MODERN AGENCIES LTD v. INCOME TAX OFFICER
[Citation -1986-LL-1110-2]

Citation 1986-LL-1110-2
Appellant Name MODERN AGENCIES LTD
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 10/11/1986
Assessment Year 1982-83
Judgment View Judgment
Keyword Tags interest paid on borrowed capital • scheme of amalgamation • gross dividend income • payment of interest • allowable deduction • capital expenditure • computing deduction • provident fund
Bot Summary: Out of this income a sum of Rs. 8,86,771 related to dividend income on the original holding and the balance of Rs. 39,74,743 was dividend income received on the holding account of Karamchand Thappar Sons Ltd. For the purpose of computing relief on dividend income under s. 80M, the ITO estimated the expenditure relatable to the earning of dividend income of Rs. 8,86,771 at Rs. 10,000. According to Shri Roy cl of s. 57 is not at all applicable to dividend income as in the case of such income no expenditure is required to be incurred for the purpose of making or earning such income as in such a case, incurred for the purpose of making or earning such income as in such a case, income has already been earned on declaration, distribution or payment of dividend. In view of s. 80AA inserted by the Finance Act, 1980 with retrospective effect from 1st April, 1968, deduction under s. 80M has to be computed with reference to the income by way of dividend as computed in accordance with the provisions of the IT Act, 1961 and not with reference to the gross amount of such dividend. In respect of the dividend income under the head income from other sources certain deductions are allowed under s. 57. An income which has accrued or has become due is not the same thing as making income. Unless one has control over income, he cannot be said to be making that income. Having regard to the facts and circumstances of the case we are of the opinion that it would be fair and reasonable to estimate the expenditure relatable to the dividend income which is deductible under s. 57 at Rs. 25,000.


This appeal filed by assessee is directed against order dt. 13th Nov., 1985 passed by CIT(A). Pursuant to order of Hon'ble High Court at Calcutta, Karamchand Thapper & Sons Ltd., stood merged with assessee company on 12th April, 1982. scheme of amalgamation was effective from 1st July, 1981. assessment year. with which we are concerned in this appeal is 1982-83 for which accounting year ended on 31st Dec., 1981. during relevant accounting year assessee company earned gross dividend income of Rs. 48,59,614. Out of this income sum of Rs. 8,86,771 related to dividend income on original holding and balance of Rs. 39,74,743 was dividend income received on holding account of Karamchand Thappar & Sons Ltd. For purpose of computing relief on dividend income under s. 80M, ITO estimated expenditure relatable to earning of dividend income of Rs. 8,86,771 at Rs. 10,000. Expenses for earning dividend income in respect of Karamchand Thapper and Sons Ltd, were estimated at Rs. 4 lakhs. To this amount ITO added further sum of Rs.1,47,946, which according to him was amount of interest paid on borrowed capital utilised for purchasing of shares. In this way total expenditure in respect of Karamchand Thapper and Sons Ltd, was estimated at Rs. 4,47,946. ITO computed deduction under s. 80M on net dividend income after deducting these expenses. assessee appealed to CIT(A). CIT(A) has noted in para 22 of his order that there is really no dispute about disallowance of Rs. 1,47,946 o n interest paid for purchase of shares. So this amount was confirmed by CIT(A). From his order it further appears that it was admitted on behalf of assessee that one Shri. T.K. Rudra, officer of assessee company, was responsible for watching over entire collection of dividends and also for looking after allied jobs connected with dividend warrants themselves. Shri T.K. Rudra received annual salary of Rs. 18,000. CIT(A) expressed view that considering volume of income from dividend Shri T.K. Rudra must be assisted by at least two assistants whose emoluments would be round about Rs. 2,000 per month. i.e. Rs. 24,000 annually. CIT(A) thus was view that total annual emoluments of three persons engaged in earning dividend income should be around Rs. 42,000. To this amount was added sum of Rs. 8,000 on estimate so as to cover expenses incurred by assessee towards provident fund, pension, gratuity etc., for three employees. In this way CIT(A) estimated collection expenses at Rs. 50,000. He accordingly directed ITO to re-compute deduction under s. 80M taking collection expenses at Rs. 50,000 instead of Rs. 4 lakhs for Karamchand Thappar & Sons Ltd and Rs. 10,000 for Modern Agencies Ltd. Still feeling aggrieved, assessee came up in second appeal before Tribunal. All grounds in this appeal are directed against order of CIT(A) regarding expenses which are to be deducted for computing deduction under 80M. Here it may be pointed out that ground No.3 which states that CIT(A) went wrong in disallowing sum of Rs. 1,47,940 out of interest paid for purchasing shares has not been pressed before us. This ground is accordingly rejected and order of CIT(A) on this particular point is upheld. remaining grounds relate to order of CIT(A) directing ITO to re- compute deduction under s. 80M taking collection expenses at Rs.50,000. Shri. K. Roy, ld. authorised representative for assessee, submitted before that no expenses were incurred by assessee for earning dividend income. It was further submitted that expenses incurred for collecting dividend income cannot be considered for deduction in order to arrive at net dividend income for purpose of allowing relief under s. 80M. Elaborating his argument Shri Roy submitted that collection expenses are not incurred for earning dividend income and that these expenses are incurred after dividend income has already been earned. In this connection our attention was invited to s. 8 of IT Act, 1961 in order to show that dividend income accrues as soon as dividend is declared, distributed or paid. It was urged that for accrual or income no expenditure was required to be incurred by assessee company. It was next submitted that expenditure incurred by assessee company for collecting or realising dividend income is not deductible either under s. (i) or cl. (iii) of s. 57. According to Shri Roy cl (iii) of s. 57 is not at all applicable to dividend income as in case of such income no expenditure is required to be incurred for purpose of making or earning such income as in such case, incurred for purpose of making or earning such income as in such case, income has already been earned on declaration, distribution or payment of dividend. Thus according to Shri Roy except expenditure incurred on payment of interest on borrowed capital utilised for purpose of purchasing shares, no other expenditure is relatable to earning of dividend income. It was thus urged that CIT(A) was wholly in error in directing ITO to re- compute deduction under s. 80M taking collection expenses at Rs. 50,000. Ld. departmental representative has, on other hand, fully supported order of CIT(A). We have considered rival contentions as also facts on record. In view of s. 80AA inserted by Finance (No.2) Act, 1980 with retrospective effect from 1st April, 1968, deduction under s. 80M has to be computed with reference to income by way of dividend as computed in accordance with provisions of IT Act, 1961 and not with reference to gross amount of such dividend. So deduction under s. 80M has to be allowed on net dividend income after deductions permissible under Act. In respect of dividend income under head "income from other sources certain deductions are allowed under s. 57. Under cl. (i) of s. 57 deduction of any reasonable sum paid by way of collection or remuneration to banker or any other person for purpose of realising dividend is allowable. According to Shri Roy this clause is not applicable in instant case as no commission of remuneration to any banker or any other person for purpose of realising dividends was paid. We do not agree with this contention. CIT(A) has recorded specific finding on basis of admission made on behalf of assessee that Shri. T.K. Rudra, officer of assessee company was responsible for watching over entire collection of dividends and also for looking after allied jobs connected with dividend warrants themselves. Shri Rudra received annual salary of Rs. 18,000. According to CIT(A) at least two other assistants must be engaged fully in management of collection etc., in respect of dividend income. Working cannot be doubted that assessee paid remuneration to Shri. T.K. Rudra, and also to at least one more employee for purpose of realising dividend income. So, this part of expenditure is deductible under s. 57 and, therefore, has to be taken into consideration while computing net dividend income for purpose o f allowing deduction under s. 80M. We are also of view that such expenditure also falls under cl. (iii) of s. 57. Under this cl. (ii) of s. 57 any expenditure not being in nature of capital expenditure, laid out or expended wholly and exclusively for purpose of making or earning dividend income is allowable as deduction under s. 57. In this clause legislature has simultaneously used words 'working and earning' in relation to income in respect of which expenditure has been incurred. If we interpret language of this clause in manner desired by Shri Roy, it would lead to startling results. Evidently, different meaning has to be assigned with words 'making and earning'. Not only expenditure incurred for earning dividend is allowable under this clause but also any expenditure for making such income is allowable as deduction under this clause. work 'making' has not been used in sense of accrual of income. income which has accrued or has become due is not same thing as making income. income is made when after it has accrued. person concerned gets control over such income. Unless one has control over income, he cannot be said to be making that income. So, in our opinion cl. (iii) will also apply to expenditure which has been expended for purpose of realising or collecting dividend income. So, expenditure estimated by CIT(A) would fall within ambit of both cls. (i) and (iii) of s. 57 and, therefore, is allowable deduction under this section. We accordingly repel contention advanced on behalf of assessee that no expenditure, other than interest paid on borrowed capital is relatable to dividend income. We are, however, of opinion that expenditure estimated at Rs. 50,000 by CIT(A) is on higher side. dividends have been received by assessee company from 11 companies and it was stated by Shri Roy before us that from 11 companies only 27 dividends warrants were received. Having regard to facts and circumstances of case we are of opinion that it would be fair and reasonable to estimate expenditure relatable to dividend income which is deductible under s. 57 at Rs. 25,000. This amount is over and above expenditure incurred on payment of interest in respect of which order of ITO has been confirmed by CIT(A). No other point has been pressed before us in this appeal which, for No other point has been pressed before us in this appeal which, for reasons given above stands allowed in part. *** MODERN AGENCIES LTD v. INCOME TAX OFFICER
Report Error