Law:

Section:

JUDGMENT Mehta, J.- The question which is involved in this reference is whether, while computing the deduction of tax on inter-corporate dividend under section 85A of the Income-tax Act, 1961, the income from dividend should be taken at its gross figure or at net figure after deducting the expenditure incurred by the concerned assessee to earn that dividend. Short facts of the case are that the respondent-assessee is a private limited company. During the course of the accounting periods relevant to the assessment years 1965-66 and 1966-67 it derived income in the form of dividends on shares of other companies. For the assessment year 1965-66, its gross dividend receipts from Indian companies amounted to Rs. 6,09,101. As against this receipt it incurred an expenditure of Rs. 23,594 in the shape of interest on borrowings made to earn these dividends. During the course of the assessment a question arose whether for the purpose of deduction contemplated by section 85A of the Income-tax Act, 1961, which is hereinafter referred to as "the Act", average rate of tax on gross amount of Rs. 6,09,101 should be calculated or whether the said average rate of tax should be calculated on the net amount thereof after deducting Rs. 23,594, paid by way of interest on the borrowings made to earn the said dividends. Similar question also arose in regard to the next assessment year 1966-67. The Income-tax Officer and the Appellate Assistant Commissioner held that for the purpose of deduction under section 85A only the net and not the gross amount of dividends should be taken into account. Being aggrieved by this decision of the Appellate Assistant Commissioner the assessee preferred an appeal to the Appellate Tribunal. The Appellate Tribunal relied upon the decision given by the Bombay High Court in Commissioner of Income-tax v. Industrial Investment Trust Co. Ltd. [1968] 67 ITR 436 (Born.) and the Calcutta High Court decision in Commissioner of Income-tax v. Darbhanga Marketing Co. Ltd. [1971] 80 ITR 72 (Cal.), and came to the conclusion that for the purpose of deduction under section 85A, it is the gross dividend income received by the assessee and not the net dividend income…

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