CLOTH TRADERS (P) LTD., ETC vs. ADDL. COMMR. OF INCOME TAX, GUJARAT-I, ETC.

CIVIL APPEAL No. 117/1975Supreme Court[1979] 3 S.C.R. 98404 May 1979Bench: 3 JudgesAuthor: P.N. BHAGWATI, D.A. DESAI, A.D. KOSHAL CLOTH TRADERS23 pages
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What were the facts?

The appeals and references before the Supreme Court concerned assessment years 1965-66 to 1969-70. The core issue was whether rebate of income tax on dividends received by a company from another Indian company was admissible on the actual dividend amount or only on the dividend income as computed after deductions, specifically interest paid on borrowings for investments. The Gujarat High Court had ruled against the assessees, creating a conflict with decisions from the Bombay, Madras, and Calcutta High Courts. The Supreme Court was asked to resolve this divergence in interpretation of Sections 85A and 80M of the Income Tax Act, 1961.

What did the Supreme Court hold?

The Supreme Court allowed the appeals and answered the questions in favour of the assessees. The Court held that assessees are entitled to relief under Section 85A for assessment years 1965-66, 1966-67, and 1967-68, and under Section 80M for assessment years 1968-69 and 1969-70, in respect of the entire amount of dividend income without deductions for interest paid on borrowings for acquiring shares. The Court reasoned that the historical context of similar provisions and the legislative intent behind amendments, including the retrospective deletion of the words 'received by it', indicated a desire to widen the scope of relief. The phrase 'any dividend from an Indian company' or 'any income by way of dividends from an Indian company' was interpreted to mean the full amount of dividend derived or obtained, not the net dividend after expenses. The Court also noted that the legislature had not amended Section 80M to override the judicial interpretation favouring the full dividend amount, despite several amendments to other aspects of the section. The possibility of deductions exceeding gross total income was addressed by Section 80A(2). The ratio is that deductions under Sections 85A and 80M are to be calculated on the gross dividend income, not the net dividend income after expenses.

What were the issues?

1. Whether, under Section 85A of the Income Tax Act, 1961, rebate of income tax is admissible on the actual amount of dividend received by a company from an Indian company, or if it is confined only to the dividend income as computed under the Act after making deductions for interest paid on borrowings for making the investment? (Mixed question of law and fact, turning on Section 85A). 2. Whether, under Section 80M of the Income Tax Act, 1961, rebate of income tax is admissible on the actual amount of dividend received by a company from an Indian company, or if it is confined only to the dividend income as computed under the Act after making deductions for interest paid on borrowings for making the investment? (Mixed question of law and fact, turning on Section 80M). Assessee's contentions: The assessees argued that the rebate/deduction was admissible on the entire amount of dividend received, without deducting interest paid on borrowings for acquiring shares. They relied on the interpretations of similar provisions by the Bombay, Madras, and Calcutta High Courts. Revenue's contentions: The revenue contended, and the Gujarat High Court held, that the rebate/deduction was confined to the dividend income as computed after making necessary deductions under the Act, including interest expenses.

Which sections of the Income-tax Act were involved?

Section 85A,Section 80M,Section 99(1)(iv),Section 80A(2),Section 57

AI-generated summary — verify with the full judgment below

A CLOTH TRADERS (P) LTD., ETC . •• ADDL. COMMR. OF INCOME TAX, GUJARAT-I, ETC.

May 4, 1979 ll [P. N. BHAGWATI, D. A. DESAI AND A. D. KosHAL. JJ.] c lncome Tax Act, 1961 (43 of 1961)-Sections 85A & SOM-Whether rebate of income tax admissible on the amount of dividend received bJ the assessee company from an Indian company or whether confined onl}' to divi- deml income as computed under the Act after making lhe deduction on the interest paid on borrowings for making the investmentJ.

The earliest provision granting exemption Of super-tax in respect of in.ter- corporate dividends was made aB far back as 9th December, 1933 in a Notifica- tion issued by the Governor General in Council and it provided as follows : 'The Governor General in Council is plea<:ed to exempt from super-tax. D (i) so much of the income of any investment trust company as is derived from dividend paid by any other company which hm; paid or will pay super-tax in respect of the profits. out of wliich such dividends are paid."

This Notification was followed by a provision of a similar kind granting exemption from super-tax in respect of certain specified categories of inter- E corporate divid

The order continues below.

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