The main legal point established in the judgment is that the deduction under Section 80M should be allowed without reducing the deduction under Section 36(1)(viii) from the dividend income.

Sanjiv Khanna, J.

1. This appeal by the Revenue, which relates to Assessment Year 1986-87, stands admitted for adjudication on the following substantial questions of law:-

“1. Whether on the facts and circumstances of the case the ITAT was correct in law in allowing the deduction u/s 80M & 80K without reducing from the dividend income, the deduction as admissible u/s 36(1)(viii) of the Act?

2. Whether ITAT was correct in law in allowing the deduction u/s 36(1)(viii) of the Act to the extent of 40% of the income determined without restricting the amount transferred to the reserve created during the year?

3. Whether on the facts and circumstances of the case the Tribunal was correct in awarding the allowance of Rs.72,574/-being the amortization expenses incurred for acquiring lease hold land by the assessee?”

2. Return filed by the respondent-assessee was made subject matter of regular assessment under Section 143(3) of the Income Tax Act, 1961 (“Act”, for short), vide assessment order dated 30th March, 1989. Total income was assessed at Rs.25,35,90,870/-. The assessee was allowed deduction under Section 36(1)(viii) of the Act and was also allowed deduction under Sections 80M and 80K of the Act on dividend income of Rs.2,26,12,593/-. The total quantum of deduction allowed under Section 36(1)(viii) was Rs.17,81,18,441/-. Similarly, the assessee was allowed amortisation of expenses of Rs.72,574/- in respect of the leasehold land.

3. The Commissioner of Income Tax, under Section 263 of the Act, by her order dated 7th March, 1991 issued directions to the Assessing Officer to pass a fresh or re-frame the assessment order on the aforementioned deductions, after giving due opportunity.

4. Thereupon, order dated 9th August, 1991 was passed by the Assessing Officer. The Assessing Officer after referring to Section 80AA and 80AB of the Act held that the deduction under Sections 80M and 80K should be allowed with reference to the ‘gross total income’ computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. The dividend income included in the ‘gross total income’ ought to be reduced by 40% as the deduction had been allowed under Section 36(1)(viii) of the Act. The reason given was that once deduction under Section 36(1)(viii) was allowed on income that included dividend income, the gross dividend should be reduced by 40% to compute the net dividend income. Accordingly, by order dated 9th August, 1991, the deduction under Sections 80K and 80M was recomputed as under:-

“A) DEDUCTION U/S 80-K

Gross Dividend 46,976

Less: u/s 36(1)(viii) 18,790

28,186

Exemption u/s 80-K @ 60% Rs.16,911

B) Deduction u/s 80-M

Other Dividend 2,26,90,618

Less : Admn. Expenses 25,000

2,26,65,618

Less: Dedn. U/s 36(1)(viii)40% 90,26,247

Dividend entitled to deduction

Before allowing deduction under 1,36,39,381

Chapter – VIA

Deduction u/s 80-M (60%) 81,23,622/-”

5. The Assessing Officer referred to the second proviso to Section 36(1)(viii) and observed that the “reserves” eligible for deduction cannot exceed twice the paid-up capital of the respondent of Rs.3500 crores. Thus, deduction allowable under Section 36(1)(viii) had to be restricted to Rs.17,75,72,000/- and need not be allowed upto 40% of the total income before making any deduction under the said sub-section or Chapter VI-A.

6. On the third question, the Assessing Officer disallowed revenue deduction of Rs.72,574/-treating the payment as capital in nature as it was incurred towards amortization of leasehold land at Calcutta, Patna and Kanpur. The lease period, it was observed, varied between 66 years to 99 years.

7. The Commissioner of Income Tax (Appeals) [C.I.T (A)], however, reversed the aforementioned findings holding that deduction under Section 80M should be calculated without deducting the “deduction” under Section 36(1)(viii) of the Act from the dividend income. Amortisation expenses were also directed to be allowed as revenue expense. Noticeably, the assess