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IN THE HIGH COURT OF BOMBAY
Kotwal and V.S. Desai, JJ.
Appellants: Commissioner of Income-tax, Bombay City II
Vs.
Respondent: Industrial Investment Trust Co. Ltd.
Income-tax Reference No. 69 of 1962 Decided On: 11.09.1967
INCOME TAX - Notification No. 47 of 1933 - Exemption from super-tax - Whether assessee entitled to exemption on whole of dividend income or only on part after deducting expenses - Construction of notification - Whether expenses incurred for earning exempt income can be deducted from taxable income - Held, assessee entitled to exemption on whole of dividend income without deduction of expenses - Expenses incurred for earning exempt income cannot be deducted from taxable income.
Fact of the Case:
The assessee, an investment trust company, received dividend income from other companies that had paid or would pay super-tax on the profits from which the dividends were paid. The assessee claimed exemption from super-tax on the entire dividend income under Notification No. 47 of 1933, which exempted from super-tax income derived from dividends paid by companies that had paid or would pay super-tax on the profits from which the dividends were paid. The Income-tax Officer and Appellate Assistant Commissioner allowed exemption only on a part of the dividend income after deducting a proportionate amount of the assessee's business expenses, holding that the exemption applied to the computed income and not the gross income. The Tribunal accepted the assessee's contention that it was entitled to exemption on the entire dividend income. On a reference to the High Court, the question arose whether the assessee was entitled to exemption from super-tax on the whole of the dividend income without deduction of any expenses.
Finding of the Court:
The High Court held that the assessee was entitled to exemption from super-tax on the whole of the dividend income without deduction of any expenses. The court interpreted the notification as providing for a self-contained exemption from super-tax, and held that the word "income" in the notification meant the gross income received by the assessee as dividends, and not the computed income after deducting expenses. The court also held that the expenses incurred by the assessee in earning the dividend income could not be deducted from the taxable income, as the expenses were incurred for the purpose of earning both exempt and taxable income, and there was no basis for allocating the expenses between the two types of income.
Issues: 1. Whether the assessee was entitled to exemption from super-tax on the whole of the dividend income or only on a part after deducting expenses. 2. Whether the expenses incurred for earning exempt income can be deducted from taxable income.
Ratio Decidendi: 1. The court interpreted Notification No. 47 of 1933 as providing for a self-contained exemption from super-tax, and held that the word "income" in the notification meant the gross income received by the assessee as dividends, and not the computed income after deducting expenses. 2. The court held that the expenses incurred by the assessee in earning the dividend income could not be deducted from the taxable income, as the expenses were incurred for the purpose of earning both exempt and taxable income, and there was no basis for allocating the expenses between the two types of income.
Final Decision: The assessee was entitled to exemption from super-tax on the whole of the dividend income without deduction of any expenses.
1. This is a reference under section 66 (1) of the Indian Income-tax Act referring to this court a question of law, which arises in the assessment orders made on the assessee for the assessment of eight years, viz., the assessment years 1951-52 to 1958-59.
2. The assessee is a company incorporated under the Indian companies Act having for its principal business, acquisition and holding of investments in stocks and shares, etc. It has extensive holdings and derives income from dividends and interest on securities. In all the assessment years, which are involved in this reference, the nature of the business of the company and its earning was the same. It is, therefore, necessary to give the figures of income only for the first year as the said figures are typical with regard to the subsequent years also. In the assessment years also. In the assessment year 1951-52 the company derived income from dividends to the extent of Rs. 7,61,407. Our of this amount, a sum of Rs. 5,86,873 represented the dividends paid by other companies which had paid or would pay super tax in respect of the profits out of which such dividends were paid. The balance of Rs. 1,74,534 represented income from other than such dividends. Now, the assessee-company satisfied all the conditions set out in the explanation to the Notification No. 47 of the Governor-General-in-Council dated 9th December, 1933, and was, therefore, entitled to the exemption from payment of super-tax in respect of the income specified in the said notification. In the assessment year the sum of Rs. 5,86,873 represented such income and the assessee accordingly claimed exemption in terms of the notification in respect of the entire amount. The loss of the business being the expenses for the year of assessment was Rs. 92,619 and allowing this amount the computed total income of the assessee came to Rs. 6,68,788. The Income-tax Officer took the view that the business loss or expenses had to be spread over the entire income and, consequently, the assessee will be entitled to exemption in terms of the notification not in respect of the entire amount of Rs. 5,86,873 but only in respect of that part of the computed income, which was referable to the said amount of Rs. 5,86,873. In other words, the exemption could be allowed only in respect of a sum arrived at by deducting from Rs. 5,86,873 the proportionate expenses attributable to the said figure. In that view of the matter, he apportioned the expenses between the two figures of Rs. 5,86,873 and Rs. 1,74,534 which represented, respectively, the income which was entitled to exemption under the notification and the income which was not so exempted, and, ultimately, arrived at the conclusion that the income of the assessee which was liable to pay super-tax was Rs. 1,74,534 less the proportionate business loss of Rs. 22,544. The assessee appealed to the Appellate Assistant Commissioner, who agreed with the view taken by the Income-tax Officer. In the further appeal to the Tribunal, it accepted the assessees contention that, on a proper construction of the notification, the assessee was entitled to an exemption in respect of the entire amount of Rs. 5,86,873. On an application made by the department under section 66 (1) of the Income-tax Act, it has referred the following question arising out of its order to this court :
"Whether, on the facts and on a proper construction of the Notification No. 47 dated December 9, 1933, the assessee was entitled to exemption from super-tax on the whole of the dividend income derived from any other company which has paid or will pay super-tax in respect of the profits out of which such dividends were paid without deduction of any loss or other expenses that the company has incurred ?"
3. The notification in question is as follows :
"The Governor-General-in-Council is pleased to exempt from super-tax -
(i) so much of the income of any investment trust company as is derived from dividends paid
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