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From the Courts »
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THE COMMISSIONER OF INCOME TAX, DELHI-IV Vs. M/S INDUSTRIAL FINANCE CORPORATION OF INDIA LIMITE
November, 22nd 2014
*          IN THE HIGH COURT OF DELHI AT NEW DELHI
+                  INCOME TAX APPEAL NO. 127/2002
                                         Reserved on :        24th September, 2014
                                          Date of decision:   11th November, 2014

        THE COMMISSIONER OF INCOME TAX, DELHI-IV
                                                                     ..... Appellant
                                Through Mr. Kamal Sawhney, Sr. Standing
                                Counsel & Mr. Sanjay Kumar, Advocate.

                                versus

        M/S INDUSTRIAL FINANCE CORPORATION OF INDIA
        LIMITED                                     ..... Respondent
                      Through Ms. Kavita Jha & Mr. Vivek Bansal,
                      Advocates.

        CORAM:
        HON'BLE MR. JUSTICE SANJIV KHANNA
        HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J.:

        This appeal by the Revenue, which relates to Assessment Year 1986-
87, stands admitted for adjudication on the following substantial questions
of law:-
                   "1. Whether on the facts and circumstances of the
                   case the ITAT was correct in law in allowing the
                   deduction u/s 80M & 80K without reducing from the
                   dividend income, the deduction as admissible u/s
                   36(1)(viii) of the Act?

                   2.     Whether ITAT was correct in law in allowing
                   the deduction u/s 36(1)(viii) of the Act to the extent
                   of 40% of the income determined without restricting
                   the amount transferred to the reserve created during
                   the year?
                   3.     Whether on the facts and circumstances of the
                   case the Tribunal was correct in awarding the

ITA No. 127/2002                                                       Page 1 of 12
                   allowance of Rs.72,574/- being the amortization
                   expenses incurred for acquiring lease hold land by
                   the assessee?"

2.      Return filed by the respondent-assessee was made subject matter of
regular assessment under Section 143(3) of the Income Tax Act, 1961
("Act", for short), vide assessment order dated 30th March, 1989. Total
income was assessed at Rs.25,35,90,870/-.           The assessee was allowed
deduction under Section 36(1)(viii) of the Act and was also allowed
deduction under Sections 80M and 80K of the Act on dividend income of
Rs.2,26,12,593/-. The total quantum of deduction allowed under Section
36(1)(viii) was Rs.17,81,18,441/-. Similarly, the assessee was allowed
amortisation of expenses of Rs.72,574/- in respect of the leasehold land.

3.      The Commissioner of Income Tax, under Section 263 of the Act, by
her order dated 7th March, 1991 issued directions to the Assessing Officer
to pass a fresh or re-frame the assessment order on the aforementioned
deductions, after giving due opportunity.




4.      Thereupon, order dated 9th August, 1991 was passed by the
Assessing Officer. The Assessing Officer after referring to Section 80AA
and 80AB of the Act held that the deduction under Sections 80M and 80K
should be allowed with reference to the ,,gross total income computed in
accordance with the provisions of the Act before making any deduction
under Chapter VI-A. The dividend income included in the ,,gross total
income ought to be reduced by 40% as the deduction had been allowed
under Section 36(1)(viii) of the Act. The reason given was that once
deduction under Section 36(1)(viii) was allowed on income that included
dividend income, the gross dividend should be reduced by 40% to compute
the net dividend income. Accordingly, by order dated 9th August, 1991, the
deduction under Sections 80K and 80M was recomputed as under:-

ITA No. 127/2002                                                   Page 2 of 12
                         "A) DEDUCTION U/S 80-K
                   Gross Dividend              46,976
                   Less: u/s 36(1)(viii)       18,790
                                               28,186
                   Exemption u/s 80-K @ 60% Rs.16,911

             B) Deduction u/s 80-M
                Other dividend                   2,26,90,618
                Less: Admn. Expenses                  25,000
                                                 2,26,65,618

                   Less: Dedn. U/s 36(1)(viii)40% 90,26,247
                   Dividend entitled to deduction 1,36,39,381
                   Before allowing deduction under
                   Chapter-VIA
                   Deduction u/s 80-M (60%)       81,23,622/-"

5.       The Assessing Officer referred to the second proviso to Section
36(1)(viii) and observed that the "reserves" eligible for deduction cannot
exceed twice the paid-up capital of the respondent of Rs.3500 crores.
Thus, deduction allowable under Section 36(1)(viii) had to be restricted to
Rs.17,75,72,000/- and need not be allowed upto 40% of the total income
before making any deduction under the said sub-section or Chapter VI-A.

6.       On the third question, the Assessing Officer disallowed revenue
deduction of Rs.72,574/- treating the payment as capital in nature as it was
incurred towards amortization of leasehold land at Calcutta, Patna and
Kanpur. The lease period, it was observed, varied between 66 years to 99
years.

7.       The Commissioner of Income Tax (Appeals) [C.I.T (A)], however,
reversed the aforementioned findings holding that deduction under Section
80M should be calculated without deducting the "deduction" under Section
36(1)(viii) of the Act from the dividend income. Amortisation expenses
were also directed to be allowed as revenue expense. Noticeably, the

ITA No. 127/2002                                                 Page 3 of 12
assessee did not challenge re-computation of deduction under Section 80K
made by the Assessing Officer possibly because the amount involved was
only Rs.18,790/-.            Similarly, the assessee did not challenge the re-
computation of deduction under Section 36(1)(viii) with reference to the
second proviso

8.      Revenue preferred an appeal raising the following grounds:-

                   "On the facts and in the circumstances of the case, the Ld.
                   CIT (A) has erred in:

        (i)        directing A.O. to allow deduction u/s 80-M & 80-K without
                   reducing from the dividend income the deduction admissible
                   u/s 36(1)(viii) following its order in other asst. year which
                   has not been accepted by department.

        (ii)        directing the A.O. to allow the deduction u/s 36(1)(viii) to
                   the extent of 40% of the income determined without
                   restricting the amount transferred to the reserve created
                   during the year u/s 36(1)(viii) by following appellate order
                   for earlier year, which has not been accepted by the
                   department.

        (iii)      deleting the disallowance of Rs.72,574/- in respect of
                   leasehold property by following the appellate order for earlier
                   year, which not been accepted by the department."

9.      It is noticeable that the Revenue while framing the grounds of appeal
did not notice that the assessee had not challenged reduction of deduction
under Section 80K and the C.I.T(A) had not dealt with the said issue.
Similarly, the assessee had not questioned application of the second
proviso to Section 36(1)(viii) before the C.I.T(A) and this issue was neither
raised nor decided. We accordingly hold that the Income Tax Appellate
Tribunal (Tribunal, for short) fell in error in treating the deduction under
Section 80K and disallowance made under Section 36(1)(viii) as a ground
raised by the Revenue in appeal.                 Similar error has been made while
framing the substantial questions of law. We hold and observe that while
deciding question No. 1, we will examine the deduction under Section 80M

ITA No. 127/2002                                                               Page 4 of 12
and not under Section 80K. Further, question No. 2 does not arise for
consideration as the said issue never arose in the appellate proceedings
after the findings recorded by the Assessing Officer. The findings of the
assessing officer to this extent were accepted.

10.      Now, we would like to reproduce Section 36(1)(viii) and Section
80M of the Act as they existed and applicable to the relevant assessment
year:-
                   "36. (1) The deductions provided for in the following clauses
                   shall be allowed in respect of the matters dealt with therein,
                   in computing the income referred to in section 28-

                   xxxxxxxxxx

                   (viii) in respect of any special reserve created by a financial
                   corporation which is engaged in providing long-term finance
                   for industrial or agricultural development in India or by a
                   public company formed and registered in India with the main
                   object of carrying on the business of providing long-term
                   finance for construction or purchase of houses in India for
                   residential purposes, an amount not exceeding forty per cent
                   of the total income (computed before making any deduction
                   under Chapter VI-A) carried to such reserve account:

                   Provided that the corporation or, as the case may be, the
                   company is for the time being approved by the Central
                   Government for the purposes of this clause:
                   Provided further that where the aggregate of the amounts
                   carried to such reserve account from time to time exceeds
                   twice the amount of the paid-up share capital (excluding the
                   amounts capitalised from reserves) of the corporation or, as
                   the case may be, the company, no allowance under this clause
                   shall be made in respect of such excess.

                   Explanation: In this clause, "public company" shall have the
                   meaning assigned to it in Section 3 of the Companies Act,
                   1956 (1 of 1956)

                   xxxxxxxxxxxx

                   80M. (1) Where the gross total income of an assessee, being
                   a domestic company, includes any income by way of
                   dividends from a domestic company, there shall, in
                   accordance with and subject to the provisions of this section,
                   be allowed, in computing the total income of the assessee, a

ITA No. 127/2002                                                               Page 5 of 12
                   deduction from such income by way of dividends of an
                   amount equal to-

            (a) in respect of such income by way of dividends from a
                company formed and registered under the Companies Act,
                1956 ( 1 of 1956), after the 28th day of February, 1975, and
                engaged exclusively or almost exclusively in the manufacture
                or production of any one or more of the articles or things
                specified in items 2 and 3, item 4 (excluding alloy, malleable
                and S.G. iron castings), items 7 to 15 (both inclusive), items
                17 and 18, item 23 (excluding refractories) and items 24, 26,
                27, 28, 29, 30 and 33 in the list in the Ninth Schedule.
                the whole of such income
            (b) in respect of such income by way of dividends other than the
                dividends referred to in clause (a)      sixty per cent of such
                income

                   (2) Where a company to which this section applies is entitled
                   also to the deduction under Section 80K, the deduction under
                   sub-section (1) shall be allowed in respect of income by way
                   of dividends referred to therein as reduced by the amount of
                   the deduction under Section 80K.

                   xxxxxxxxxxxxx


11.     Before we proceed further, we would also like to reproduce Sections
80B(5) and 80AA of the Act, which are as under:-
                   "80B(5) ,,gross total income means the total income
                   computed in accordance with the provisions of this Act,
                   before making any deduction under this Chapter;

                   xxxxxxxxxx

                   80AA. Computation of deduction under Section 80M- Where
                   any deduction is required to be allowed under Section 80M in
                   respect of any income by way of dividends from a domestic
                   company which is included in the gross total income of the
                   assessee, then, notwithstanding anything contained in that
                   section, the deduction under that section shall be computed
                   with reference to the income by way of such dividends as
                   computed in accordance with the provisions of this Act
                   (before making any deduction under this Chapter) and now
                   with reference to the gross amount of such dividends."

12.     Sub-section (1) to Section 36 states that the deduction provided in
the clauses thereunder shall be allowed in respect of matters dealt with

ITA No. 127/2002                                                             Page 6 of 12
therein while computing income referred to in Section 28 of the Act.
Section 28 of the Act relates to income by way of "profits and gains of
business or profession".      Clause (viii) of Section 36(1) states that the
stipulated financial corporation shall be allowed deduction in respect of
special reserve created by them of an amount not exceeding 40% of the
total income computed before allowing any deduction under Chapter VI-A,
carried to the reserve account. Thus, when special reserve was created and
income earned during the year was carried or transferred to the reserve
account, deduction under clause (viii) to Section 36(1) was to be allowed.
The deduction could have exceeded 40% of the total income of the said
year.     The total income referred to in the said clause meant income
computed before making any deduction under Chapter VI A. The second
proviso to Section 36(1)(viii) dealt with second upper limit for claiming
deduction under Section 36(1)(viii). On the application of the second
proviso, the finding of the Assessing Officer has attained finality.

13.     Chapter VI-A of the Act consists of fasciculus of Sections dealing
with deductions permissible while computing total income. Section 80M in
the opening words refers to the expression "gross total income of an
assessee" and thereafter stipulates that where gross total income of the
assessee includes income by way of dividends etc., the deductions would
be allowed.        The expression "gross total income" for the purpose of
Chapter VI-A as defined in Section 80B(5) meant total income computed
in accordance with the provisions of this Act but before making any
deductions under Chapter VI-A. Accordingly, the Section postulated that
the gross total income meant total income computed under Chapter III of
the Act. Thus, the total income computed under Section 28 of the Act after
allowing deductions under Section 36(1)(viii), plus other income of the
assessee, as computed, would constitute the gross total income on which

ITA No. 127/2002                                                  Page 7 of 12
deduction under Sections 80M could be allowed. The deduction allowed
under Section 36(1)(viii) of the Act got excluded and did not partake
income included in gross total income on which deduction under Sections
80M was to be allowed. The amounts deducted under Section 36(1)(viii)
ceased to be part of the gross total income as stipulated in Section 80B(5).
Thus, there is no question of double deduction or multiple deduction on the
same income, if deduction under Section 36(1)(viii) stands excluded and is
not part of the gross total income on which deduction under Section 80M
was to be allowed.




14.     Section 80M dealt with and allowed deduction on specific
type/character of income by way of dividends. Deduction was to be
allowed as per the computation made under the said Section. Section 80M
did not make any reference to deduction under Section 36(1)(viii). There
was no such stipulation expressed or implied. Reliance placed on Section
80AA of the Act (since omitted), which has been quoted above, is
misconceived. Section 80AA dealt with computation of deduction under
Section 80M and mandated that deduction under the said Section should be
with reference to the income by way of dividends computed in accordance
with the provisions of the Act, but before making any deduction under
Chapter VI- A and not with reference to the gross amount of dividends.
The said provision was incorporated by Finance (No. 2) Act, 1980 after the
judgment of the Supreme Court in the case of Cloth Traders Private
Limited versus Additional Commissioner of Income Tax, (1979) 118 ITR
243 (SC).          However, Cloth Traders Private Limited (supra)             was
overruled by the Supreme Court in Distributors (Baroda) Private Limited
versus Union of India, (1985) 155 ITR 120 (SC) and the counsel for the
appellant-Revenue has relied upon the following paragraph of the latter
judgment:-

ITA No. 127/2002                                               Page 8 of 12
                   " We may, therefore, first examine the language of
                   Section 80M for arriving at its true interpretation. But before
                   we do so, let us consider what is the object behind grant of
                   relief under Section 80M. It was common ground between
                   the parties that the main object of the relief under
                   Section 80M is to avoid taxation once again in the hands of
                   the receiving company of the amount which has already
                   borne full tax in the hands of the paying company. Vide the
                   written submission under the heading "Object of relief on
                   intercorporate dividends" filed by the learned Counsel on
                   behalf of the assessee in the course of the arguments. Now
                   when an amount by way of dividend is received by the
                   assessee from the paying company, the full amount of such
                   dividend would have suffered tax in the assessment of the
                   paying company and it is obvious, that, in order to encourage
                   inter-company investments, the Legislature intended that this
                   amount should not bear tax once again in the hands of the
                   assessee either its entirety or to a specified extent. But the
                   amount by way of dividend which would other-wise suffer
                   tax in the hands of the assessee would be the amount
                   computed in accordance with the provisions of the Act and
                   not the full amount received from the paying company.
                   Therefore, it is reasonable to assume that in enacting
                   Section 80M the Legislature intended to giant relief with
                   reference to the amount of dividend computed in accordance
                   with the provisions of the Act and not with reference to the
                   full amount of dividend received from the paying company. It
                   is difficult to imagine any reason why the Legislature should
                   have intended to give relief with reference to the full amount
                   of dividend received from the paying company when that is
                   not the amount which is liable to suffer tax once again in the
                   hands of the assessee. The Legislature could certainly be
                   attributed with the intention to prevent double taxation but
                   not to provide an additional benefit which would go beyond
                   what is required for saving the amount of dividend from
                   taxation once again in the hands of the assessee. Bearing in
                   mind these prefatory observations in regard to the legislative
                   object, we may now proceed to construe the language of
                   Section 80M."


15.     The aforesaid paragraph shows that the Supreme Court was
conscious and attentive to the fact that Section 80M stood enacted with the
object to provide relief on inter-corporate dividends for the said income
had already suffered incidence of tax in the hands of paying company and,
therefore, should not be subjected to tax twice. Thus, where the dividend

ITA No. 127/2002                                                               Page 9 of 12
would not have otherwise suffered tax, the said amount of dividend should
not be allowed the said deduction.

16.     We do not think the aforesaid ratio or provision under section 80AA
would have any application to the facts of the present case. The assessee,
as is apparent from the calculations made by the Assessing Officer, had
received dividend of Rs.2,26,90,618/-. The total income of the assessee as
per the original assessment order dated 30th March, 1989 was Rs.25.35
crores, which stood enhanced to Rs.26.96 crores. The income so computed
was after deduction under Chapter VI A and after reducing administrative
expenses of Rs. 26,26,65,618/-. The total income before deduction under
VI-A, necessarily would be much higher. It therefore follows that the
dividend income was a miniscule and a fraction of the total income. The
aforesaid total (taxable) income was computed after allowing deduction
under Section 36(1)(viii) of Rs.17.75 crores, an amount if not subtracted
would have further increased the quantum the total income. Therefore, in
the facts of the present case, it will not be appropriate and correct to treat
dividend income of Rs.2,26,65,618/- as a part of Rs.17.75 crores, deposited
and transferred to the special reserve. The aforesaid dividend income of Rs
2,26,65,618 could well be treated and regarded as a part of and included in
the total income, subjected to tax of Rs.25.35 crores/ Rs.25.96 crores.
There is therefore a basic fallacy and flaw in the argument raised by the
Revenue.

17.     Even otherwise we find that the issue in question, the effect of
Section 36(1)(viii), viz. deduction claimed under Section 80M in view of
Section 80AA stands examined by different High Courts with the question
raised being decided in favour of the assessee and against the revenue. The
first decision is that of Madhya Pradesh High Court in Commissioner of


ITA No. 127/2002                                                 Page 10 of 12
Income Tax versus Madhya Pradesh Audyogik Vikas Nigam Limited,
(2005) 274 ITR 625 wherein reference was made to the decision of the
High Court of Madras in CIT versus Chemical Holdings Limited, (2001)
249 ITR 540 and the decision of the High Court of Bombay in CIT versus
Maganlal Chhaganlal Private Limited, (1999) 236 ITR 456, observing
that Section 80AA only stipulated income by way of dividends included in
the gross total income and it was inapposite to state that deductions under
section 80M should take place after deducting the sum allowable under
section 36(1)(viii). The deduction under Section 36(1)(viii) should be
computed with reference to the income by way of dividends as computed
in accordance with the provisions of the Act. The relevant words were
"before making any deduction under this Chapter and not with reference to
gross amount of such dividends". Examining the aforesaid provisions, the
courts had observed that the provisions did not support the submission of
the Revenue. The ratio stands approved by the Karnataka High Court in
CIT versus Canfin Homes Limited, ITA No. 3159/2005 decided on 5th
July, 2010, wherein it was held that Section 36(1)(viii) required creation of
a special reserve by a finance corporation engaged in long-term finance for
industrial or agricultural development in India. Deduction could not exceed
40% of the total income computed before making any deduction under the
clauses of section 36(1) or Chapter VI A. An amount not exceeding 40%
of the total income could be allowed as a deduction under the headings
"profits and gains" of business or profession. Reference was thereafter
made to the heading "income from other sources", under Chapter III of the
Act. On harmonious reading of the provisions, it was held that Sections
36(1)(viii) and 80M read with Section 80AA operated in altogether
different fields and in the absence of any provision, prohibiting benefit,
appellate authorities were justified in deciding the issue in favour of the
assessee. Similar view stands expressed by the High Court of Gujarat in

ITA No. 127/2002                                                Page 11 of 12
Deputy Commissioner of Income Tax versus GIIC Limited, (2010) 325
ITR 597 (Guj.).

18.      Question No. 1 accordingly has to be decided in favour of the
respondent-assessee and against the Revenue. This answer will apply to the
deduction claimed under section 80M and not in respect of deduction
claimed under section 80K of the Act.

19.      Question No. 3, counsel for the respondent-assessee concedes, has to
be decided against the assessee in view of the pronouncement of this Court
in Gail India Limited versus Joint Commissioner of Income Tax , (2012)
211 Taxman 587 (Del.), wherein it has been held that amortisation of
payments made towards long lease is not ,,revenue expenditure but ,,capital
expenditure. Question No. 3 is accordingly answered in favour of the
appellant-Revenue and against the respondent-assessee.

20.      As far as second question is concerned, which arises from ground
No.2 before the tribunal, the respondent-assessee never challenged the
computation before C.I.T. (A), hence it need not have been raised before
the Tribunal. The Tribunals finding to this effect is null and void. The
question is accordingly answered.

21.      The appeal is accordingly disposed of. There will be no order as to
costs.

                                                     (SANJIV KHANNA)
                                                         JUDGE


                                                   (V. KAMESWAR RAO)
                                                          JUDGE
November 11th, 2014
VKR/kkb

ITA No. 127/2002                                                 Page 12 of 12

 
 
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