
[1005 F-G]
Madras Auto Service v. Income Tax Officer, 101 ITR 589;
approved.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 117-118
of 1975.
(From the Judgment and Order dated 28-11-1973 of the
Gujarat High Court in I.T.R. No. 21 of 1972).
TAX REFERENCE NO. 2 OF 1975
(From the Tax Reference made by the Income Tax Tribunal
Ahmedabad against its order dated 7-7-1973 in I.T.A. No. 643
(AHD)/71-72).
TAX REFERENCE NOS. 6-9 OF 1975
(From the Tax Reference made by the Income Tax Tribunal
Ahmedabad in R. A. Nos. 103-106/AHD/74-75 arising out of
I.T.A. Nos. 946-949/AHD/72-73 for Assessing years 1966-67 to
1969-70).
TAX REFERENCE NO. 16 OF 1975
(From the Tax Reference made by the Income Tax
Tribunal, Ahmedabad in Reference Application No. 62/AHD/74-
75 arising out of I.T.A. No. 580/AHD/72-73).
TAX REFERENCE NO. 18 OF 1975
(From the Tax Reference made by the Income Tax
Appellate Tribunal, Ahmedabad Bench in R.A. No. 271/AHD/74-
75 arising out of I.T.A. No. 2431/AHD/72-73 decided on 29-7-
74 assessment year 1969-70).
CIVIL APPEAL NOS. 117-118/75
For the Appellant : Mr. B. Sen, I. N. Shroff and H. S.
Parihar.
For the Respondent : S. N. Kacker, Sol. Gen., B. B.
Ahuja and Miss A. Subhashini.
For the Interveners : (1) Ramakrishna Sons Ltd.: S. P.
Mehta, T. A. Ramachandran and M/s. J. Ramachandran, (2) M/s.
Jardine Henderson Ltd.: Dr. Debi Pal and D. N. Gupta, (3)
Indore Exporting & Importing Co. Ltd. : Dr. Debi Pal, Miss
Bina Gupta and Mr. Praveen Kumar, and (4) Ketu Investments
(P) Ltd. : S. T. Desai, Mrs. A. K. Verma and J. B.
Dadachanji, K. J. John and Shri Narain.
TAX REFERENCE NO. 2 OF 1975
For the Appellant : S. N. Kacker, Sol. Genl, S. P.
Nayar and Miss A. Subhashini.
990
For the Respondent : F. S. Nariman, I. N. Shroff, and
H. S. Parihar.
For the Interveners : (1) M/s. Jardine Henderson Ltd.:
Dr. Debi Pal and D. N. Gupta, (2) Indore Exporting &
Importing Co. Ltd. : Dr. Debi Pal, Miss Bina Gupta and Mr.
Praveen Kumar, and (3) M/s. Ajay Investment Co. : Praveen
Kumar and Miss Bina Gupta.
TAX REFERENCE NOS. 6-9 OF 1975
For the Appellant : F. S. Nariman, I. N. Shroff, and H.
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S. Parihar.
For the Respondent : S. N. Kacker, Solicitor General,
S. P. Nayar and Miss A. Subhashini.
For the Intervener Central India Industries : Dr. Debi
Pal, Miss Bina Gupta and Mr. Praveen Kumar.
TAX REFERENCE No. 16 OF 1975
For the Appellant : Mrs. A. K. Verma and J. B.
Dadachanji, K. J. John and Shri Narain.
For the Respondent : S. N. Kacker, Sol. Genl. and Miss
A. Subhashini.
For the Interveners-Central India Industries : Dr. Debi
Pal, Miss Bina Gupta and Mr. Praveen Kumar.
TAX REFERENCE NO. 18 OF 1975
For the Appellant : S. P. Mehta, K. C. Patel, Shri
Narain, J. B. Dadachanji, Mrs. A. K. Verma and Miss Arti
Mehta.
For the Respondent : Miss A. Subhashini.
For the Intervener-Central India Industries Ltd : Dr.
Debi Pal, Miss Bina Gupta and Mr. Praveen Kumar.
The Judgment of the Court was delivered by
BHAGWATI, J.-This group of appeals and References
raises a short question of construction of sections 85A and
80M of the Income Tax Act, 1961 (hereinafter referred to as
the present Act). The question is whether on a true
interpretation of these sections, rebate of income tax is
admissible on the actual amount of divident received by an
assessee, being a company, from an Indian company, or it is
confined only to the dividend income as computed in
accordance with the provisions of the Act, that is, after
making the deductions specified in section 57 including
deduction of the interest paid on borrowings for making the
investments. The Gujarat High Court has taken a view against
the assessee while a different view has been taken by the
991
Bombay, Madras and Calcutta High Courts. The appeals are
preferred by the assessee, namely, Cloth Traders (P) Ltd.
against the judgment of the Gujarat High Court and they
relate to the assessment years 1965-66 and 1966-67 when
section 85A was in force. The Reference before us have been
made directly by the Tribunal under section 257 of the Act
in view of the conflict of opinion amongst the High Courts.
Out of these References, three are at the instance of the
assessees, namely, C. V. Mehta (P) Ltd., M/s. Distributors
(Baroda) Pvt. Ltd., and H. K. (Investment) Co. Pvt. Ltd. and
one is at the instance of the Commissioner of Income-tax,
Gujarat. They relate to different assessment years:
assessment year 1969-70 in case of C. V. Mehta (P) Ltd. and
Distributors (Baroda) Pvt. Ltd. and assessment years 1965-66
to 1969-70 in case of H. K. (Investment) Co. Pvt. Ltd. The
interpretation of both sections 85A and 80M is involved in
these References since section 85A with some minor
alterations made in it from time to time was in force during
the assessment years 1965-66 to 1967-68 and section 80M
followed upon it with effect from the commencement of the
assessment year 1968-69 as part of Chapter IVA. Though the
language of sections 85A and 80M is almost identical, there
are some verbal dissimilarities, but as we shall presently
point out, they do not make any difference in interpretation
so far as the present question is concerned.
We are concerned in these appeals and References only
with the interpretation of sections 85A and 80M but in order
to arrive at the true interpretation of these sections, it
is necessary to refer briefly to the history of the
legislation enacted in these sections, since these sections
were not written by the Legislature on a clean slate, nor
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were they the out come of any new or innovative exercise of
legislative judgment, but they were preceded by similar
provisions granting rebate of super tax or income tax on
inter-corporate dividends and these provisions as
interpreted by the courts throw light on the true meaning
and content of sections 85A and 80M.
The earliest provision granting exemption of super-tax
in respect of inter-corporate dividends was made as far back
as 9th December, 1933 in a Notification issued by the
Governor General in Council and it provided as follows:
"The Governor General in Council is pleased to
exempt from super-tax-
(i) so much of the income of any investment trust
company as is derived from dividend paid by any other
company
992
which has paid or will pay super-tax in respect of the
profits out of which such dividends are paid."
This provision came up for consideration before a Division
Bench of the High Court of Bombay in Commissioner of Income
Tax v. Industrial Investment Trust Co. Ltd.(1) and the
question was whether the dividend income exempted from
super-tax was the entire income by way of dividend received
by an investment trust company or the dividend income as
computed in accordance with the provisions of the Act, that
is, after deducting the expenses incurred in earning it. The
High Court of Bombay held that the "dividend income which
was exempted under the notification would be the dividend
income received by the assessee and not the said income less
any further amounts", because "the notification must be
regarded as a self-contained one and not controlled by any
other provisions of the Act" and there was "no warrant to
construe the word ’Income’ in the notification as total
income, nor to qualify the dividend income specified in the
said notification as the dividend income computed under
section 12 of the Act". It was thus held that the entire
amount of dividend received by an investment trust company
would be exempt from super-tax and not the amount of
dividend minus the expenses incurred in earning it. This
Notification was followed by a provision of a similar kind
granting exemption from super-tax in respect of certain
specified categories of inter-corporate dividends introduced
as section 56A in the Indian Income-tax Act, 1922
(hereinafter referred to as the Old Act) by Finance Act,
1953. It is not necessary to make any detailed reference to
this provision since there is no decided case which has
considered this provision or expressed an opinion upon it.
When the old Act was repealed and the present Act
enacted with effect from 1st April, 1962, section 99, sub-
section (1) was introduced in the present Act exempting
certain categories of income from super-tax and one of such
categories was that set out in clause (iv). Section 99, sub-
section (1), clause (iv) read as follows:
"99(1) Super-tax shall not payable by an assessee in
respect of the following amounts which are included in his
total income.
(iv) if the assessee is a company, any dividend
received by it from an Indian company, subject to the
provisions contained in the Fifth Schedule".
993
This provision continued to be in force upto 31st
March, 1965 subject to a minor inconsequential amendment
made by Finance Act, 1964. Now a question arose before the
High Court of Bombay in Commissioner of Income Tax v. Indian
Guarantee & General Insurance Co. Ltd.(1) whether the
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exemption granted under this provision was in regard to the
entire amount of dividend received by the assessee from an
Indian company or it was limited to the dividend income
computed in accordance with the provisions of the Act and
forming part of total income. The argument of the assessee
based on the words ’any dividend received by it from an
Indian company’ was that it was the full amount of dividend
received by the assessee which was exempt from super-tax,
while the Revenue relying on the words "amounts which are
included in his total income" contended that it was only the
amount of dividend computed in accordance with the
provisions of the Act and forming part of total income which
was entitled to the benefit of exemption under this
provision. The High Court accepted the contention of the
assessee and pointed out that on a plain reading of sub-
clause (iv) of sub-section (1) of section 99 it was clear
that the exemption from super-tax was granted in respect of
"any dividend received by it from an Indian company" and
these last words, according to their plain grammatical
construction, could mean only one thing, namely, the entire
amount of dividend received by the assessee from an Indian
company and nothing less. The High Court emphasised the word
"received" following immediately upon the word ’dividend’
and observed that the use of this word also showed that the
exemption was in regard to the dividend received and not in
regard to the "dividend received minus the expenses". The
High Court pointed out that the words "amounts which are
included in his total income" in the opening part of section
99 sub-section (1) did not have any limitative effect, but
they were used merely as a convenient mode of describing the
different items of income set out in clauses (i) to (v) of
that sub-section. Clauses (i) to (v) referred to different
items of income which were sought to be exempted from super-
tax under subsection (1) of section 99 and it was only if
these items of income were included in the total income of
the assessee that the question of exemption from super-tax
would arise and hence the legislature used the general words
"amounts which are included in his total income" in the
opening part of sub-section (1) of section 99 as an omnibus
formula to cover these different items. These words
according to the High Court were descriptive of the items of
income included in the computation of the total income and
were not indicative of the quantum
994
of the amounts of the different items included in such
computation and they did not, therefore, have the effect of
cutting down the plain natural meaning of the words "any
dividend received by it from an Indian company" which
represented the quantum of income in respect of which
exemption from super-tax was granted under the section. This
view, observed the High Court, not only followed logically
and inevitably from the words used in the statutory
provision, but was also in consonance with the object of the
legislation, which was to prevent double taxation of the
amount of dividend with the view to encouraging investment
by companies in the share capital of other companies. It may
be pointed out that the same view in regard to the
construction of clause (iv) of sub-section (1) of section 99
was taken by the Calcutta High Court in Commissioner of
Income-tax v. Darbhanga Marketing Co.(1) and it was held
that under that provision, exemption from super-tax was
granted to an assessee in respect of "any dividend received
by it" which meant the full amount of dividend received by
the assessee and not "dividend received minus the amount of
interest on monies borrowed for earning the same". The
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Calcutta High Court observed: "The expressions ’which are
included in his total income’ in sub-section (1) of section
99 and ’incomes forming part of total income’ in the heading
are descriptive of the items included in the computation of
the total income and not indicative of the quantum of the
amounts included under the different items in the
computation of total income. Such a construction of these
expressions would be in harmony wit the obvious meaning of
the expression ’dividend received’". The decision of the
Bombay High Court in Industrial Investment Trust Co’s case
(supra) was strongly relied upon by the Calcutta High Court
in coming to this decision and the view taken by the
Calcutta High Court was noted with approval by the Bombay
High Court in New Great Insurace Co’s case (supra). The same
view was also taken by the Madras High Court in Commissioner
of Income-tax v. Madras Motor and General Insurance Co.
Ltd.(2) and it was approved in later decision of the same
Court in Madras Auto Service v. Income-tax Officer (3). It
would, thus, be seen that notwithstanding the words "amounts
which are included in his total income" in the opening part
of sub-section (1) of section 99, all the three High Courts,
namely, Bombay, Calcutta and Madras took the view that the
entire amount of dividend received by the assessee from an
Indian Company was exempt from
995
super-tax and the exemption was not limited to dividend
income computed in accordance with the provisions of the Act
and forming part of the total income.
Section 99, sub-section (1) however remained in force
only upto the close of the assessment year 1964-65 and by an
amendment made by Finance Act 10 of 1965, section 99, sub-
section (1) was omitted and Chapter VI-A and section 85A
were introduced in the present Act with effect from 1st
April, 1965. Chapter VI-A comprised sections 80A and 80D
providing for certain specified deductions to be made in
computing total income while section 85A, in so far as
material, provides as follows:
"85A. DEDUCTION OF TAX ON INTER-CORPORATE
DIVIDENDS:-Where the total income of an assessee being a
company includes any income by way of dividends received by
it from an Indian company or a company which has made the
prescribed arrangements for the declaration and payment of
dividends (including dividends on preference shares) within
India, the assessee shall be entitled to a deduction from
the income-tax with which it is chargeable on its total
income for any assessment year of so much of the amount of
income-tax calculated at the average rate of income-tax on
the income so included (other than any such income on which
no income-tax is payable under the provisions of this Act)
as exceeds an amount of twenty-five per cent thereon;.. "
There were some amendments made in section 85A by Finance
Act, 1966 but they are not material for our present purpose
and we need not refer to them. Section 85A also came to be
considered by the Bombay High Court in the New Great
Insurance Co’s case (supra) because two of the assessment
years with which the Bombay High Court was concerned in that
case were assessment years 1965-66 and 1966-67 when section
85A was in force. The Bombay High Court pointed out that
except for some minor verbal changes section 85A was almost
in the same terms as section 99, sub-section (1), clause
(iv), the only real differences being that the exemption
granted under section 99, sub-section (1), clause (iv) was
in regerd to super-tax, while the deduction allowed under
section 85A was in regard to income-tax. The same
interpretation was, therefore, placed on section 85A as in
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the case of section 99 sub-section (1), clause (iv) and it
was held that under section 85A, the assessee would be
entitled to de-
996
duction of income-tax in respect of the whole of the
dividend received from an Indian company. The expression
"where the total income ........ includes any income by way
of dividends" in the opening part of section 85A was
construed as referring to the category of income by way of
dividends received from an Indian company so that if this
particular category of income is included in the computation
of total income, the assessee would be entitled to a
deduction of so much of the amount of income tax calculated
at the average rate of incometax on the "income so included"
as exceeds an amount of twenty-five per cent of such income.
The words "income so included" were read to mean not the
quantum of the "income by way of dividends" included in the
total income but the income falling within the category of
"income by way of dividends from an Indian company" included
in the total income. Thus the view taken by the Bombay High
Court was that under Section 85A also, the deduction
admissible was in respect of the entire dividend received by
the assessee from an Indian company and not in respect of
dividend income minus deductions allowable under the
provisions of the Act in computing the total income.
The original Chapter VI-A and certain other sections
including section 85A were deleted from the present Act by
Finance (No. 2) Act, 1967 with effect from 1st April, 1968
and replaced by a new Chapter VI-A which contains a
fasciculous of sections from section 80A to section 80VV.
Section 80A, sub-section (1) provides that in computing the
total income of an assessee there shall be allowed from his
gross total income, in accordance with and subject to the
provisions of Chapter VI-A, the deduction specified in
section 80C to section 80VV and sub-section (2) of that
section imposes a ceiling on such deductions by enacting
that the aggregate amount of such deductions shall not, in
any case, exceed the gross total income of the assessee. The
expression "gross total income" is defined in clause (5) of
section 80B to mean the total income computed in accordance
with the provisions of the Act before making any deduction
under Chapter VI-A or under section 280.O. Section 80M is
the new section which corresponds to the repealed section
85A and it provides for deduction in respect of certain
categories of inter-corporate dividends. It is the
interpretation of this section which constitutes the subject
matter of controversy between the parties and hence it would
be desirable to set it out in extenso. This section has
undergone changes from time to time since the date of its
enactment and we will, therefore, reproduce it in the form
in which it was during the assessment years 1968-69 and
1969-70 being the assessment years with which we are
concerned in these cases:
997
"80 M. DEDUCTION IN RESPECT OF CERTAIN INTER-
CORPORATE DIVIDENDS:
(1) Where the gross total income of an assessee being a
company includes any income by way of dividends received by
it from a domestic company, there shall, in accordance with
and subject to the provisions of the section, be allowed, in
computing the total income of the assessee, a deduction from
such income by way of dividends of an amount equal to-
(a) where the assessee is a foreign company-
(i) in respect of such income by way of
dividends received by it from an Indian company which is not
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such a company as is referred to in section 10B and which is
mainly engaged in a priority industry......80% of such
income
(ii) in respect of such income by way of
dividends other than the dividends referred to in subclause
(i)......... 65% of such income.
(b) where the assessee is domestic company in
respect of any such income by way of dividends.... 60% of
such income."
There were several amendments made subsequently in this
section but they relate primarily to the percentage of the
income to be allowed as a deduction and do not have any
bearing on the question of interpretation posed before us.
One amendment is, however, material and that was made by
Finance Act 1968 by which the words "received by it"
occurring in sub-section (1) of section 80M were omitted
with effect from 1st April, 1968. The Finance Act of 1968
also provided in sub-sections (2) and (3) of section 31 that
notwithstanding the omission of section 99, sub-section (1),
clause (iv) and section 85A, the provisions of those
sections shall have and be deemed always to have effect,
subject to the modification that the words "received by it"
in the opening part of those sections were deleted. The net
effect of these amendments was that the words "received by
it" following upon the word "dividend" were omitted with
retrospective effect from section 99, sub-section (1),
clause (iv) and section 85A and section
998
80M was to be read as if the words "received by it" were not
in the opening part of that section.
We shall presently consider the language of section 80M
for the purpose of arriving at its true interpretation, but
before we do so, we must refer to an argument advanced on
behalf of the Revenue that whatever might have been the
interpretation placed on section 99, subsection (1), clause
(iv) by the Bombay, Calcutta and Madras High Courts and on
section 85A by the Bombay High Court, it cannot hold good
any more in view of the retrospective deletion of the words
"received by it" in the opening part of these sections. The
argument was that the decisions of the Bombay, Calcutta and
Madras High Courts upholding the view that the exemption
from super-tax under section 99, sub-section (1), clause
(iv) and the deduction of income-tax under section 85A were
admissible in respect of the entire amount of dividend
received by an assessee without any deduction, were based on
the words "received by it" and since these words were
retrospectively omitted, these decisions could no longer be
regarded as valid. We do not think this contention of the
Revenue can be sustained if we have regard to the object and
purpose for which the words "received by it" were deleted.
It is clear from the Notes on clause 31 which subsequently
became section 31 of the Finance Act, 1968 that the
amendments retrospectively deleting the words "received by
it" from the opening part of section 99, sub-section (1),
clause (iv) and section 85A were made with a view to
widening scope of the relief granted under these sections,
as it was felt that the presence of these words might render
those sections inapplicable in cases where the shares to
which the dividend relates are registered in the name of a
person other than the assessee and the dividend is,
therefore, received, strictly speaking, by such other person
and not by the assessee. The object of introducing these
amendments was to widen the scope of the tax relief provided
under section 99, sub-section (1), clause (iv) and section
85A by making it available to the assessee even though the
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shares to which the dividend related were registered in the
name of a person other than the assessee and not to narrow
it down by restricting it to not dividend computed after
making deductions allowed under the provisions of the Act.
The omission of the words "received by it" does not,
therefore, make any difference in the interpretation of
section 99, sub-section (1), clause (iv) and section 85A so
far as the present question is concerned. Even after the
deletion of the words "received by it", the expressions "any
dividend from an Indian company" and "any income by way of
dividends from an Indian company" occurring in the opening
part of these sections continue to mean the
999
same thing, namely the full amount of dividend derived or
moving from an Indian company. The decisions of the Bombay,
Calcutta and Madras High Courts interpreting these sections
cannot, therefore, be said to be displaced by the
retrospective omission of the words "received by it".
So far as section 99, sub-section (1), clause (iv) is
concerned, we have no doubt that the interpretation placed
on this provision by the Bombay, Calcutta and Madras High
Courts is correct. The reasoning given by the Bombay High
Court in New Great Insurance Co.’s case (supra) is
unexceptionable and we find ourselves in agreement with it.
It is clear on a plain natural construction of the language
of this provision that it grants exemption from super-tax in
respect of "any dividend from the Indian company" and these
last mentioned words cannot mean anything else than the full
amount of dividend derived from an Indian company. They
cannot obviously mean dividend from an Indian company minus
any expenses incurred in earning it, or less any other
deduction allowable under the Act. It is no doubt true that
the opening part of section 99, sub-section (1) contains the
words "the following amounts which are included in his total
income", but these words do not have any limitative effect
so as to restrict "dividend from an Indian company" in
respect of which exemption from super-tax is granted to net
dividend computed in accordance with the provisions of the
Act and forming part of the total income. It may be noticed
that the ememption from supr-tax granted under section 99,
sub-section (1) is not only in respect of "dividend from an
Indian company" is not referred to in clause (iv), but also
in respect of other items of income mentioned in clauses (i)
to (iii) and (v). The Legislature clearly and understandably
wanted to provide that the different categories of income
mentioned in clauses (i) to (v) should be eligible for
exemption from super-tax only if they are included in the
total income and the Legislature could have made such a
provision separately in respect of each category of income
in the opening part of section 99, sub-section (1), but
instead of adopting such legislative device, which would
have been both inapt and inelegant, the Legislature chose to
use an omnibus expression "the following amounts which are
included in his total income", which would cover all the
different items of income dealt with in clause (i) to (v).
These words were introduced merely to provide that the
category of income in respect of which exemption from super-
tax is claimed must be included in the total income and they
were not intended to refer to the quantum of such income
included in the total income for exempting it from supertax:
they were descriptive of items of income included in the
total
1000
income and were not indicative of the quantum of the amounts
included under different items in the computation of the
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total income. It would, therefore, seem that though the
exemption from super-tax granted under clause (iv) of sub-
section (1) of section 99 would be applicable only if the
particular item of income, namely, "dividend from an Indian
company" is included in the total income, what is exempted
is "dividend from an Indian company" which can only mean the
full amount of dividend received from an Indian company.
This view which we are taking is clearly supported by
the decision of this court in Commissioner of Income-tax,
Kerala v. South Indian Bank Ltd.(1) where the question was
so as to the true interpretation of a notification issued by
the Central Government under section 60A of the old Act
which was in the following terms:
"No income-tax shall be payable by an assessee on
the interest receivable on the following income-tax free
loans issued by the former Govermnent of Travancore or by
the former Government of Cochin, provided that such interest
is received within the territories of the State of
Travancore Cochin and is not brought into any other part of
the taxable territories to which the said Act applies. Such
interest shall, however, be included in the total income of
the assessee for the purposes of section 16 of the Indian
Income-tax Act, 1922."
The argument of the Revenue was that the exemption from
income tax granted under this notification was in respect of
interest receivable on securities minus the expenses
incurred in earning it and not in respect of the entire
amount of interest because it was only that amount of
interest arrived at after computation in accordance with
section 8 of the old Act which was includible in the total
income and liable to bear tax and the exemption from tax
could, therefore, only be in respect of such amount. This
argument was negatived by the Court and it was pointed out
by Subba Rao, J., that: "this notification does not refer to
the provisions of section 8 of the Income-tax Act at all. It
gives a total exemption from income-tax to an assessee in
respect of the interest receivable on income-tax free loans
mentioned therein. It gives that exemption subject to two
conditions, namely, (i) that the interest is received within
the territories of the State of Travancore Cochin, and (ii)
that it is not brought into any other part of the taxable
territories. It includes the said exempted interest in the
total
1001
income of the assessee for the purpose of section 16 of the
Income-tax A Act. Shortly stated, the notification is a
self-contained one; it provides an exemption from income-tax
payable by an assessee on a particular class of income
subject to specified conditions. Therefore, there is no
scope for controlling the provisions of the notification
with reference to section 8 of the Income-tax Act. The
expression "interest receivable on income-tax free loans" is
clear and unambiguous. Though the point of time from which
the exemption works is when it is received within the
territories of the State of Travancore-Cochin, what is
exempted is the interest receivable. "Interest receivable"
can only mean the amount of interest calculated as per the
terms of the securities. It cannot obviously mean interest
receivable minus the amount spent in receiving the same." It
may be noted that the last part of this notification
provided for inclusion "of such interest", that is, interest
in respect of which exemption from tax was granted, in the
total income of the assessee and obviously this would have
to be done after computation in accordance with the
provisions of section 8 of the old Act. But even so, it was
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held that the exemption from tax was in respect of the
entire amount of interest received on the securities. The
reasoning adopted in this decision clearly supports the view
we are taking in regard to the construction of clause (iv)
of sub-section (1) of section 99 and we must hold that the
decisions of the Bombay, Calcutta and Madras High Courts lay
down the correct law on the interpretation of this
provision.
The next provision we must consider is section 85A
which came in the wake of section 99, sub-section (1),
clause (iv). This section lays down a condition for its
applicability in its opening part by using the words "where
the total income of an assessee-includes any income by way
of dividends from an Indian company". The condition is that
the total income must include income by way of dividends
from an Indian company. It is only if this category of
income from a component part of total income that the
provision enacted in the section is attracted and the
assessee becomes entitled to rebate on income calculated
with reference to the "income so included". The argument of
the Revenue was that the words "income so included" must
mean the quantum of the income included in the total income
and, therefore, rebate on income tax granted under section
85A can only be in respect of dividend income computed in
accordance with the provisions of the Act and forming part
of the total income and not in respect of the full amount of
dividend received by the assessee. This argument is, in our
opinion, fallacious. It is based on a misreading of the
words "income so included" and ignores the context in which
these words occur. If the opening part of the section refers
to inclusion of the
8-409 SCI/79
1002
particular category of income denoted by the words "income
by way of dividends from an Indian company", the words "so
included" cannot have reference to the quantum of the income
included, but they must be held T.D. r.f. only to the
category of income included, that is, income by way of
dividends from an Indian company. The meaning of the section
would become clear if we substitute the words "income by way
of dividends from an Indian company" for the words "income
so included". Then it would be obvious-indeed it would need
no argument to hold-that the rebate on income tax is to be
calculated by applying the average rate of tax to the
"income by way of dividends from an Indian company" which
can only mean the full amount of dividend received from an
Indian company. This was the view taken by the Bombay High
Court in the New Great Insurance Co.’s case and we find
ourselves in agreement with it.
We must now turn to consider section 80M for the
purpose of arriving at its true interpretation. There is a
close similarity between section 85A and section 80M so far
as the opening part of the two section is concerned, but
when we come to the latter part, we find that there is a
difference, inasmuch as section 85A provides for calculation
of rebate of income tax on "income so included", while
section 80M provides for deduction of the whole or part of
"such income by way of dividends". Even if there by any
doubt or ambiguity in regard h to the meaning of the words
"income so included" in section 85A, though we do ’not think
that there is any scope for such doubt or ambiguity, the
language employed by the Legislature in section 80M is much
clearer and leaves no doubt that deduction, whether whole or
60 percent, is to be calculated with reference to the entire
amount of income by way of dividends received from a
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domestic company. Section 80M occurs in Chapter VI-A which
is headed "Deduction to be made in computing total income".
Section 80A, sub-section ( 1 ) provides that in computing
the total income of an assessee, the deductions specified in
sections 80 to 80 VV shall be made from his gross total
income and gross total income, according to the definition
in section 80B, clause (5), means the total income computed
in accordance with the provisions of the Act before making
any deduction under Chapter VI A or under section 280.O.
What section 80 A, sub-section (1) requires is that first
the total income of the assessee must be computed in
accordance with the provisions of the Act without taking
into account the deductions required to be made under
Chapter VI-A or under section 280.O and then from the gross
total income thus computed, the deductions specified in
sections 80 to 80 VV must be made in order to arrive at the
total income. But sub-
1003
section (2) of section 80 A provides that the aggregate
amount of the deductions required to be made under Chapter
VI-A shall not exceed the gross total income of the assessee
so that the total income arrived at after making the
deductions specified in sections 80 to 80 VV from the gross
total income can never be a minus or negative figure. This
provision imposing a ceiling on the deduction which may be
made under sections 80 to 80 VV clearly postulate that in a
given case the aggregate amount of these deductions may
exceed the gross total income. It is in the context of this
background that we have to determine the true interpretation
of section 80 M, which, as the marginal note indicates,
provides for deduction in respect of certain intercorporate
dividends. Section 80 M, sub-section (1) opens with the
words "Where the gross total income of an assessee-includes
any income by way of dividends From a domestic company" and
proceeds to say that in such a case there shall be allowed
in computing the total income of the assessee a deduction
"from such income by way of dividends" of an amount equal to
the whole of such income or 60 per cent of such income, as
the case may be, depending on the nature of the domestic
company from which the income by way of dividends is
received. Now the words "such income by way of dividends"
must be referable to the income by way of dividends
mentioned earlier and that would be income by way of
dividends from a domestic company which is included in the
gross total income. The whole of such income that is, income
by way of dividends from domestic company or 60 per cent of
such income, as the case may be, would be deductible from
the gross total income for arriving at the total income of
the assessee. The words "where the gross total income of an
assessee.... includes any income by way of dividends from a
domestic company" are intended only to provide that a
particular category of income, namely, income by way of
dividends from a domestic company, should form a component
part of the gross total income. These words merely prescribe
a condition for the applicability of the section, namely,
that the gross total income must include the category of
income described by the words "income by way of dividends
from a domestic company." If the gross total income includes
this particular category of income, whatever be the quantum
of such income included, the condition would be satisfied
and the assessee would be eligible for deduction of the
whole or 60 per cent of "such income". Now, if the words
"where the gross total income of an assessee-includes any
income by way of dividends from a domestic company" in the
opening part of the section refer only to the inclusion of
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the category of income denoted by the words "income by way
of dividends from a domestic company" and not to the quantum
of the income so included,
1004
the words "such income" cannot have reference to the quantum
of the income included, but they must be held referable only
to the category of the income included, that is, income by
way of dividends from a domestic company. The words "such
income" as a matter of plain grammar must be substituted by
the words "income by way of dividends from a domestic
company" in order to arrive at a proper construction of the
section and if that is done, it would be obvious that the
deduction is to be in respect of the whole or 60 per cent of
the "income by way of dividends from a domestic company"
which can only mean the full amount of dividends received
from a domestic company. The deduction permissible under the
section is, therefore, to be calculated with reference to
the full amount of dividends received from a domestic
company and not with reference to the dividend income as
computed in accordance with the provisions of the Act, that
is, after making deductions provided under the Act. This was
the view taken by the Madras High Court in Madras Auto
Service v. Income-tax officer Madras(1) and it meets with
our approval. It is true that the Gujarat High Court has
taken a contrary view in Cloth Traders Pvt. Ltd. v. Commr.
Of Income-tax, Gujarat, which is the subject matter of Civil
Appeals Nos. 117 and 118 of 1975, but we think it proceeds
on an erroneous interpretation of the language of section
80M, sub-section (1). It wrongly construes the words "such
income" to be referable to the quantum of income includible
in the gross total income, overlooking the fact that the
opening words in the section, namely, "where the gross total
income of an assessee-includes any income by way of
dividends from a domestic company" refer only to the
inclusion of the category of income by way of dividend from
a domestic company and they are not indicative of the
quantum of the income included in the gross total income. It
is true that on this view the deduction in respect of the
income by way of dividends from a company falling within cl.
(a) of sub-section (1) of s. 80M may exceed the quantum of
such income included in the gross total income, but that
possibility is indeed contemplated and taken care of by
section 80A, sub-section (2) which provides that the
aggregate amount of the deductions shall not in any case
exceed the gross total income of the assessee.
We may point out that even though the consistent view
taken by the Bombay, Madras and Calcutta High Courts in
regard to the inter pretation of section 99, sub-section
(1), clause (iv) was that the exemption From super-tax under
that provision was admissible in respect of
(1) 101 I. T. R. 589.
1005
the full amount of dividends received from an Indian company
and A was not limited to the dividend income computed
accordance with the provisions of the Act and forming part
of total income and the same view was taken by the Bombay
High Court in the New Great Insurance Co. case (supra) in
regard to the interpretation of s. 85A which contained the
opening words "where the total income of an assessee-
includes any income by way of dividends from an Indian
company", similar to the opening words in sub-section (1) of
section 80M and the Madras High Court also placed the same
interpretation on section 80M, sub-section ( 1 ) in Madras
Auto Service case (supra), the legislature did not choose to
make any amendment in the language of section 80M, sub-
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section (1) with a view to setting at naught this judicial
interpretation. If the legislature was of the view that the
deduction should not be in respect of the full amount of
dividends received from a domestic company, but it should
only be in respect of the amount of dividends computed after
deducting allowable expenditure, we have no doubt that the
legislature would have amended section 80M, sub-section (1)
and made its intention quite clear. The legislature in fact
amended section 80M several times in respect of other
matters subsequent to the decision of the Bombay High Court
in the New Great Insurance Co.’s case and the decision of
the Madras High Court in the Madras Auto Service’s case, but
it did not choose to amend the language employed in s. 80M,
sub-s.(1) for the purpose of overriding the interpretation
placed by the courts. This would seem to indicate
legislative recognition of the interpretation placed by the
courts on s. 85A and s. 80M and it is a circumstance, though
not of much weight, which lends support to the view we are
taking in regard to the interpretation of s. 80M.
We may also in this connection refer to section 80K
read with Rule 20, section 80 MM, section 80 N and section
80 o which occur in the same group of sections as section
80-M. These sections use the same legislative formula as
section 80-M and open with the identical words "where the
gross total income of an assessee .. includes any income...
". It appears on a plain reading of these secions that the
deduction admissible is in respect of the whole of the
income received by the assessee and not in respect of the
income computed after making the deductions provided under
the Act. Vide Madras Auto Service case (supra) and
Additional Commissioner of Income Tax v. Isthmian India
Maritime P. Ltd.(1). We derive considerable support for our
view from the analogy of these sections. H
(1) (1978) 1131. T. R. 570 (Mad.)
1006
We, therefore, allow Civil Appeals Nos. 117 and 118 of
1975 and answer the question referred to the Tribunal in
those appeals in favour of the assessee and against the
Revenue. The questions referred by the Tribunal in Tax
References Nos. 2, 6 to 9, 16 and 18 of 1975 are also
answered in favour of the assessee and against the Revenue.
We hold that the assessees in these appeals and References
are entitled to relief under section 85A for the assessment
years 1965-66, 1966-67 and 1967-68 under section 80M for the
assessment years 1968-69 and 1969-70 in respect of the
entire amount of the dividend income without deduction of
interest paid on borrowings for acquiring the shares. The
Commissioner will pay the costs of the appeals and the
references to the respective assessees.
N.V.K. Appeals allowed.
1007