Law: Income Tax Act, 1961

Section: 256(1),2(22)(d),80M,56(2)(i),57

Section 2(22)(d) of the Income-tax Act, 1961 - Deemed dividend - Assessment year 1974-75 - Whether entire amount received by shareholder on purchase by company of shares pursuant to scheme of reduction of capital would constitute divided under section 2(22) without deducting face value of shares - Held, yes Section 80M of the Income-tax Act, 1961 - Deductions - Inter-corporate dividend - Assessment year 1974-75 - Whether deduction under section 80M is available in respect of amount received on reduction of share capital which is deemed as dividend Under section 2(22)(d) - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1974-75 - Whether in case of a dealer of shares purchase price of shares will be allowable as business expenditure - Held, yes Section 57(iii) of the Income-tax Act, 1961 - Income from other sources - Deductions - Assessment year 1974-75 - Whether in case of dealer in shares, though dividend will be assessable as income from other sources, purchase price of shares cannot be allowed as deduction under section 57(iii) - Held, yes - Whether expenditure allowable under section 57(iii) will also include capital expenditure - Held, no - Whether expenditure incurred for acquisition of shares can be treated as expenditure for earning dividend income - Held, no FACTS The assessee-company, being one of the shareholders of the P Bank to the extent of 20, 144 shares purchased by it on 2-1-1974, exercised the option to sell to P Bank, its shares at Rs. 40 per share in the assessment year 1974-75. There was a profit in this transaction. The purchase consideration of the shareholders who had exercised the option to sell to P Bank at Rs. 40 per share was paid from the general reserve pursuant to the scheme of reduction of capital of the company. The assessee claimed that the excess realisation over the face value of shares of Rs. 10 each was in the nature of dividend within the meaning of section 2(22)(d). It also claimed that dividend income of Rs. 6,04,320 under section 2(22)(d) entitled the assessee-company for relief under section 80M. The ITO, however, did not allow the claim. On appeal, the AAC…

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