THE C.I.T.BOMBAY CITY-IV BOMBAY vs. M/S.MAGANLAL CHAGANLAL PVT.LTD., BOMBAY.

IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION

INCOME INCOME INCOME TAX REFERENCE NO. 37 OF 1990 TAX REFERENCE NO. 37 OF 1990 TAX REFERENCE NO. 37 OF 1990

The Commissioner of Income-tax,

Bombay City-VI, Bombay.

... Applicant.

V/s.

M/s.Maganlal Chaganlal P.Ltd.

C/o. Standard Drum & Barrel Mfg.Co.

Govan Pada Village,

Chembur, Bombay - 400 074.

... Respondent.

Mr.Ashok Kotangale for the applicant.

Ms.Asifa Khan for the respondent.

CORAM CORAM CORAM : V.C.DAGA AND A.S.AGUIAR, JJ. : V.C.DAGA AND A.S.AGUIAR, JJ. : V.C.DAGA AND A.S.AGUIAR, JJ.

DATED DATED DATED : 30th September 2005. : 30th September 2005. : 30th September 2005.

ORAL ORAL ORAL JUDGMENT : JUDGMENT : JUDGMENT : (Per V.C. Daga, J.)

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This reference under Section 256(1) of the

Income-Tax

Act,

1961

("Act" for short) is

the

instance

of the Revenue, arising out of the order in

I.T.A.No.2848/Bom/1984

dated

16th

November,

1987

passed

by the Income-Tax Appellate Tribunal,

Mumbai

("the

Tribunal"

for short) for the Assessment

Year

1975-76

whereby the following substantial

questions

of law has been referred for the opinion of this

Court :-

(1) Whether on the facts and in the

circumstances of the case, the Tribunal was

right in law in holding that where the CNR No : HCBM020003401990 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:31:06

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assessee is a dealer in shares and holds

certain shares as stock-in-trade, the

interest paid by the assessee on the funds

borrowed for the purpose of investment in

such shares is to be allowed as admissible

deduction u/s. 36(1)(iii) and not under

section 57(1)(iii) ?

(2) Whether, on the facts and in the

circumstances of the case, the Tribunal was

right in holding that where the assessee is

a dealer in shares and holds certain shares

as stock-in-trade, the interest paid by the

assessee

the

funds borrowed

for

the

purpose of investment in such shares is not

to be reduced from the gross dividend while

granting relief u/s 80 M?

The The The Facts : Facts : Facts :

--------- --------- ---------

The assessee-company derives income from

business

manufacturing

drums

and

barrels

and

dealing

and speculation in shares.

During the

year

under consideration, the assessee received, by way of

dividend,

income of a sum of Rs.13,35,454/-

and

claimed deduction under section 80M of the Act on the

entire

amount.

The Income Tax Officer ("I.T.O." for

short)

worked

out the interest attributable to

the

borrowed

funds

for

acquisition

shares

Rs.25,80,801/-

and

adjusted

the same

against

the

dividend

income.

further allocated

sum

Rs.29,246/-,

which

according

him,

represented

expenses incurred for the purpose of earning dividend

income.

The

result was that there was no

positive

income

under

the

head

"dividend

income"

and

consequently, he denied the assessee’s claim under

section 80M. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:31:06

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The Commissioner of Income Tax (Appeals)

("C.I.T.(A)"

for short), in the appeal filed at

the

instance

the assessee, granted

partial

relief.

The C.I.T.(A) worked out the interest attributable to

the

investment in shares at Rs.3,22,528/- payable on

sum

of Rs.25,59,020/-, being the

borrowed

funds

utilised

for

acquisition of shares

M/s.Killick

Nixan Ltd.

and M/s.British Burma Petroleum Ltd.

The

balance

interest was allowed by the C.I.T.(A)

under

section

36(1)(iii)

on the ground that the

interest

was

admissible

deduction

under

section

36(1)(iii)

the Act being payment in

respect

sums

borrowed

for the purpose of business in

share

dealings.

doing

so, C.I.T.(A)

relied

the

decision

the Gujarat High Court in the

case

C.I.T. C.I.T. C.I.T. v. Cotton Fabrics Ltd. v. Cotton Fabrics Ltd. v. Cotton Fabrics Ltd., (1981) 131 ITR 99

(Guj).

In the appeal preferred by the Revenue

before

the

Tribunal, the order passed by

C.I.T.(A)

came

be confirmed.

The Tribunal held

that

the

Supreme

Court

decision in the case of

Distributors Distributors Distributors

(Baroda) (Baroda) (Baroda) Pvt.Ltd.

Pvt.Ltd.

Pvt.Ltd.

Union of India

Union of India

Union of India, (1985) 155 ITR

120 (SC), relied upon by the Revenue, did not apply

to the facts of the case. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:31:06

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Rival Rival Rival Submissions : Submissions : Submissions :

----------------- ----------------- -----------------

Learned Counsel appearing for the Revenue

reiterated

the submissions made before the

Tribunal

and placed reliance on the judgment of the Apex Court

the

case

Distributors

(Baroda)

Pvt.Ltd. Distributors

(Baroda)

Pvt.Ltd. Distributors

(Baroda)

Pvt.Ltd.

(supra).

further

submits that in the

case

assessee itself, for the assessment year 1968-69, the

very

same

question,

may be in a

little

different

form,

was

considered by this Court in its

judgment

reported

in (1999) 236 ITR 456 (C.I.T.

Maganlal C.I.T.

Maganlal C.I.T.

Maganlal

Chhaganlal Chhaganlal Chhaganlal (P.)

(P.)

(P.) Ltd.

Ltd.

Ltd.).

He submits that in that case,

while dealing with more or less similar question, the

Division

Bench of this Court held that the deduction

under

Section

80M of the Act has to

calculated

with

reference to the amount of dividend computed in

accordance

with

the provisions of the

Act

forming

part of the gross total income, i.e., after deducting

interest

paid

on monies borrowed for

earning

such

income,

and not with reference to the full amount of

dividend received by the assessee.

He, thus, submits

that

the

question raised in the case

assessee,

once

again, is no more open for debate.

further

submits

that the aforesaid judgment of this Court in

the

case

assessee,

for

the

assessment

year

1968-69,

has

become

final

and

conclusive

and,

therefore,

it would not be reasonable or proper

for

this

Court to take contrary view in the case arising Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:31:06

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out of the order meant for the subsequent assessment

year 1975-76.

Per contra, learned counsel appearing for

the

respondent-assessee

urged

that the

amount

interest

paid

the overdraft

and

the

expenses

incurred

to earn the income, related to the business

of trading in shares, have to be allowed as deduction

in computing income under the head "business" and the

expenses should be deducted from the dividend income

granting deduction under section 80M of the Act.

The The The Issue : Issue : Issue :

--------- --------- ---------

The issue for consideration is:-

"Whether or not the interest paid on

borrowings used for the purchase of shares

held by the respondent-assessee should not

be reduced from the dividend income

granting deduction under section 80M or it

should be treated as business expenditure

incurred for trading in shares?"

Consideration Consideration Consideration : : :

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Having heard rival parties, before dealing

with

rival

submissions, we must point out that

the

assessee

a private limited company

carrying

on Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:31:06

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business

manufacturing of drums and barrels

and

also dealing in shares and making investments in

shares.

In the case of assessee itself for the

assessment

year 1968-69, deduction under section 80M

the Act had been calculated with reference to the

amount

dividend computed in accordance with

the

provisions

of the said section forming part;

of the

gross total income, i.e.

after deducting interest on

monies borrowed for earning such income, and not with

reference

to the full amount of dividend received by

the assessee [see C.I.T. v. Maganlal Chhaganlal

(P.) Ltd., (1999) 236 ITR 456].

10.

The aforesaid judgment of the Division

Bench

this

Court

presided

over

Justice

B.P.Saraf

(as

then

was)

the

case

respondent-assessee

itself

had

been

delivered

following

the judgment of the Apex Court in the case

Distributors (Baroda) P.Ltd. Distributors (Baroda) P.Ltd. Distributors (Baroda) P.Ltd.

(supra).

The

said

judgment has been accepted by the respondent-

assessee.

11.

Apart from the above, the main business of

the

respondent-assessee

herein

is not to

deal

shares

and

stocks

but

manufacture

drums

and

barrels.

Thus,

the case of the assessee

fully Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:31:06

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covered

by the ratio of the decision of the

Supreme

Court

the case of Distributors

(Baroda)

P.Ltd. Distributors

(Baroda)

P.Ltd. Distributors

(Baroda)

P.Ltd.

(supra);

wherein

it has been held

that

deduction

under

section 80M(1) of the Act has to be calculated

with

reference to the amount of dividend computed in

accordance

with

the provisions of the

Act

forming

part of the gross total income, i.e., after deducting

interest

paid

on monies borrowed for

earning

such

income, and not with reference to the full amount of

dividend received by the assessee.

12.

At this juncture, it will not be out of

place

to mention that in Income Tax Reference No.117

1989 (C.I.T.

M/s.Emrald Co.Ltd.), which

has

been

decided by us along with the reference at hand,

did

permit

the respondent-assessee

therein

claim deduction of interest paid on overdraft and the

expenditure

incurred

relating

to the

business

trading

shares

treating

allowable

expenditure

under the head "business" since the sole

business

of the assessee therein M/s.Emrald

Co.Ltd.

(supra)

was to deal in shares and stocks only.

The

income

from

dividend was an incidental income.

that view of the matter, it is not possible for us to

follow

the

judgment delivered by us in the case

M/s.Emrald

Co.Ltd.

(supra).

The said judgment

can

be distinguished on fact.

The view taken in the case

hand

based

the

fact

that

the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:31:06

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respondent-assessee’s main business is not of dealing

shares and stocks but they are basically

engaged

the business of manufacture of drum and

barrels.

According

to us,

this is a

crucial

distinguishing

feature

between

the

case

the

present

respondent-assessee (M/s.Maganlal Chhaganlal P.Ltd.)

and that of M/s.Emrald Co.Ltd. (supra).

13.

Thus, in the facts and circumstances of

this case, we answer both questions referred to us in

the negative, i.e., in favour of Revenue and against

the assessee.

Reference stands disposed of with no order

as to costs.

(A.S.AGUIAR, (A.S.AGUIAR, (A.S.AGUIAR, J.) J.) J.)

(V.C.DAGA, (V.C.DAGA, (V.C.DAGA, J.) J.) J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:31:06 Powered by TCPDF (www.tcpdf.org)