LAWS(MAD)-1985-3-39

COMMISSIONER OF INCOME TAX Vs. BINNY AND CO

Decided On March 21, 1985
COMMISSIONER OF INCOME-TAX Appellant
V/S
BINNY AND COMPANY Respondents

JUDGEMENT

(1.) THE assessee is a private limited company and has been carring on business in the purchase and sale of handloom clothes, shipping, stevedoring as well as managing agency. On July 21, 1967, it had entered into an agreement with Capelin Associates Limited, Geneva. Switzerland (hereinafter referred to as "the foreign company"), for the purpose of setting up plant and machinery at Bangalore for manufacturing readymade garments. In accordance therewith, a factory for manufacturing readymade garments was set up during the accounting, year ending December 31, 1967. While determining the total income of the assessee at Rs. 40,52,750 for the assessment year 1968-69, with which we are concerned in this reference, the Income-tax Officer, disallowed, among others, Rs. 4,11,474 representing the aggregate of the amounts paid to the foreign company, according to the terms of the agreement, by way of salary paid to the foreign technicians, the cost of air passage, hotel accommodation, etc., for them. Beside, the Income-tax Officer found that the assessee had employed a portion of the money borrowed by it for investment in the shares of other companies and concluded that the interest paid by it on such borrowals should be allocated between the business income and the income by way of dividends and worked out the interest allocable to the income by way of dividend as 52.90% of the total interest paid and computed the interest on borrowals unutilised for the assessment year 1968-69 at Rs. 5,17,566 after negativing the contention of the assessee that the investment in shares was only an extension of the business activity of the assessee and, therefore, the entire interest should be deducted in computing the business income. While granting relief under section 80M of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the Income-tax Officer computed the same at 60% of the net dividend, that is to say, Rs. 18,52,198 as against the gross dividend of Rs. 23,69,664. On appeal by the assessee, the assessment was confirmed except that it was found that for the assessment year in question, Rs. 4,83,909 should be substituted for Rs. 5,17,566 being the interest disallowed. Not satisfied with this, the assessee preferred a further appeal to the Tribunal. Before the Tribunal, the assessee raised an additional ground that the relief under section 80M of the Act should have been granted on the gross dividend received by it during the relevant previous year. THE Tribunal held that 20% of the expenditure incurred by the assessee by way of payment to the foreign company in accordance with the terms of the agreement should be taken as revenue expenditure and the balance as capital expenditure and further that one-third of the capital expenditure can be taken as adding to the cost of the machinery of the garment factory for the purpose of depreciation. Dealing with the claim for relief under section 80M of the Act, the Tribunal held that the deduction under section 80M should be made on 60% of the gross dividend and, in that view, the Tribunal felt that the consideration of the question, whether the entirety of the interest paid by the assessee on moneys borrowed should be deducted from its business income would be unnecessary, as in its opinion, the result would be the same whether the whole of the interest is deducted in computing the business income or a portion of it is deducted from the gross dividend.

(2.) AGGRIEVED by the order of the Tribunal, the Revenue has come up on this reference under section 256(2) of the Act, on the following questions :