HIGH COURT OF PUNJAB AND HARYANA
Commissioner of Income-tax-I, Ludhiana
Vardhman Holdings Ltd.
IT Appeal NOS. 50 TO 52 & 73 OF 2012
JANUARY 25, 2013
R.P. Nagrath, J.
ITA Nos. 50, 51, 52 and 73 of 2012 arise out of the common order dated 30.08.2011 (Annexure A-VI) passed by Income Tax Appellate Tribunal, Chandigarh, Bench ‘B’, Chandigarh (ITAT), disposing of four appeals for the assessment years 1994-95, 1995-96, 2000-2001 and 1997-98 respectively of the assessee, on the issue of deduction under Section 80M of the Income Tax Act, 1961 (for brevity ‘IT Act’). The identical questions of fact and law arise in these appeals filed under Section 260A of IT Act and therefore, taken up together for disposal.
2. For convenience, facts are taken from the ITA No. 50 of 2012, relating to the assessment year 1994-1995. The respondent-assessee declared total taxable income of Rs. 13,45,07,470/- for the said Assessment Year.
3. The respondent-assessee claimed deduction under Section 80M of the IT Act, on the ‘gross dividend’ of Rs. 87,50,490/- received by it. The Assessing Officer (AO) noted that as per Section 80AA of the IT Act, deduction under Section 80M is admissible on the quantum of ‘net dividend’ received during the year. Initially the AO in the assessment order dated 29.11.1996 (Annexure A-I) reduced the proportionate amount out of personnel, administrative & miscellaneous and financial expenses to determine the ‘net dividend’ permissible for deduction under Section 80M of the IT Act. The said amount was determined at Rs. 11,81,025/-, which was reduced from the eligible dividend of Rs. 81.99 lacs and deduction was allowed to the respondent-assessee to the tune of Rs. 70,18,975/- under Section 80M of the IT Act as the ‘net dividend’ income.
4. In appeal the Commissioner of Income Tax (Appeals) [CIT (A)] held that only the financial expenses incurred by the assessee could be taken into consideration for working out the deduction and not the personnel and administrative & miscellaneous expenses. The disallowance by the CIT(A) was calculated at Rs. 5,49,000/- instead of Rs. 11,81,025/-. In these terms, the appeal was partly allowed. The ITAT in the appeal filed by the Revenue as well as the respondent-assessee vide order dated 31.01.2007 (Annexure A-III) restored the matter to the AO with a direction to determine the issue in the light of decision of Special Bench, Income Tax Appellate Tribunal, Chandigarh in the case of Punjab State Industrial Development Corpn. Ltd. v. Dy. CIT  102 ITD 1 (Chd.)(SB).
5. Now, AO on reconsideration of the matter redetermined the disallowance, proportionate to the personnel and administrative & other expenses and not on the amount of financial expenses, to the tune of Rs. 6,66,035/- vide order dated 26.12.2007 (Annexure A-IV). CIT(A) accepted the appeal partly, restricting disallowance to the extent of Rs. 1 lac, taking into account similar amount of disallowance to the assessee for the assessment year 2002-03. The Revenue filed appeals before ITAT which determined the disallowance for different years at Rs. 1 lac for assessment year 1994-95; Rs. 1.5 lacs for 1995-96 and Rs. 2 lacs for each of the assessment years 1997-98 and 2000-01. Accordingly the appeals were disposed of. Against the order of ITAT dated 30.08.2011 (Annexure A-VI) and the order of CIT(A) dated 01.02.2010 (Annexure A-V), the Revenue has preferred these appeals.
6. Revenue has proposed the following substantial question of law:-
“Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal is justified in restricting the disallowance u/s 80M to the extent of Rs. 1,00,000/- instead of upholding the total disallowance of Rs. 6,66,035/- made by the A.O. being proportionate expenses?”
Similar question has been proposed in the other connected appeals.
7. It was vehemently contended by learned counsel for the Revenue that the gross dividend income of respondent-assessee varies exorbitantly in each of the assessment years, in question, and thus determination of allowance by the authorities below, by estimation or guess work, is absolutely illegal and that AO was quite correct in determining the disallowance, based on sound reasons by taking into account the amount, proportionate to the personnel and administrative & miscellaneous expenses.
8. It is indisputable that the dividend income for the assessment years in question was received from the investments made in the earlier years. There is also no quarrel with the proposition of law that the deduction under Section 80M of IT Act is to be allowed on the ‘net dividend’ and not the ‘gross dividend’. This was so held by Apex Court in Distributors Baroda (P.) Ltd. v. Union of India  155 ITR 120 , that the deduction required to be allowed under Section 80M(1) of the IT Act is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act, and forming part of the gross total income, and not with reference to the full amount of dividend received by the assessee.
9. In Punjab State Industrial Tribunal Development Corporation’s case (supra), the Special Bench of the Tribunal held as under:-
“46. (i) That deduction under s. 80M is to be allowed on net dividend income computed as per provisions of ss. 57 to 59 of the IT Act. The deduction is not to be allowed on gross dividend receipt. (ii) That net dividend income is to be computed under the head “Other sources” after deduction of expenditure incurred for purposes of earning, making or realizing dividend income. (iii) The deduction to be allowed out of dividend income are as per specified provision of the statute. These cannot be allowed on general commercial considerations. (iv) That actual expenditure incurred are to be taken into consideration. There is no question of taking expenditure on estimate or presumption basis while computing dividend income or while allowing deduction under s. 80M of the IT Act. (v) That where shares are acquired out of borrowed funds, on which dividend is received, deduction of interest paid can be allowed under s. 57, provided loan was taken for making and earning dividend income. There is no question of deduction of any amount paid as interest, to which provisions of s. 36(1)(iii) are applicable, while computing deduction under s. 80M of the IT Act. (emphasis supplied)
47. In the light of above propositions, I am unable to agree with the order of the Tribunal for asst. year 1990-91 to 1992-93 in the case of the assessee. There is no material to hold that assessee spent any amount on earning or making or realizing any dividend. There is further no evidence to show that borrowed funds were utilized for acquiring shares on which dividend was paid to the assessee. No evidence of incurring of any actual expenditure has been shown. In the circumstances, when no expenditure has been shown to have been incurred for earning, making or realizing dividend income, there is absolutely no question of deducting any part of interest or management expenses or expenses allowed as a deduction to the assessee under s. 36(1)(viii) or any other provision of the IT Act, while computing dividend income. I, therefore, direct that deduction under s. 80M be allowed to the assessee as claimed by the assessee in all the assessment years under appeal.”
10. In CIT v. Metalman Auto (P.) Ltd.  336 ITR 434 AO held that for earning dividend income, the assessee must be presumed to have incurred some expenditure which had been disallowed under Section 14A. On appeal CIT (A) held that in the absence of evidence of any expenditure having been shown to have been incurred, disallowance under Section 14A was not justified. The Tribunal observed thus:-
“25. Ground No. 4 is regarding disallowance under Section 14A of the Act in relation to the exempt income earned by the Assessee. In this regard, the facts are that the Assessee had earned income by way of interest on UTT Bonds and dividend of Rs. 54,000 and Rs. 93,08,912 respectively which was exempted from tax. The AO estimated a sum of Rs. 1,00,000 having been incurred by the Assessee for earning such exempt income and accordingly, made an addition under Section 14A of the Act. Out of the sum of Rs. 1,00,000, Rs. 65,000 was considered as interest expenditure relatable to the borrowed capital used for investment in the securities yielding exempt income and Rs. 35,000 was estimated out of the administrative expenses. The CIT(A) has deleted the addition on the ground that the investments have been made from funds on which no interest has been paid. The CIT(A) also noticed that the AO has not backed his assertion that investments were made from combined funds of the Assessee which could not be bifurcated. Against the deletion of addition, the Revenue is in appeal before us.
26. Obviously, the issue is to be decided in the light of the judgment of the Hon’ble jurisdictional High Court in the case of Hero Cycles Ltd. (supra). As per the Hon’ble jurisdictional High Court, the disallowance under Section 14A requires a finding of incurrence of expenditure for earning the exempt income. In case no expenditure has been incurred, the disallowance under Section 14A is not justified. In other words, there cannot be a presumption that certain expenditure is bound to be incurred for earning the exempt income. Considered in this light, we find that there is no mistake in the order of the CIT(A). Quite clearly, the AO had only made a presumption that certain expenditures have been incurred for earning the impugned exempt incomes. Therefore, following the parity of reasoning laid down by the Hon’ble jurisdictional High Court in the case of Hero Cycles Ltd. (supra), we affirm the decision of the CIT(A) and accordingly, ground raised by the Revenue is dismissed.”
This Court held that for disallowance under Section 14A presumptive expenditure in the absence of actual expenditure could not be taken into account.
11. No authority taking a contrary view that the Revenue is entitled to reduce from ‘gross dividend’ received, the presumptive expenditure in the absence of actual expenditure for determining the ‘net dividend’ income, has been cited. The Revenue did not conduct an enquiry to determine the actual expenditure incurred in earning the dividend income by the assessee, which is a manufacturing concern and also deals in trading of the hosiery goods. It is not an investment company. It has been the categorical stand of the respondent-assessee that the investment, on which the dividend income is earned, was old and the total dividend warrants received by the assessee were only 2 to 3 on the shares held of the sister concern. The appellant’s counsel urged that the ITAT or for that matter CIT(A) had no basis before them to determine the expenses incurred in earning dividend income by approximation but we find that for that matter the grievance could be raised by respondent-assessee and not the Revenue which has come in appeal.
12. We do not find that any substantial question of law arises in these appeals, therefore, the same are dismissed.