Supreme Court of India
GODREJ & BOYCE MANUFACTURING COMPANY LIMITEDversusDY. COMMISSIONER OF INCOME-TAX & ANR.
- Citation
- 2017 INSC 451
- Decided
- 8 May 2017
- Disposal
- Appeal(s) allowed
- Bench
- RANJAN GOGOI
Holding
Section 14A disallows deduction of expenditure incurred in earning dividend income that is not includible in total income, even where tax on such dividend is paid by the dividend‑paying company under s.115‑0; consequently, the appellant is entitled to the full exemption of dividend income without any deduction for AY 2002‑03.
Summary
Godrej & Boyce Manufacturing Co. Ltd. claimed that interest expenditure incurred to earn dividend income (exempt under s.10(33) because tax is paid by the dividend‑paying company under s.115‑0) could not be disallowed under s.14A of the Income‑Tax Act. The Revenue argued that s.14A barred deduction of any expenditure incurred in earning income that does not form part of total income, even if the tax on the dividend is paid by the company. The Supreme Court held that the plain language of s.14A applies to dividend income on which tax is payable under s.115‑0, and therefore such expenditure cannot be deducted. For the assessment year 2002‑03, the Court found no material nexus between the disallowed interest and the dividend income and allowed the appellant the full benefit of the exemption without any deduction. The appeal was allowed and the High Court order set aside.
Issues considered
- Whether the phrase "income which does not form part of total income under this Act" in s.14A includes dividend income on which tax is payable under s.115‑0 and income from mutual‑fund units under s.115‑R.
- Whether, on the facts of the case and in view of the earlier findings, s.14A should be applied to disallow the claimed deduction for the assessment year 2002‑03.
Legislation cited
- Income Tax Act, 1961s. 10(33), s. 115-0, s. 115-0(4), s. 115-0(5), s. 115-R, s. 14A, s. 194, s. 195, s. 196C, s. 199, s. 57
Subjects
Section 14ADividend incomeTax exemptionIncome not includibleInterest expenditureAssessment yearTax on distributed profitsStatutory interpretation
Judgment
[2017] 3 S.C.R .. 602
A GODREJ & BOYCE MANUFACTURING COMPANY LIMITED
v.
DY. COMMISSIONER OF INCOME-TAX & ANR.
(Civil Appeal No. 7020of2011)
8 MAYOS,2017
[RANJAN GOGOi AND ASHOK BHUSHAN, JJ.]
Income Tax Act, 1961 - s. 14A - Expenditure incurred in
relation to income not includible in total income - Phrase ''income
which does not form part of total income under this Act" in s. l 4A -
c Scope of - If includes dividend income on shares in respect of
which tax is payable u!s. 115-0 and income on units of 111utual funds
on which tax is payable u/s. 115-R - Held: s.14A would apply to
dividend income on which tax is payable u/s. 115-0-: Pliiin reading
of s.14A shows that the income must not be includible in the total
D income of the assessee - Once the said condition is satisfied, the
expenditure incurred in earning the said income cannot be allowed
to be deducted - Thus, s. l 4A would operate to disallow deduction
of all expenditure incurred in earning the dividend income uls. 115-0
which is not includible in the total income of the assessee - On facts
and in the circu111stances of the assessee s case, for the assessment
E
year in question, the assessee is entitled to the benefit of clai111 of
dividend income without any deduction - ss.115-0, 115-R.
Allowing the appeal, the Court
HELD: 1.1 The object behind the introduction of Section
F 14A of the Income Tax Act, 1961 by the Finance Act of 2001 is
clear and unambiguous. The legislature intended to check the
claim of allowance of expenditure incurred to.wards earning
exempted income in a situation where an assessee has both
exempted and non-exempted income or includible or non-
includible income. While there can be no doubt that if the income
G in question is taxable and, therefore, includible in the total
income, the deduction of expenses incurred in relation to such
an income must be allowed, such deduction would not be
permissi.ble merely on the ground that the tax on the dividend
received by the assessee has been paid by the dividend paying
H company and not by the recipient assessee, when under Section
602
GODREJ & BOYCE MANUFACTURJNG COMPANY LTD. v. 603
DY. COMMISSIONER OF INCOME-TAX
10(33) of the Act such income by way of dividend is not a part of A
the total income of the recipient asscssee. A plain reading of
Section 14A would go to show that the income must not be
includible in the total income of the asscssce. Once the said
condition is satisfied, the expenditure incurred in earning the
said income cannot be allowed to be deducted. The Section does
B
not contemplate a situation where even though the income is
taxable in the hands of the dividend paying company the same to
be treated as not includible in the total income of the .recipient
assessee, yet, the expenditure incurred to earn that income must
be allowed on the basis that no tax on such income has been paid
by the asscssee. Such a meaning, if ascribed to Section 14A, would c
be plainly beyond what the language of Section 14A can be
understood to reasonably convey. [Para 24] '(622-C-G]
1.2 The literal meaning of Section 14A, far from giving rise
to any absurdity, appears to be wholly consistent with the scheme
of the Act and the object/purpose of levy of tax on income. D
Therefore, the well entrenched principle of interpretation that
where the words of the statute are clear and unambiguous
recourse cannot be had to principles of interpretation other than
the literal view would apply. [Para 27] [624-C-D]
1.3 While it is correct that Section 10(33) exempts only E
dividend income under Section 115-0 of the Act and there arc
other species of dividend income on which tax is levied under
the Act, it cannot be seen how the said position in law would
assist the asscsscc in understanding the provisions of Section
14A in the manner indicated. What is required to be construed is
the provisions of Section 10(33) read in the light of Section 115- F
0 of the Act. So far as the species of dividend income on which
tax is payable under Section 115-0 of the Act is concerned, the
earning of the said dividend is tax free in the hands of the assessee
and not .includible in the total income of the said assessee. If that
is so, it cannot be seen how the operation of Section 14A, of the G
Act to such dividend income can be foreclosed. The fact that
Section 10(33) and Section 115-0 of the Act were brought in
together; deleted and reintroduced later in a composite manner,
also, does not assist the assessce. Rather, the said facts would
countenance a situation that so long as the dividend income is
H
604 SUPREME COURT REPORTS [2017] 3 S.C.R.
A taxable in the hands of the dividend paying company, the same is
not includible in the total income of the recipient assessee. At
such point of time when the. said position was reversed (by the
Finance Act of 2002; reintroduced again by the Finance Act, 2003),
it was the assessee who was liable to pay tax on such dividend
income. In such a situation the assessee was entitled under
B
Section 57 of the Act to claim the benefit of exemption of
expenditure incurred to earn such income. Once Section 10(33)
and 115-0 was reintroduced the position was reversed. The above,
actually fortify the situation that Section 14A of the Act would
operate to disallow deduction of all expenditure incurred in
C . earning the dividend income under Section 115-0 which is not
includible in the total income of the assessee.[Para 30)(625-B-F]
1.4 Even if it is assumed that the additional income tax under
Section 115-0 is on the dividend and not on the distributed profits
of the dividend paying company, no material difference to the
D applicability of Section 14A would arise. Sub-sections (4) and (5)
of Section 115-0 of the Act makes it very clear that the further
benefit of such payments cannot be claimed either by the dividend
paying company or by the recipient assessee. The provisions of
Sections 194, 195, 196C and 199 of the Act, would further fortify
the fact that the dividend income under Section 115-0 of the Act
E is a special category of income ·which has been treated differently
by the Act making the same non-includible in the total income of
the recipient assessee as tax thereon had already been paid by
the dividend distributing company. The other species of dividend
income which attracts levy of income tax at the hands of the
F recipient assessee has been treated differently and made liable
to tax under the said provisions of the Act. [Para 31) [625-G-H;
)' .. 626-A-B)
1.5 The first question is answered against the assessee by
holding that Section 14A would apply to dividend income on which
G tax is payable under Section 115-0. [Para 34] [627-B]
1.6 Section 14A as originally enacted by the Finance Act of
2001 with effect from 1:4.1962 is in the same fonn and language
as currently appearing in sub-section (1) of Section 14A of the
Act. Sections 14A (2) and (3) were introduced by the Finance Act
H of 2006 with effect from 1.4.2007. It cannot be denied is that the
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 605
DY. COMMISSIONER OF INCOME-TAX
requirement for attracting the provisions of Section 14A(l) is A
proof of the fact that the expenditure sought to be disallowed/
deducted had actually been incurred in earning the dividend
income. Insofar as the appellant-assessee is concerned, the issues
stand concluded in its favour in respect of the Assessment Years
1998-1999, 1999-2000 and 2001-2002. Earlier to the introduction
B
of sub-sections (2) and (3) of Section 14A, such a determination
was required to be made by the Assessing Officer in his best
judgment. In all the said assessment years, it was held that the
Revenue had failed to establish any nexus between the
expenditure disallowed and the earning of the dividend income
in question. In the appeals arising out of the assessments made c
for some of the assessment years the said question was specific.ally ·
looked into from the standpoint of the requirements of the
provisions of sub-sections (2) and (3) of Section 14A which had
by then been brought into force. It is on such consideration that
findings were recorded that the expenditure bore no relation to
D
the earning of the dividend income and hence, assessee was
entitled to the b.enefit of full exemption claimed on account of
dividend income. [Para 36] [627-C-G]
1. 7 It cannot be seen how in the said fact situation, a different
view could have been taken for the Assessment Year 2002-2003.
Sub-sections (2) and (3) of Section 14A of the Act read with Rule E
8D of the Rules merely prescribe a formula for determination of
expenditure incurred in relation to income which does not form
part of the total income under the Act in a situation where the
Assessing Officer is not satisfied with the claim of the assessee.
Whether such determination is to be made on application of the F
formula prescribed under Rule 8D or in the best judgment of the
Assessing Officer, what the law postulates is the requirement of
a satisfaction in the Assessing Officer that having regard to the
accounts of the assessee, as placed before him, it is not possible
to generate the requisite satisfaction with regard to· the .
correctness of the claim of the assessee. It is only thereafter that 0
the provisions of Section 14A(2) and (3) read with Rule 8D or a
best judgment determination, as earlier prevailing, would become
applicable. [Para 37] [627-H; 628-A-C]
1.8 In the instant case, there is no mention of the reasons
H
---....
606 SUPREME COURT REPORTS [2017]3 S.C.R.
A which had prevailed upon the Assessing Officer, while dealing
with the Assessment Year 2002-2003, to hold that the claims of
the Assessee that no expenditure was incurred to earn the
dividend income cannot be accepted and why the 'orders of the
tribunal for the earlier Assessment Years were not acceptable to
the Assessing Officer, particularly, in the absence of any new fact
B
or change of circumstances. Neither any basis was disclosed
establishing a reasonable nexus between the expenditure
disallowed and the dividend income received. That any 1)art of
the borrowings of the assessee had been diverted to earn tax
free income despite the availability of surplus or interest free
c funds availabl~ remains unproved by any material whatsoever.
While it is true that the principle of res judicttla would not apply
to assessment proceedings under the Act, the need for
consistency and c~rtainty and existence of strong and compelling
reasons for a departure from a settled position has to be spelt
out which clearly is absent. [Para 38) [628-D-l<']
D
1.9 The second question formulated is answered in favour
of the assessee and for the Assessment Year 2002-2003, the
assessee is entitled to the full benefit of the claim of dividend
income without any deductions. [Para 39) [629-B-C]
E 1.10 The order of the High Court is set aside subject to
tl~e aforesaid conclusions. [Para 40] [629-C)
K.P. Varghese v. Income-Tax ()ffice1~ Ernakulam and
Anr. (1981) 131 ITR 597 (SC); C.l I v. Walfort Share
& Stock Brokers P. I.Ad. (2010) 326 ITR 1 (SC);
F Commissioner of Income Tax-III vs. Calcutta Knifll'ears,
Ludhiana (2014) 6 SCC 444; Commissioner of Income-
Tax vs. Tara Agencies (2007) 292 ITR 444 (SC);
Radhasoami Satsang vs. Co111111issio11er of Income-Tax
(1992) 193 ITR (SC) 321 - referred to.
Cape Brandy Syndicate vs. !RC [1921] 1 KB 64 -
G referred to.
Case Law Reference
(1981) 131 ITR 597 (SC) referred to Para 14
(2010) 326 ITR 1 (SC) referred to Para 19
H
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 607
DY. COMMISSIONER OF INCOME-TAX
(2014) 6 sec 444 referred to Para 27 A
(2007) 292 ITR 444 (SC) referred to Para 28
(1992) 193 ITR (SC) 321 referred to Para 38
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7020
of201 I. B
From the Judgment and Order dated 12.08.20I 0 of the High Cou11
ofBombay in Income Tax Appeal No. 626 of2010.
Sohrab E. Dastur, Percy J. Pardiwalla, Sr. Advs., Nitesh Joshi,
Rustom B. Hathikhanawala, Advs. for the Appellant.
The Judgment of the Com1 was delivered by
c
RANJAN GOGOi, J. I. The appellant C~mpany, incorporated
in the year 1932, is engaged in the business of manufacture of steel
furniture, security equipments, typewriters, electrical equipments and a
host of other related products. It is also a promoter of various other
D
companies and invests its funds in such companies in order.to maintain
control of such concerns as -sister concerns.
2. The issue in the present appeal relates to the admissibility or
otherwise of deduction ofexpenditure incurred in earning dividend income
which is not includible in the total income o(the Assessee by virtue of
E
the provisions of Section I 0(33) of the Income Tax Act, 1961 (hereinafter
referred to as "the Act") as in force during the relevant Assessment
Year i.e. 2002-2003.
3. For the Assessment Year 2002-2003, the appellant-Company
filed its return declaring a total loss of Rs.45,90,39,210/-. In the said
return, it had shown income by way of dividend from companies and F
income from units of mutual funds to the extent of Rs.34,34, 78,686.
Dividend income to the extentof98% of the said amount was contributed
by the Godrej group companies whereas only 0.05% thereof amounting
to Rs.l,71,000/- came from non-Godrej group companies. A sum of
Rs.66, 79,000/-, constituting 1.95% ofthe aforesaid dividend income, came G
from mutual funds. Admittedly, a substantial part of the appellant's
im'.estment in the group companies was in the form· of bonus shares
which did not involve any fresh capital investment or outlay.
4. The other relevant facts which may be taken notice of is that
on the first day of the previous year relevant to the Assessment Year H
608 SUPREME COURT REPORTS [2017] 3 S.C.R.
A 2002-2003 i.e. 1st April, 2001, the investment in shares and mutual funds
·of the appellant company stood at Rs.127 .19 crore whereas at the end
of the previous year i.e. as on 31st March, 2002 the investment was
Rs.125 .54 crore. The above figures would go to show that there were
no fresh investments made during the previous year relevant to the
B Assessment Year 2002-2003. In fact, the investments had come down
· to the extent noticed above.
5. Furthermore, as against the investment ofRs.125.54 crore as
on 31st March, 2002, on the said date the appellant had a total of Rs.280.64
crore by way of interest free funds in the form of share capital (Rs.6.55
crore) as.well as Reserves and Surplus (Rs.274.09 crore). On the other
c hand, as against the investment of Rs.127 .19 crore on the first day of
the previous year i.e. 1"April,200 I, the appellant had a total ofRs.2 70.51
crore by way of interest free funds in the form of share capital (Rs.6.55
crore) and Reserves and Surplus (Rs.263.96 crore). The above facts
would show that the appellant had sufficient interest free funds available
D for the purpose of making investments.
.. _6. At this stage we may go back a little in time and start with the
Assessment Year 1998-1999 wherein the appellant's dividend income
was Rs.11,41,34,093/-. The Assessing Officer notionally allocated
Rs.1,47,40,000/- out of the total interest expenditure ofRs.34,64,89,000/
E - as referable to the earning of the said dividend income and had
disallowed such interest expenditure and consequently reduced the
exemption available under Section I0(33) of the Act to the net dividend.
In appeal, the Commissioner oflncome Tax (Appeals) allowed exemption
of the entire dividend income on the ground that the Assessing Officer
had failed to show any nexus between the investments in shares and
F units of mutual funds on the one hand and the borrowed funds on the
other. The learned Income Tax Appellate Tribunal (hereinafter referred
to as "Tribunal") which was moved by the Revenue confirmed the
appellate order. The said order had attained finality.
7. For the Assessment Years 1999-2000 and 2001-2002 the issue
G with regard to exemption under Section 10(33) of the Act was similarly
held in favour of the assessee by the Commissioner of Income Tax
(Appeals) and the learned Tribunal, once again. Initially, the Assessing
Officer, in both the Assessment Years, had disallowed notionally computed
interest expenditure as being relatable to the earning of dividend income.
H The said appellate order(s) had also attained finality. For the intervening
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 609
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.]
Assessment Year 2000-200 I there was no scrutiny of the appellant's A
return of income. Consequently, the dividend income was allowed in full
without disallowing any expenditure incurred in relation to earning such
income. However, for the Assessment Year 2002-2003, the Assessing
Officer did not allow interest expenditure to the extent of
Rs.6,92,06,000/- holding the same to be attributable to earning the dividend
B
income of Rs. 34,34, 78,686/-. The said figure of interest expenditure
disallowed was worked out from the total interest expenditure for the
year on a notional basis in the ratio of the cost of the investments in
shares and units of mutual funds to the cost of the total assets appearing
in the balance sheet. Though the aforesaid orderofthe Assessing Officer
was reversed by the Commissioner oflncome Tax (Appeals) following c
the earlier orders pertaining to the previous Assessment Years, as noticed
above, the learned Tribunal, in appeal, took a different view by its order
dated 26m August, 2009. The learned Tribunal held that sub-sections (2)
and (3) of Section l 4A of the Act (inserted by the Finance Act, 2006
with effect from I" April, 2007) were retrospectively applicable to the
D
Assessment Year 2002-2003 and, therefore, the matter should be
remanded to the Assessing Officer for recording his satisfaction/findings
in the 1ight of the said sub-sections of Section I 4A of the Act. This was
notwithstanding the fact that the only disallowance made by the Assessing
Officer which was reversed in appeal by the Commissioner of Income
Tax (Appeals) was in respect of interest expenditure what was worked E
out on a notional basis.
8. The High Com1 by the impugned judgment dated 12'11 August,
20 I 0, inter alia, held that Section I4A of the Act has to be construed on
a plain grammatical construction thereof and the said provision is attracted
in respect of dividend income referred to in Section 115-0 as such income F
is not includible in the total income of the shareholder. Sub-sections (2)
and (3) of Section I 4A of the Act and rule SD of the Income-tax Rules,
1962 (hereinafter referred to as "the Rules") would, however, not apply
to the AY 2002-03 as the said provisions do not have retrospective effect.
Notwithstanding the above the High Com1 upheld the remand as made
by the Tribunal to the AO though for a slightly different reason as will be G
noticed hereinafter. We may also notice that the High Court in its
impugned judgment also held that the tax paid under section U 5-0 of
the Act is an additional tax on that component of the profits of the dividend
distributing company which is distributed by way of dividends and that
the same is not a tax on dividend income of the assessee. H
610 SUPREME COURT REPORTS [2017] 3 S.C.R.
A 9. Aggrieved, the instant appeal has been filed raising two
questions in the main which have been summarized by the appellant, and
we may say accurately, as follows :
"(a) Irrespective of the factual position and findings in the case
of the Appellant, whether the phrase "income which does
B not form part of total income under this Act" appearing in
Section 14A includes within its scope dividend income on
shares in respect of which tax is payable under Section
115-0 of the Act and income on units of mutual funds on
which tax is payable under Section 115-R.
c (b) Whatever be the view on the legal aspects, whether on the
facts and in the circumstances of the Appellant's case and
bearing in mind the unanimous findings of the lower
authorities over a considerable period of time (which were
accepted by the Revenue) there could at all be any question
of the provisions of Section 14A in the appellant's case."
D
10. We have heard Shri Sohrab E. Dastur, learned Senior Counsel
appearing for the appellant and Shri Ranjit Kumar, learned Solicitor
General appearing for the Revenue.
11. At the very outset, the relevant provisions of the Act which
E will require a consideration are extracted below:
"2. In _this Act, unless the context otherwise requires,-
(22) "dividend" includes-
(a) any distribution by a company of accumulated profits,
whether capitalised or not, if such distribution entails the
F
release by the company to its shareholders of all or any
part of the assets of the company;
(b) xxx xxx xxx xxx xxx
(c) xxx xxx xxx xxx xxx
G (d) xxx xxx xxx xxx xxx
(e) xxx xxx xxx xxx xxx
but "dividend" does not include-
xxx xxx xxx xxx xxx
H
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 611
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.]
(24) "income" includes- A
(i) profits and gains ;
(ii) dividend;
(iia) .................. "
xxx xxx xxx xxx xxx B
I 0. Incomes not included in total income.- In computing the
total income of a previous year of any person, any income falling
within any of the following clauses shall not be included-
xxx xxx xxx xxx xxx
c
(33) any income by way of-
(i) dividends referred to in section 115-0; or
(ii) income received in respect ofunits from the Unit Trust of
India established under the Unit Trust oflndiaAct, 1963 (52 of
1963); or D
(iii) income received in respect of the units of a mutual fund
specified under clause (23D)
Provided that this clause shall not apply to any income arising
from transfer of units of the Unit Trust oflndia or of a mutual E
fund, as the case may be"
xxx xxx xxx xxx xxx
14A. Expenditure incurred in relation to ii1come not includible in
total income.-
F
( I) For the purposes of computing the total income under this
Chapter, no deduction shall be allowed in respect of
expenditure incurred by the assessee in relation to income
which does not form part of the total income under this
Act.
(2) The Assessing Officer shall determine the amount of G
expenditure incurred in relation to such income which does
not form part ofthe total income under this Act in accordance
with such method as may be prescribed, if the Assessing
Officer, having regard to the accounts of the assessee, is
H
612 SUPREME COURT REPORTS [2017] 3 S.C.R.
A not satisfied with the correctness of the claim of the assessee
in respect of such expenditure in relation to income which
does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation
to a case where an assessee claims that no expenditure
B has been incurred by him in relation to income which does
not form part of the total income under this Act:
Provided that nothing contained in this section shall empower
the Assessing Officer either to reassess under section 147
or pass an order enhancing the assessment or reducing a
c refund already made or otherwise increasing the liability of
the assessee under section 154, for any assessment year
beginning on or before the l st day of April, 2001.
Rule 80.-(introduced by CBDTNotification No.45/2002 dated -
24.03.2008.
D "Method for determining amount of expenditure in relation to
income not includible in total income.
8D.(J) Where the Assessing Officer, having regard to the
accounts oft he assessee of a previous year, is not satisfied
with-
E
(a) the correctness of the claim of expenditure made by
the assessee; or
(b) the claim made by the assessee that no expenditure has
been incurred, in relation to income which does not form
part of the total income under the Act for sucll previous
F
year, he shall determine the amount of expenditure in
relation to such income in accordance with the provisions
of sub-rule (2).
(2) The expenditure in relation to income which does not form
part of the total income shall be the aggregate of following
G amounts, namely:-
(i) the amount of expenditure directly relating to income which
- does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by
H _ way of interest during the previous year which is not directly
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 613
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.]
attributable to any particular income or receipt, an amount A
computed in accordance with the following formula,
namely:-
A x B
c
Where A= amount of expenditure by way of interest other B
than the amount of interest included in clause (i) incurred
during the previous year;
B =the average of value of investment, income from which
does not or shall not form part of the total income, as
appearing in the balance sheet of the assessee, on the first c
day and the last day of the previous year;
C =the average of total assets as appearing in the balance
sheet of the assessee, on the first day and the last day of
the previous year;
D
(iii) an amount equal to one-half per cent of the average of the
value of investment, income from which does not or shall
not form part of the total income, as appearing in the balance
sheet of the assessee, on the first day and the last day of
the previous year."
E
(3) For the purposes of this rule, the 'total assets' shall mean,
total assets as appearing in the balance sheet excluding the
increase on account of revaluation of assets but including the
decrease on account of revaluation of assets."
115-0. Tax on distributed profits of domestic companies.-
F
(!) Notwithstanding anything contained in any other provision
of this Act and subject to the provisions of this section, in
addition to the income-tax chargeable in respect of the total
income of a domestic company for any assessment year,
any amount declared, distributed or paid by such company
G
by way of dividends (whether interim or otherwise) on or
after the 1st day of April, 2003, whether out of current or
accumulated profits shall be charged to additional income-
tax (hereafter referred to as tax on distributed profits) at
the rate of fifteen per cent.
H
614 SUPREME COURT REPORTS [2017] 3 S.C.R.
A ( l A) xxx xxx xxx xxx xxx
(I B) xxx xxx xxx xxx xxx
(2) Notwithstanding that no income-tax is payable by a domestic
company on its total income computed in accordance with the
provisions of this Act, the tax on distributed profits under sub-
B
section ( 1) shall be payable by such company.
(3) The principal officer of the domestic company and the
company shall be liable to pay the tax on distributed profits to
the credit of the Central Government within fourteen days from
the date of-
c
( a) declaration of any dividend; or
(b) distribution ofany dividend; or
(c) payment of any dividend,
D whichever is earliest.
(4) The tax on distributed profits so paid by the company shall
be treated as the final payment of tax in respect of the amount
declared, distributed or paid as dividends and no further credit
therefor shall be claimed by the company or by any other person
E in respect of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be
allowed to the company or a shareholder in respect of the
amount which has been charged to tax under sub-section (1)
or the tax thereon.
F (6) xxx xxx xxx xxx xxx
(7) xxx xxx xxx xxx xxx
(8) xxx xxx xxx xxx xxx"
xxx xxx xxx xxx xxx xxx
G
"l l5R. Tax on distributed income to unit holders.- (I)
Notwithstanding anythii:ig contained in any other provisions of
this Act and section 32 of the Unit Trust oflndia Act, 1963 (52
of l 963), any amount of income distributed on or before the 31st
day of March, 2002 by the Unit Trust ofindia to its unit holders
H
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 615
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.]
shall be chargeable to tax and the Unit Trust of India shall be A
liable to pay additional income-tax on such distributed income at
the rate of ten per cent: ·
Provided that nothing contained in this sub-section shall apply
in respect of any income distributed to a unit holder of open-
ended equity oriented funds in respect of any distribution made B
from such fund for a period of three years commencing from
the 1st day of April, 1999.
(2) Notwithstanding anything contained in any other provision of
this Act, any amount of income distributed by the specified
company or a Mutual Fund to its unit holders shall be chargeable C
to tax and such specified company or Mutual Fund shall be liable
to pay additional income-tax on such distributed income at the
rate of-
( i) xxx xxx xxx xxx xxx
(ii) xxx xxx xxx xxx xxx D
(iii) xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx xxx xxx
12. Shri Sohrab E. Dastur, learned Senior Counsel appearing for
the appellant has argued that Section l 4A of the Act pertains to E
disallowance of expenditure relatable to an item of income.on which tax
has not been paid. According to the learned counsel, Section I4A applies
only in situations where income is tax free; non-taxable and there is no
incidence 9f tax per se. Dividend on shares is subjected to tax under
Section 115-0 of the Act whereas returns of units or mutual funds is
F
subjected to tax under Section l l 5R. The fact that the tax on such
dividend is paid by the dividend paying company and not by the recipient
of the dividends, according to the learned counsel, is of no consequence.
Proceeding further, Shri Dastur has argued that under Section 10(33) of
the Act, income by way of dividend referred to in Section I I 5-0 of the
Act or income received in respect of units from the UTI or of mutual G
funds alone is exempted. It is only one specie of dividend income which
is exempted under Section I 0(33) of the Act whereas other species of
such (dividend) income, say for example, dividend from foreign companies
is still liable to tax. ·As):ax has already been paid on such dividend,
though by the dividend paying company, Section 14A will not apply to
H
616 SUPREME COURT REPORTS [2017] 3 S.C.R.
A exclude expenditure incu~red to earn such dividend income as the said
income, really, is not tax-free.
13. Shri Dastur has further argued that there is a discernible
correlation between Section I 0(33) and Section 115-0 of the Act
inasmuch as both the Sections were inserted in the Act by the Finance
B Act, 1997. When the earlier status was restored by the Finance Act,
2002 shareholders once again became liable for tax on dividends which
position continued until the provisions of Section I 0(33) of the Act
[engrafted as Section I 0(34)] and Section 115-0 were reintroduced by
the Finance Act, 2003 with effect from 1" April, 2003. It is, therefore,
argued that both the Sections 10(33) and Section 115-0 of the Act
c constitute a composite scheme for taxation of dividend income wherein
the legislative policy is clear that dividend, though to be taxed in the
hands of the company distributing the same, is not to be included in the
total income of the recipient Assessee. The mere fact that the amount
is not to be included in the total income of the recipientAssessee, would
D not attract the provisions of Section I4A of the Act, inasmuch as the
cardinal test is whether the dividend income is tax-free or not. The
person paying the tax, according to the learned counsel, is not relevant
for the aforesaid purpose.
I4. Shri Dastur has also urged that the abov~ position has been
E accepted by the Revenue in its counter affidavit wherein it has been
admitted tha~ the exemption granted under Section I0(33) is consequent
upon collection of tax on dividend income from the dividend distributing
company under Section 115-0 of the Act. It is, therefore, argued by
Shri Dastur that a Iiteral interpretation of Section 14A must be avoided.
Reference in this regard is made to the case of K.P. Varghese vs.
F Income-Tax Office1; Ernakulam and Anr. 1• It is specifically contended
by Shri Dasturthat.tax on the dividend paid is not a tax on profits out of
which dividend is distributed inasmuch as under Section 115~0 of the
Act dividend can be paid either from accumulated profits or current
profits. hrfact, Section 205 of the Companies Act permits payment of
G dividend out of accumulated profits in the year though the company may
have incurred losses. Furthermore, it is contended that the dividend
paying company would be charged to tax under Section 115-0 of the
Act even in a case where no tax is payable under the regular provisions
of the Act because its entire income, say, is otherwise eligible for
H I (1981) 131 ITR597(SC)
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 617
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.]
deductions. In other words, tax under Section 115-0 oftheAct is payable A
by the dividend paying company even when no tax is payable on the
income of such company under the regular provisions of the Act.
15. On the other hand, the learned Solicitor General of India, who
has argued the case on behalf of the Revenue has laid before the Court
the position of law prior to insertion of Section l 4A of the Act by the B
Finance Act of 2001. According to the learned Solicitor General, the
insertion of Section 14A in the Act was to offset several judicial
pronouncements holding that in case of an assessee earning income
which is both includible and non-includible in the total income, the entire
expenses would be permissible as deduction, including, expenses
pertaining to income not includible in the total income. The learned Solicitor c
General has drawn the attention of the Court to the Memorandum
explaining the provisions ofthe Finance Bill, 2001 which is to the following
effect.
"Ce11ain incomes which are not includible while computing the
total income as these are exempt under various provisions of the D
Act. There have been cases where deductions have been claimed
in respect of such exempt income. This in effect means that the
tax incentive given by way of exemptions to certain categories
of income is being used to reduce also the tax payable on the
non-exempt income by debiting the expenses incurred to earn E
the exempt income against taxable income. This is against the
basic principles of taxation whereby only the net income, that is,
gross income minus the expenditure, is taxed. On the same
analogy, the exemption is also in respect of the net income.
Expenses incurred can be allowed only to the extent they are
relatable to the earning of taxable income. Therefore, it is F
proposed to insert a new section I 4A so as to clarify the intention
of the Legislature since the inception of the Income-tax Act,
1961, that no deduction shall be made in respect of any
expenditure incurred by the assessee in relation to income which
does not fonn pm1 of the total income under the Income-tax G
Act."
16. The position is made clear by Circular No. 14 issued by the
C.B.D.T. explaining the said purpose of the Finance Act, 200 I. The said
Circular has also been placed before the Court by the learned Solicitor
General. H
618 SUPREME COURT REPORTS [2017] 3 S.C.R.
A 17. The learned Solicitor General has also traced the history of
the Amendments to Section l 4A of the·Act and, in particular, to the
insertion of sub-sections (2) and (3) thereof by the Finance Act of2006.
The purpose of insertion of sub-sections (2) and (3), as explained in the
Memorandum explaining the provisions of the Finance Bill 2006, has
also been relied upon by the learned Solicitor General, who contends
B
that from the said Memorandum it is clear that sub-sections (2) and (3)
had been introduced as the existing provisions of Section l 4A did not
provide any method of computation of expenditure incurred to earn an
income which does not form a part of the total income. It is, therefore,
urged by the learned Solicitor General that the legislative intent behind
c enactment of Section 14A and sub-sections (2) and (3) thereof was to
combat situations where tax incentives given by way of non-inclusion of
different categories of income under the head "Income which do not
form pait of the total Income" was actually used to reduce the tax payable
on the total income.
D 18. The Scheme of the Income Tax Act, 1961 has been sought to
be explained by the learned Solicitor General to contend that S.ection 14
of the Act provides for five heads of income i.e. 'Jn come from Salaries';
'Income from House Prope1ty'; 'Income from Profits & Gains of
Business or Profession'; 'Income from Capital Gains'; and 'Income
from Other Sources'. It is contended that even though Income from
E dividend falls under the head "Income from Other Sources" specifically
provided for under Section 56 of the Act, dividend income referred to in
Section 115-0 of the Act is excluded from the provisions of deductions
contained in Section 57 inasmuch as such income does not form a part
of the total income in view of Section l 0(33) of the Act. The learned
F Solicitor General has argued that Section I 4A reiterates a fundamental
prinqiple enshrined by the Act that e~penses are allowable only to the
extent that they have a nexus to.the earning of taxable income or income
. which forms a part of the total income.
19. Reliance in this regard is placed on the decision of this Court
G in C./.T vs. Walfort Share & Stock Brokers P. Ltd. 2 which decision,
according to the learned Solicitor General, virtually decides the issues
arising in the present case.
20. Referring to Section 115-0 of the Act, the learned Solicitor
General had submitted that the said section levies an additional income
H ' (2010) 326 !TR I (SC)
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 619
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.]
tax on the profits of a Company which has been declared and distributed A
to its shareholders in the form of dividend. No credit of such additional
income tax paid by the company is available either to the company or
the shareholders [Section 115-0(4 )]. Such additional income tax paid by
the company does not also enure to the benefit of the shareliolders
receiving the amount of dividend distributed by such company. The
B
amount of such dividend does not form part of tax paid dividend in the
hands of the shareholders. In fact, pointing to the provisions of Section
115-0(5) it is argued that under the said provisions a shareholder cannot
claim deduction in respect of the dividend received by it/him from a
dividend paying company on which tax has been paid by the said company
under Section 115-0(1) of the Act. This, according to the learned Solicitor c
General, makes the intent of Section 14 crystal clear. The liability to pay
tax under Section 115-0 in respect of the dividend is on the dividend
paying company and the.shareholder/assessee has no connection with
the same. Such an assessee is not required to include the dividend amount
in his/its total income for the purposes of charge to tax. In such a situation,
D
the expenditure in~urred for earning the said income cannot be allowed.
21. There is a supplemental argument made by the learned Solicitor
General based on the provisions of Sections 194, 195, 196C and 199
contained in Chapter XVII of the Act which deals with "Collection and
Recovery of Tax" including tax on dividend income received by a
E
shareholder. It may be convenient, to appreciate what has been argued,
to notice what the aforesaid provi£ions of the Act actually say.
194. Dividends. The principal officer of an Indian company or a
company which has made the prescribed a1Tangements for the
declaration and payment of dividends (including dividends on
preference shares) within India, shall, before making any payment F
in cash or before issuing any cheque or warrant in respect of
any dividend or before making any distribution or payment to a
shareholder, who is resident in India, of any dividend within the .
meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or
sub-clause (d) or sub-clause (e) of clause (22) of section 2, G
deduct from the amount of such dividend, income-tax at the rates
in force:
Provided that no such deduction shall be made in the case of a
shareholder, being an individual, if-
H
620 SUPREME COURT-REPORTS (2017] 3 S.C.R.
A (a) xxx xxx xxx xxx xxx
(b) xxx xxx xxx xxx xxx
Provided further thatthe provisions of this section shall not
apply to such income credited or paid to-
B ( a) xxx xxx xxx xxx xxx
( b) xxx xxx xxx xxx xxx
(c) xxx xxx xxx xxx xxx
Provided also that no such deduction shall be made in
respect of any dividends referred to in Section 115-0."
c
xxx xxx xxx xxx xxx xxx
195.0ther sums.- (I) Any person responsible for paying to a
non-resident, not being a company, or to a foreign company, any
interest(not being interest referred to in section l 94LB or section
D 194LC) or section l 94LD or any other sum chargeable under
the provisions of this Act (not being income chargeable under
the head "Salaries") shall, at the time of credit of such income to
the account of the payee or at the time of payment thereof in
cash or by the issue of a cheque or draft or by any other mode,
whichever is earlier, deduct income-tax thereon at the rates in
E force:
Provided that ......................... ..
' Provided further that no such deduction shall be made in respect
of any dividends referred to in section 115-0.
F xxx xxx xxx xxx xxx xxx
l 96C. Income from foreign currency bonds or shares of Indian
company.-
Where any income by way ofinterest or dividends in respect
of bonds or Global Depository Receipts referred to in section
G
l 15AC or by way of long-term capital gains arising from
the transfer of such bonds or Global Depository Receipts is
payable to a non-resident, the person responsible for making
the payment shall, at the time of credit of such income to
the account of the payee or at the time of payment thereof
H in cash or by the issue of a cheque or draft or by any other
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 621
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOI, J.]
mode, whichever is earlier, deduct income-tax thereon at A
the rate of ten per cent :
Provided that no such deduction shall be made in respect
of any dividends referred to in section 115-0."
199. Credit for tax deducted.-(!) Any deduction made in
accordance with the foregoing provisions of this Chapter and B .
paid to the Central Government shall be treated as a payment
of tax on behalfofthe person from whose income the deduction
was made, or of the owner of the security, or of the depositor
or of the owner of property or of the unit-holder, or of the
shareholder, as the case may be. c
(2)Any sum referred to in sub-section (lA) of section 192 and
paid to the Central Government shall be treated as the tax paid
on behalf of the person in respect of whose income such
payment of tax has been made.
(3) The Board may, for the purposes of giving credit in respect D
of tax deducted or tax paid in terms of the provisions of this
Chapter, make such rules as may be necessary, including the
rules for the purposes of giving credit to a person other than
those referred to in sub-section (l) and sub-section (2) and
also the assessment year for which such credit may be given. E
22. All the said provisions, noticeably, exclude dividend received
under Section 115-0. As the provisions of the aforesaid Sections of the
Act contemplate deduction of tax payable by the shareholder on the
dividend income, however, to the exception of dividend income under
Section 115-0, it is submitted by the learned Solicitor General that it is F
crystal clear that the additional income tax paid under Section 115-0 by
the dividend paying company cannot assume the character of tax paid
on dividend income by the assessee shareholder. The position, according
to the learned Solicitor General, is further fortified by the provisions of
Section 115-0(4), reference to which has already been made earlier.
Specific reference is made to Section 199 of the Act which provides for G
credit to be given for the tax deducted at source on dividend paid. If the
tax paid on dividend under Section 115-0 is on income earned by the
shareholder, Section 199 would have also provided for ded_liction of tax
at source in respect of the dividends paid under Section 115-0 of the
Act to the assessee, it is contended.
H
622 SUPREME COURT REPORTS [2017) J S.C.R.
A 23. Insofar as the second issue arising in the case is concerned,
namely, the appellate orders of the learned Tribunal for the Assessment
Years 1998-1999, 1999~2000 and 2001-2002 granting the benefit of full
deduction on interest expenditure, it is submitted by the learned Sol,fcitor
General that each assessment year has to be reckoned separat~Jy; there .
is no estoppel and, furthermore, sub-sections (2) and (3)ofSection l 4A
B
having been introduced by the FinanceAct of2006, theTribunal and the
High Court was fully justified in remanding the matter to the Assessing
Officer for a de nova consideration in the light of the provisions contained
in sub-sections (2) and (3) of Section l 4A of the Act.
24. The object behind the introduction of Section 14A of the Act
c by the Finance Act of 200 I is clear and unambiguous. The legislature
intended to check the Claim of allowance of expenditure incurred towards
earning exempted income in a situation where an assessee has both
exempted and non-exempted income or includible or non-includible
I
income. While there can be no scintilla of doubt that if the income in
D question is taxable and, therefore, includible in the total income, the
deduction of expenses incurred in relation to such an income must be
allowed, such deduction would not be permissible merely on the ground
that the tax on the dividend received. by the assessee has been paid by
the dividend paying company and not by the recipient assessee, when
under Section I 0(33) of the Act such income by way of dividend is not
E
a part of the total income of the recipient assessee. A plain reading of
Section l 4A would go to show thatthe income must not be includible in
the total income of the assessee. Once the said condition is satisfied, the
expenditure incurred in earningthe said income cannot be allowed to be
deducted. The section does not contemplate a situation where even though
F the income is taxable in the hands. of the dividend paying company the
same to be treated as not includible in the total income of the recipient
assessee, yet, the expenditure incurred to earn that income must be
allowed on the basis that no tax on s1whJincome has been paid by the
assessee. Such a meaning, if ascribed to Section l 4A, would be plainly
beyond what the language of Section l 4A can be understood to
G reasonably convey.
25. The reliance placed by the Assessee on K.P. Varghese (supra)
may now be considered. In K.P. Varghese (supra) the interpretation of
sub-section (2) of Section 52 of the Income TaxAct, 1.961 (as it then in
force), which is in the following terms, came up fqr co11sideration before
H this Court.
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 623
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.]
"Consideration for transfer in cases of under-statement. A
52 (f) Where the person who acquires a capital asset from an
assessee is directly or indirectly connected with the assessee
and the Income-tax Officer has reason to belit;ve that the transfer
was effected with the object 6f avoidance or reduction of the
liability of the assessee under Section 45, the full value of the B
consideration for the transfer shall, with the previous approval
of the Inspecting Assistant Commissioner, be taken to be the fair
market value of the capital asset on the date of the transfer.
(2) without prejudice to the provisions of Sub-section (I), if in
the opinion of the Income-tax Officer the fair 1narket value of a c
capital asset transferred by an assessee as on the date of the
transfer exceeds the full value of the consideration declared by
the assessee in respect of the transfer of such capital assets by
an amount ofnot less than fifteen per cent of the value declared,
the full value of the consideration for such capital asset shall,
with the previous approval of the Inspecting Assistant D
Commissioner, be taken to be its fair market value on the date of
its transfer.
Provided that... .. "
26. On behalf of the Assessee, it was contended that a literal E
construction of Section 52(2) of the Act, as quoted above, could lead to
a manifestly unreasonable and absurd consequence. Such consequence
as urged by the Assessee was appreciated by the Court by taking the
illustration of the price in a sale agreement of immovable property as on
the date of the ~greement and the market price thereof as on the date of
the sale which could be at a later point ,of time. If Section·52(2) were to F
be interpreted literally, the Assessee would be required to pay tax on
capital gains which had not occurred to him. It was, therefore, held:
"It is difficult to conceive of any rational reason why the
Legislature should have thought it fit to impose liability to tax on
an assessee who is bound by law to carry out his contractual G
obligation to sell the property at the agreed price and honestly
carries out such contractual obligation. It would indeed be strange
if obedience to the law should attract the levy of tax on income
which has neither arisen to the assessee nor has been received
by him."
H
624 SUPREME COURT REPORTS [2017] 3 S.C.R.
A Accordingly, it was held that:
"where the plain literal interpretation of a statutory provision
produces a manifestly absurd and unjust result which could never
have been intended by the Legislature, the court may modify the
language used by the Legislature or even "do some violence" to
B it, so as to achieve the obvious intention of the Legislature and
produce a .rational construction: Vide Luke v. !RC [1963] AC
557; [1964] 54 ITR 692.
27. We do not see how the aforesaid principle of law in K.P
Varghese (supra) can assist the Assessee in the present case. The literal
"' meaning of Section l 4A, far from giving rise to any absurdity, appears to
c
be·wholly consistent with the scheme of the Act and the object/purpose
of levy of tax on income. Therefore, the well entrenched principle of
interpretation that where the words of the statute are clear and
unambiguous recourse cannot be had to principles ofinterpretation other
than the literal view will apply. In this regard, the view expressed by this
D Court in Commissioner of Income Tax-111 vs. Calcutta Knitwears.
Ludhiana' may be usefully noticed below:
"the language of a taxing statute shouid ordinarily be read and
understood in the sense in which it is harmonious with the object
of the statute to effectuate the legislative animation. A taxing
E statute should be strictly construed; common sense approach,
equity, logic, ethics and morality have no role to play. Nothing is
to be read in, nothing is to be implied; one can only look fairly at
the language used and nothing more and nothing less.
28. A similar view is to be found in Commissioner oflncome-
Tax vs. Tara Agencies• wherein this Cou1t had concluded that:
F
"Therefore, the legal position seems to be clear and consistent
that it is the bounden duty and obligation of the court to interpret
the statute as it is. It is contrary to all rules of construction to
· read words into a statute which the legislature in its wisdom has
deliberately not incorporated." (para 69)
G
29. The off-quoted observations ofRowlatt,J. in the case of Cape
Brandy Syndicate vs. IRC5 may also be noticed at this juncture. On
the question arising the learned Judge had observed (page 71) that:
'(2014) 6 sec 444 (para 31)
'(2007) 292 !TR 444(SC) [At Page 464)
H '[1921) 1KB64
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 625
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.]
" .. .in a taxing statute one has to look at what is clearly said. A
There is no room for any intendment. There is no equity about a
tax. There is no presumption as to a tax. Nothing is to be read in,
nothing is to be implied. One can only look fairly on the language
used."
30. While it is correct that Section I 0(33) exempts only dividend 8
income under Section 115-0 of the Act and there are other species of
dividend income on which tax is levied under the Act, we do not see how
the said position in law would assist the assessee in understanding the
provisions of Section 14A in the manner indicated. What is required to
be construed is the provisions of Section I0(33) read in the light of Section
115-0 of the Act. So far as the species of dividend income on which tax
c
is payable under Section 115-0 of the Act is concerned, the earning of
the said dividend is tax free in the hands of the assessee and not includible
in the total income of the said assessee. Ifthat is so, we do not see how
the operation of Section 14A of the Act to such dividend income can be
foreclosed. The fact that Section 10(33) and Section 115-0 of the Act D
were brought in together; deleted and reintroduced later in a composite
manner, also, does not assist the assessee. Rather, the aforesaid facts
would countenance a situation that so long as the dividend income is
taxable in the hands of the dividend paying company, the same is not
includible in the total income of the recipient assessee. At such point of
time when the said position was reversed (by the Finance Act of 2002; E
reintroduced again by the Finance Act, 2003), it was the assessee who
was liable to pay tax on such dividend income. In such a situation the
assessee was entitled under Section 57 of the Act to claim the benefit of
exemption of expenditure incurred to earn such income. Once Section
I 0(33) and 115-0 was reintroduced the position was reversed~ The F
above, actually fortifies the situation that Section I 4A of the Act would
operate to disallow deduction of all expenditure incurred in earning the
dividend income under Section 115-0 which is not includible in the total
income of the assessee.
31. So far as the provisions of Section 115-0 of the Act are G
concerned, even if it is assumed that the additional income ta" under the
aforesaid provision is on the dividend and not on the distributed profits of
the dividend paying company, no material difference to the applicability
of Section 14A would arise. Sub-sections (4) and (5) of Section 115-0
of the Act makes it very clear that the further benefit of such payments
H
626 SUPREME COURT REPORTS [2017] 3 S.C.R.
A cannot be claimed either by the dividend paying company or by the
recipient assessee. The provisions of Sections 194, 195, I 96C and I 99
of the Act, quoted above, would further fortify the fact that the dividend
income under Section 115-0 of the Act is a special category of income
which has been treated differently by the Act making the same non-
includible in the total income of the recipient assessee~as tax thereon
B
had already been paid by the dividend distributing company. The other
species of dividend income which attracts levy of income tax at the
hands of the recipient assessee has bee.n treated differently and made
liable to tax under the aforesaid provisions of the Act. In fact, if the
argume1lt is that tax paid by the dividend paying company under Section
c 115-0 is to be understood to be on behalf of the recipient assessee, the
provisions of Section 57 should enable the assessee to claim deduction
of expenditure incurred to earn the income on which such tax is paid.
Such a position in law would be wholly incongruous in view of Section
I 0(3 3) of the Act.
D 32. A briefreference to the decision of this Com1 in Commissioner
of Income-Tax vs. Wal/Ort Share and Stock Brokers P Ltd. (supra)
may now be made, if only, to make the discussion complete. Jn Walfort
Share and Stock Brokers P Ltd.(supra) the issue involved was:
"whether in a dividend stripping transaction the loss on sale of
units could be considered as expenditure in relation to earning of
E dividend income exempt under Section I 0(33), disallowable under
Section J4A of the Act?"
33. While answering the said question this Court considered the
object of insertion of Section I 4A in the Jncome Tax Act by Finance
Act, 200 l, details of which have already been noticed. Noticing the
F objects and reasons behind introduction of Section 14A of the Act this
Court held that:
"Expenses allowed can only be in respect of earning of taxable
income."
Jn paragraph 17, this Court went on to observe that:
G "Therefore, one needs to read the words "expenditure incurred"
in section I 4A in the context of the scheme Of the Act and, if so
read, it is clear that it disallows certain expenditure incurred to
earn exempt income from being deducted from other income
which is includible in the "total income" for the purpose of
chargeability to tax."
H
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 627
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOI, J.]
The views expressed in Walfort Share and Stock Brokers P. A
Ltd (supra), in our considered opinion, yet again militate against the plea
urged on behalf of the Assessee.
34. For the aforesaid reasons, the first question formulated in the
appeal has to be answered against the appellant-assessee by holding
that Section 14A of the Act would apply to dividend income on which B
tax is payable under Section 115-0 of the Act.
35. We may now deal with the second question arising in the case.
36. Section 14A as originally enacted by the Finance Act of2001
with effect from 1.4.1962 is in the same form and language as currently
appearing in sub-section ( 1) of Section 14A of the Act. Sections 14A (2) c
and (3) of the Act were introduced by the Finance Act of 2006 with
effect from 1.4.2007. The finding of the Bombay High Court in the
impugned order that sub-sections (2) and (3) of Section 14A is
retrospective has been challenged by the Revenue in another appeal
which is presently pending before this Court. The said question, therefore, D
need not and cannot be gone into. Nevertheless, irrespective of the
aforesaid question, what cannot be denied is that the requirement for
attracting the provisions of Section_ l 4A( I) of the Act is proof of the fact
that the expenditure sought to be disallowed/deducted had actually been
incurred in earning the dividend income. Insofar as the appellant-assessee
is concerned, the issues stand concluded in its favour in respect of the E
Assessment Years 1998-1999, 1999-2000 and 2001-2002. Earlier to the
introduction of sub-sections (2) and (3) of Section 14A of the Act, such
a determination was required to be made by the Assessing Officer in his
bestj udgment. In all the aforesaid assessment years referred to above it
was held that the Revenue had failed to establish any nexus between F
the expenditure disallowed and the earning of the dividend income in
question. In the appeals arising out of the assessments made for some
of the assessment years the aforesaid question was specifically looked
into from the standpoint of the requirements of the provisions of sub-
sections (2) and (3) of Section 14A of the Act which had by then been
brought into force. It is on such consideration that findings have been G
recorded that the expenditure in question bore no relation to the earning
of the dividend income and hence the assessee was entitled to the benefit
of full exemption claimed on account of dividend income.
37. We do not see how in the aforesaid fact situation a different
view could have been taken for the Assessment Year 2002-2003. H
628 SUPREME COURT REPORTS [2017] 3 S.C.R.
A Sub-sections (2) and (3) of Section 14A of the Act read with Rule 80 of
the Rules merely prescribe a formula for determination of expenditure
incurred in relation to income which does not fon11 part of the total income
under the Act in a situation where the Assessing Officer is not satisfied
with the claim of the assessee. Whether such determination is to be
made on application of the formula prescribed under Rule 80 or in the
B
best judgment of the Assessing Officer, what the law postulates is the
requirement of a satisfaction in the Assessing Officer that having regard
to the accounts of the assessee, as placed before him, it is not possible to
generate the requisite satisfaction with regard to the correctness of the
claim of the assessee. Jt is only thereafter that the provisions of Section
c l4A(2) and (3) read with Rule 80 of the Rules or a best judgment
determination, as earlier prevailing, would become applicable.
38. In the present case. we do not find any mention of the reasons
which had prevailed upon the Assessing Officer, while dealing with the
Assessment Year 2002-2003, to hold that the claims of the Assessee
D that no expenditure was incurred to earn the dividend income cannot be
accepted and why the orders of the Tribunal for the earlier Assessment
Years were not acceptable to the Assessing Officer, particularly, in the
absence of any new fact or change of circumstances. Neither any basis
has been disclosed establishing a reasonable nexus between the
expenditure disallowed and the dividend income received. That any
E part of the borrowings of the assessee had been diverted to earn tax
free income despite the availability of surplus or interest free funds
available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on
3 l .3.2002) remains unproved by any material whatsoever. While it is
true that the principle of res judicata would not apply to assessment
F proceedings under the Aet, the need for consistency and certainty and
existence of strong and compelling reasons for a departure from a settled
position has to be spelt out which conspicuously is absent in the present
case. In this regard we may remind ourselves of what has been observed
by this Court in Radhasoami Satsang vs. Co111111issioner oflncome-
Tax6.
G
"We are aware of the fact that strictly speaking res judicata
does not apply to income tax proceedings. Again, each assessment
year being a unit, what is decided in one year may not apply in
the following year but where a fundamental aspect permeating
H '· (1992) 193 ITR(SC)321 [AtPage329]
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 629
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.]
through the different assessment years has been found as a fact A
one way or the other and parties have allowed that position to be
sustained by not challenging the order, it would not be at all
appropriate to allow the position to be changed in a subsequent
year."
39. In the above circumstances, we are of the view that the second B
question formulated must go in favour of the assessee and it must be
held that for the Assessment Year in question i.e. 2002-2003, the assessee
is entitled to the full benefit of the claim of dividend income without any
deductions.
40. Consequently, the appeal is allowed and the order of the High C
Court is set aside subjectto our conclusions, as above, on the applicability
of Section 14A with regard to dividend income on which tax is paid
under Section 115-0 of the Act.
Nidhi Jain Appeal allowed.
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