Law:

Section:

Section 80M of the Income-tax Act, 1961, read with sections 25A and 32(3) of the Unit Trust of India Act, 1963 - Deductions - Inter-corporate dividends - Assessment years 1976-77, 1977-78, 1978-79 and 1979-80 - Assessee, State Bank of India, was one of initial contributors to extent of Rs. 75 lakhs to Unit Trust of India (UTI) when it was set-up - During assessment year 1976-77, State Bank of India (SBI) received Rs. 442 from UTI in course of distribution of its income - Assessee treated it as dividend and claimed deduction under section 80M - Whether claim of assessee was sustainable - Held, yes FACTS When UTI was set-up, assessee-SBI was one of the initial contributors to the extent of Rs. 75 lakhs towards initial capital of UTI. In the assessment year 1976-77, UTI distributed its income and SBI received Rs. 442. The department held that amount as interest while the assessee treated the same as dividend eligible for deduction under section 80M. The Tribunal held that the said amount was dividend and the assessee was entitled to deduction under section 80M. On reference, it was contended on behalf of the department that the assessee contributed capital to trust under the UTI Act and the assessee was not a unit-holder under that Act, and that under section 32(3), read with section 25A(2) distribution of income to initial contributors has not been deemed to be dividend under Income-tax Act which showed that intention of the Legislature was to treat distributable income of unit-holders alone as dividend under the Income-tax Act. On the other hand, the assessee contended that its position was similar to a shareholder and a promoter of a company; that the UTI, after debiting the interest on borrowings and other expenses to the profit and loss account, had allocated the surplus to initial contributors and to the unit-holders and that the income received by initial contributors was dividend. HELD Under the UTI Act, there is a dichotomy between initial contributors and unit-holders. Under section 22(1), the composition of the capital of the trust for the first unit scheme is different from composition of the capital of the trust qua subsequent unit scheme under…

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