REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7020 OF 2011
GODREJ & BOYCE MANUFACTURING
COMPANY LIMITED ...APPELLANT
VERSUS
DY. COMMISSIONER OF INCOME-TAX
& ANR. ...RESPONDENTS
J U D G M E N T
RANJAN GOGOI, J.
1. The appellant Company, 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 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 of expenditure incurred in earning dividend income
which is not includible in the total income of the Assessee by virtue of
the provisions of Section 10(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 income
from units of mutual funds to the extent of Rs.34,34,78,686. Dividend
income to the extent of 98% of the said amount was contributed by the
Godrej group companies whereas only 0.05% thereof amounting to Rs.1,71,000/-
came from non-Godrej group companies. A sum of Rs.66,79,000/-,
constituting 1.95% of the aforesaid dividend income, came from mutual
funds. Admittedly, a substantial part of the appellant's investment 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 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 Assessment Year
2002-2003. In fact, the investments had come down to the extent noticed
above.
5. Furthermore, as against the investment of Rs.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
hand, as against the investment of Rs.127.19 crore on the first day of the
previous year i.e. 1st April, 2001, the appellant had a total of Rs.270.51
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 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 of Rs.34,64,89,000/-
as referable to the earning of the said dividend income and had disallowed
such interest expenditure and consequently reduced the exemption available
under Section 10(33) of the Act to the net dividend. In appeal, the
Commissioner of Income 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 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 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. The said appellate
order(s) had also attained finality. For the intervening Assessment Year
2000-2001 there was no scrutiny of the appellant's 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 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
order of the Assessing Officer was reversed by the Commissioner of Income
Tax (Appeals) following 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 26th August, 2009. The learned Tribunal
held that sub-sections (2) and (3) of Section 14A of the Act (inserted by
the Finance Act, 2006 with effect from 1st April, 2007) were
retrospectively applicable to the Assessment Year 2002-2003 and, therefore,
the matter should be remanded to the Assessing Officer for recording his
satisfaction/findings in the light of the said sub-sections of Section 14A
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 out on a notional basis.
8. The High Court by the impugned judgment dated 12th August,
2010, inter alia, held that Section 14A 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-O as such income
is not includible in the total income of the shareholder. Sub-sections (2)
and (3) of Section 14A of the Act and rule 8D 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 Court upheld the remand as made by the
Tribunal to the AO though for a slightly different reason as will be
noticed hereinafter. We may also notice that the High Court in its
impugned judgment also held that the tax paid under section 115-O 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.
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 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-O of the Act and income on units of mutual funds on which tax is
payable under Section 115-R.
(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.”
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
will require a consideration are extracted below:
“2. In this Act, unless the context otherwise requires,—
(22) "dividend" includes—
any distribution by a company of accumulated profits, whether capitalised
or not, if such distribution entails the release by the company to its
shareholders of all or any part of the assets of the company;
xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx
but "dividend" does not include—……………
xxx xxx xxx xxx xxx
(24) "income" includes—
(i) profits and gains ;
(ii) dividend ;
(iia) ………………”
xxx xxx xxx xxx xxx
10. 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
(33) any income by way of-
(i) dividends referred to in section 115-O; or
(ii) income received in respect of units from the Unit Trust of India
established under the Unit Trust of India Act, 1963 (52 of 1963); or
(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 of India or of a mutual fund, as the
case may be”
|xxx xxx xxx xxx xxx |
| |
|14A. Expenditure incurred in relation to income not includible in |
|total income.- |
|(1) 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 expenditure|
|incurred in relation to such income which does not form part of the|
|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 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 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 refund already made or|
|otherwise increasing the liability of the assessee under section |
|154, for any assessment year beginning on or before the 1st day of |
|April, 2001. |
| |
|Rule 8D.- (introduced by CBDT Notification No.45/2002 dated |
|24.03.2008. |
|“Method for determining amount of expenditure in relation to income|
|not includible in total income. |
|8D.(1) Where the Assessing Officer, having regard to the accounts |
|of the assessee of a previous year, is not satisfied with- |
|(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 such previous 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 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 way |
|of interest during the previous year which is not directly |
|attributable to any particular income or receipt, an amount |
|computed in accordance with the following formula, namely:- |
|A x _B_ |
|C |
|Where A = amount of expenditure by way of interest other 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 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; |
|(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.” |
|(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-O. Tax on distributed profits of domestic companies.-
(1) 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
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.
(1A) xxx xxx xxx xxx xxx
(1B) 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-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—
(a) declaration of any dividend; or
(b) distribution of any dividend; or
(c) payment of any dividend,
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 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.
(6) xxx xxx xxx xxx xxx
(7) xxx xxx xxx xxx xxx
(8) xxx xxx xxx xxx xxx”
xxx xxx xxx xxx xxx xxx
“115R. Tax on distributed income to unit holders.- (1) Notwithstanding
anything contained in any other provisions of this Act and section 32 of
the Unit Trust of India Act, 1963 (52 of 1963), any amount of income
distributed on or before the 31st day of March, 2002 by the Unit Trust of
India to its unit holders shall be chargeable to tax and the Unit Trust of
India shall be 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 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 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
(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 14A of the Act pertains to disallowance
of expenditure relatable to an item of income on which tax has not been
paid. According to the learned counsel, Section 14A applies only in
situations where income is tax free; non-taxable and there is no incidence
of tax per se. Dividend on shares is subjected to tax under Section 115-O
of the Act whereas returns of units or mutual funds is subjected to tax
under Section 115R. 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 115-O of the Act or income
received in respect of units from the UTI or of mutual funds alone is
exempted. It is only one specie of dividend income which is exempted under
Section 10(33) of the Act whereas other species of such (dividend) income,
say for example, dividend from foreign companies is still liable to tax.
As tax has already been paid on such dividend, though by the dividend
paying company, Section 14A will not apply to exclude expenditure incurred
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 10(33) and Section 115-O of the Act inasmuch as
both the Sections were inserted in the Act by the Finance 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 10(33) of the Act [engrafted as Section 10(34)] and
Section 115-O were reintroduced by the Finance Act, 2003 with effect from
1st April, 2003. It is, therefore, argued that both the Sections 10(33)
and Section 115-O of the Act 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
recipient Assessee, would not attract the provisions of Section 14A 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.
14. Shri Dastur has also urged that the above position has been
accepted by the Revenue in its counter affidavit wherein it has been
admitted that the exemption granted under Section 10(33) is consequent upon
collection of tax on dividend income from the dividend distributing company
under Section 115-O of the Act. It is, therefore, argued by Shri Dastur
that a literal interpretation of Section 14A must be avoided. Reference in
this regard is made to the case of K.P. Varghese vs. Income-Tax Officer,
Ernakulam and Anr.[1]. It is specifically contended by Shri Dastur that
tax on the dividend paid is not a tax on profits out of which dividend is
distributed inasmuch as under Section 115-O of the Act dividend can be
paid either from accumulated profits or current profits. In fact, Section
205 of the Companies Act permits payment of 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-O 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 deductions. In other words, tax
under Section 115-O of the Act is payable 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 14A of the Act by the 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 General has drawn the
attention of the Court to the Memorandum explaining the provisions of the
Finance Bill, 2001 which is to the following effect.
“Certain incomes which are not includible while computing the total income
as these are exempt under various provisions of the 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 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 proposed to insert a new section 14A 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 form part of the total income
under the Income-tax 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, 2001. The said
Circular has also been placed before the Court by the learned Solicitor
General.
17. The learned Solicitor General has also traced the history of
the Amendments to Section 14A of the Act and, in particular, to the
insertion of sub-sections (2) and (3) thereof by the Finance Act of 2006.
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 that from
the said Memorandum it is clear that sub-sections (2) and (3) had been
introduced as the existing provisions of Section 14A 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 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 part of the total Income” was
actually used to reduce the tax payable on the total income.
18. The Scheme of the Income Tax Act, 1961 has been sought to be
explained by the learned Solicitor General to contend that Section 14 of
the Act provides for five heads of income i.e. ‘Income from Salaries’;
‘Income from House Property’; ‘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 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-O 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
10(33) of the Act. The learned Solicitor General has argued that Section
14A reiterates a fundamental principle enshrined by the Act that expenses
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
in C.I.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-O of the Act, the learned Solicitor
General had submitted that the said section levies an additional income tax
on the profits of a company which has been declared and distributed 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-O(4)]. Such additional income tax paid by the
company does not also enure to the benefit of the shareholders receiving
the amount of dividend distributed by such company. The 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-O(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-
O(1) of the Act. This, according to the learned Solicitor General, makes
the intent of Section 14 crystal clear. The liability to pay tax under
Section 115-O 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, the
expenditure incurred 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
shareholder. It may be convenient, to appreciate what has been argued, to
notice what the aforesaid provisions of the Act actually say.
194. Dividends. The principal officer of an Indian company or a company
which has made the prescribed arrangements for the declaration and payment
of dividends (including dividends on preference shares) within India,
shall, before making any payment 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, 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—
(a) xxx xxx xxx xxx xxx
(b) xxx xxx xxx xxx xxx
Provided further that the provisions of this section shall not apply to
such income credited or paid to—
(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-O.”
xxx xxx xxx xxx xxx xxx
195.Other sums.- (1) 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 194LB or section 194LC) or section 194LD 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 force :
Provided that ……….. …… …… ….
Provided further that no such deduction shall be made in respect of any
dividends referred to in section 115-O.
xxx xxx xxx xxx xxx xxx
196C. Income from foreign currency bonds or shares of Indian company.-
Where any income by way of interest or dividends in respect of bonds or
Global Depository Receipts referred to in section 115AC 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 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 rate of ten per cent :
Provided that no such deduction shall be made in respect of any dividends
referred to in section 115-O.”
199. Credit for tax deducted.- (1) Any deduction made in accordance with
the foregoing provisions of this Chapter and paid to the Central Government
shall be treated as a payment of tax on behalf of the 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.
(2) Any sum referred to in sub-section (1A) 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 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 (1) and sub-
section (2) and also the assessment year for which such credit may be
given.
22. All the said provisions, noticeably, exclude dividend received
under Section 115-O. 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-O,
it is submitted by the learned Solicitor General that it is crystal clear
that the additional income tax paid under Section 115-O 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-
O(4), reference to which has already been made earlier. Specific reference
is made to Section 199 of the Act which provides for credit to be given for
the tax deducted at source on dividend paid. If the tax paid on dividend
under Section 115-O is on income earned by the shareholder, Section 199
would have also provided for deduction of tax at source in respect of the
dividends paid under Section 115-O of the Act to the assessee, it is
contended.
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 Solicitor
General that each assessment year has to be reckoned separately; there is
no estoppel and, furthermore, sub-sections (2) and (3) of Section 14A
having been introduced by the Finance Act of 2006, the Tribunal and the
High Court was fully justified in remanding the matter to the Assessing
Officer for a de novo consideration in the light of the provisions
contained in sub-sections (2) and (3) of Section 14A of the Act.
24. The object behind the introduction of Section 14A of the Act by
the Finance Act of 2001 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 income. While there can be
no scintilla of doubt that if the income 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 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 10(33) of the Act
such income by way of dividend is not a part of the total income of the
recipient assessee. A plain reading of Section 14A would go to show that
the income must not be includible in the total income of the assessee. Once
the said condition is satisfied, the expenditure incurred in earning the
said income cannot be allowed to be deducted. The section does 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 assessee. Such a meaning, if
ascribed to Section 14A, would be plainly beyond what the language of
Section 14A can be understood to 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 Tax Act, 1961 (as it then in
force), which is in the following terms, came up for consideration before
this Court.
“Consideration for transfer in cases of under-statement.
52 (1) 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 believe that the transfer was effected with the
object of avoidance or reduction of the liability of the assessee under
Section 45, the full value of the 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 (1), if in the
opinion of the Income-tax Officer the fair market value of a 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 of not 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
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
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
agreement 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 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 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.”
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 it, so as to achieve the obvious intention of
the Legislature and produce a rational construction: Vide Luke v. IRC
[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 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. 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 will apply. In this regard, the view expressed by
this Court in Commissioner of Income Tax-III vs. Calcutta Knitwears,
Ludhiana[3] may be usefully noticed below:
“the language of a taxing statute should 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 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 of Income-Tax
vs. Tara Agencies[4] wherein this Court had concluded that:
“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)
29. The off-quoted observations of Rowlatt,J. in the case of Cape
Brandy Syndicate vs. IRC[5] may also be noticed at this juncture. On the
question arising the learned Judge had observed (page 71) that:
"...in a taxing statute one has to look at what is clearly said. 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 10(33) exempts only dividend
income under Section 115-O 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 10(33) read in the light of Section
115-O of the Act. So far as the species of dividend income on which tax is
payable under Section 115-O 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, 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-O of the Act 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; 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 10(33) and 115-O was
reintroduced the position was reversed. The above, actually fortifies the
situation that Section 14A of the Act would operate to disallow deduction
of all expenditure incurred in earning the dividend income under Section
115-O which is not includible in the total income of the assessee.
31. So far as the provisions of Section 115-O of the Act are
concerned, even if it is assumed that the additional income tax 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-O 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,
quoted above, would further fortify the fact that the dividend income under
Section 115-O 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 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 been treated differently and made liable to tax under the aforesaid
provisions of the Act. In fact, if the argument is that tax paid by the
dividend paying company under Section 115-O 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 10(33) of the Act.
32. A brief reference to the decision of this Court in Commissioner
of Income-Tax vs. Walfort Share and Stock Brokers P. Ltd. (supra) may now
be made, if only, to make the discussion complete. In 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 dividend income exempt under Section
10(33), disallowable under Section 14A of the Act?”
33. While answering the said question this Court considered the
object of insertion of Section 14A in the Income Tax Act by Finance Act,
2001, details of which have already been noticed. Noticing the 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.”
In paragraph 17, this Court went on to observe that:
“Therefore, one needs to read the words “expenditure incurred” in section
14A 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.”
The views expressed in Walfort Share and Stock Brokers P. 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 tax is
payable under Section 115-O 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 of 2001
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)
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, 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 14A(1) 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 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 best judgment. In all the aforesaid
assessment years referred to above 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 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 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. Sub-sections
(2) and (3) of Section 14A of the Act read with Rule 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 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 the provisions of Section 14A(2) and
(3) read with Rule 8D 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 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 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 31.3.2002) remains unproved by any material
whatsoever. While it is true that the principle of res judicata would not
apply to assessment proceedings under the Act, 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. Commissioner of
Income-Tax[6].
“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 through the different assessment years has
been found as a fact 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
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
Court is set aside subject to our conclusions, as above, on the
applicability of Section 14A with regard to dividend income on which tax is
paid under Section 115-O of the Act.
....................,J.
(RANJAN GOGOI)
....................,J.
(ASHOK BHUSHAN)
NEW DELHI
MAY 8, 2017
-----------------------
[1] (1981) 131 ITR 597 (SC)
[2] (2010) 326 ITR 1 (SC)
[3] (2014) 6 SCC 444 (para 31)
[4] (2007) 292 ITR 444(SC) [At Page 464]
[5] [1921] 1 KB 64
[6] (1992) 193 ITR (SC) 321 [At Page 329]
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7020 OF 2011
GODREJ & BOYCE MANUFACTURING
COMPANY LIMITED ...APPELLANT
VERSUS
DY. COMMISSIONER OF INCOME-TAX
& ANR. ...RESPONDENTS
J U D G M E N T
RANJAN GOGOI, J.
1. The appellant Company, 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 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 of expenditure incurred in earning dividend income
which is not includible in the total income of the Assessee by virtue of
the provisions of Section 10(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 income
from units of mutual funds to the extent of Rs.34,34,78,686. Dividend
income to the extent of 98% of the said amount was contributed by the
Godrej group companies whereas only 0.05% thereof amounting to Rs.1,71,000/-
came from non-Godrej group companies. A sum of Rs.66,79,000/-,
constituting 1.95% of the aforesaid dividend income, came from mutual
funds. Admittedly, a substantial part of the appellant's investment 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 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 Assessment Year
2002-2003. In fact, the investments had come down to the extent noticed
above.
5. Furthermore, as against the investment of Rs.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
hand, as against the investment of Rs.127.19 crore on the first day of the
previous year i.e. 1st April, 2001, the appellant had a total of Rs.270.51
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 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 of Rs.34,64,89,000/-
as referable to the earning of the said dividend income and had disallowed
such interest expenditure and consequently reduced the exemption available
under Section 10(33) of the Act to the net dividend. In appeal, the
Commissioner of Income 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 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 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. The said appellate
order(s) had also attained finality. For the intervening Assessment Year
2000-2001 there was no scrutiny of the appellant's 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 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
order of the Assessing Officer was reversed by the Commissioner of Income
Tax (Appeals) following 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 26th August, 2009. The learned Tribunal
held that sub-sections (2) and (3) of Section 14A of the Act (inserted by
the Finance Act, 2006 with effect from 1st April, 2007) were
retrospectively applicable to the Assessment Year 2002-2003 and, therefore,
the matter should be remanded to the Assessing Officer for recording his
satisfaction/findings in the light of the said sub-sections of Section 14A
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 out on a notional basis.
8. The High Court by the impugned judgment dated 12th August,
2010, inter alia, held that Section 14A 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-O as such income
is not includible in the total income of the shareholder. Sub-sections (2)
and (3) of Section 14A of the Act and rule 8D 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 Court upheld the remand as made by the
Tribunal to the AO though for a slightly different reason as will be
noticed hereinafter. We may also notice that the High Court in its
impugned judgment also held that the tax paid under section 115-O 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.
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 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-O of the Act and income on units of mutual funds on which tax is
payable under Section 115-R.
(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.”
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
will require a consideration are extracted below:
“2. In this Act, unless the context otherwise requires,—
(22) "dividend" includes—
any distribution by a company of accumulated profits, whether capitalised
or not, if such distribution entails the release by the company to its
shareholders of all or any part of the assets of the company;
xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx
xxx xxx xxx xxx xxx
but "dividend" does not include—……………
xxx xxx xxx xxx xxx
(24) "income" includes—
(i) profits and gains ;
(ii) dividend ;
(iia) ………………”
xxx xxx xxx xxx xxx
10. 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
(33) any income by way of-
(i) dividends referred to in section 115-O; or
(ii) income received in respect of units from the Unit Trust of India
established under the Unit Trust of India Act, 1963 (52 of 1963); or
(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 of India or of a mutual fund, as the
case may be”
|xxx xxx xxx xxx xxx |
| |
|14A. Expenditure incurred in relation to income not includible in |
|total income.- |
|(1) 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 expenditure|
|incurred in relation to such income which does not form part of the|
|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 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 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 refund already made or|
|otherwise increasing the liability of the assessee under section |
|154, for any assessment year beginning on or before the 1st day of |
|April, 2001. |
| |
|Rule 8D.- (introduced by CBDT Notification No.45/2002 dated |
|24.03.2008. |
|“Method for determining amount of expenditure in relation to income|
|not includible in total income. |
|8D.(1) Where the Assessing Officer, having regard to the accounts |
|of the assessee of a previous year, is not satisfied with- |
|(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 such previous 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 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 way |
|of interest during the previous year which is not directly |
|attributable to any particular income or receipt, an amount |
|computed in accordance with the following formula, namely:- |
|A x _B_ |
|C |
|Where A = amount of expenditure by way of interest other 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 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; |
|(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.” |
|(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-O. Tax on distributed profits of domestic companies.-
(1) 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
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.
(1A) xxx xxx xxx xxx xxx
(1B) 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-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—
(a) declaration of any dividend; or
(b) distribution of any dividend; or
(c) payment of any dividend,
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 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.
(6) xxx xxx xxx xxx xxx
(7) xxx xxx xxx xxx xxx
(8) xxx xxx xxx xxx xxx”
xxx xxx xxx xxx xxx xxx
“115R. Tax on distributed income to unit holders.- (1) Notwithstanding
anything contained in any other provisions of this Act and section 32 of
the Unit Trust of India Act, 1963 (52 of 1963), any amount of income
distributed on or before the 31st day of March, 2002 by the Unit Trust of
India to its unit holders shall be chargeable to tax and the Unit Trust of
India shall be 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 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 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
(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 14A of the Act pertains to disallowance
of expenditure relatable to an item of income on which tax has not been
paid. According to the learned counsel, Section 14A applies only in
situations where income is tax free; non-taxable and there is no incidence
of tax per se. Dividend on shares is subjected to tax under Section 115-O
of the Act whereas returns of units or mutual funds is subjected to tax
under Section 115R. 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 115-O of the Act or income
received in respect of units from the UTI or of mutual funds alone is
exempted. It is only one specie of dividend income which is exempted under
Section 10(33) of the Act whereas other species of such (dividend) income,
say for example, dividend from foreign companies is still liable to tax.
As tax has already been paid on such dividend, though by the dividend
paying company, Section 14A will not apply to exclude expenditure incurred
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 10(33) and Section 115-O of the Act inasmuch as
both the Sections were inserted in the Act by the Finance 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 10(33) of the Act [engrafted as Section 10(34)] and
Section 115-O were reintroduced by the Finance Act, 2003 with effect from
1st April, 2003. It is, therefore, argued that both the Sections 10(33)
and Section 115-O of the Act 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
recipient Assessee, would not attract the provisions of Section 14A 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.
14. Shri Dastur has also urged that the above position has been
accepted by the Revenue in its counter affidavit wherein it has been
admitted that the exemption granted under Section 10(33) is consequent upon
collection of tax on dividend income from the dividend distributing company
under Section 115-O of the Act. It is, therefore, argued by Shri Dastur
that a literal interpretation of Section 14A must be avoided. Reference in
this regard is made to the case of K.P. Varghese vs. Income-Tax Officer,
Ernakulam and Anr.[1]. It is specifically contended by Shri Dastur that
tax on the dividend paid is not a tax on profits out of which dividend is
distributed inasmuch as under Section 115-O of the Act dividend can be
paid either from accumulated profits or current profits. In fact, Section
205 of the Companies Act permits payment of 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-O 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 deductions. In other words, tax
under Section 115-O of the Act is payable 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 14A of the Act by the 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 General has drawn the
attention of the Court to the Memorandum explaining the provisions of the
Finance Bill, 2001 which is to the following effect.
“Certain incomes which are not includible while computing the total income
as these are exempt under various provisions of the 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 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 proposed to insert a new section 14A 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 form part of the total income
under the Income-tax 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, 2001. The said
Circular has also been placed before the Court by the learned Solicitor
General.
17. The learned Solicitor General has also traced the history of
the Amendments to Section 14A of the Act and, in particular, to the
insertion of sub-sections (2) and (3) thereof by the Finance Act of 2006.
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 that from
the said Memorandum it is clear that sub-sections (2) and (3) had been
introduced as the existing provisions of Section 14A 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 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 part of the total Income” was
actually used to reduce the tax payable on the total income.
18. The Scheme of the Income Tax Act, 1961 has been sought to be
explained by the learned Solicitor General to contend that Section 14 of
the Act provides for five heads of income i.e. ‘Income from Salaries’;
‘Income from House Property’; ‘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 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-O 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
10(33) of the Act. The learned Solicitor General has argued that Section
14A reiterates a fundamental principle enshrined by the Act that expenses
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
in C.I.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-O of the Act, the learned Solicitor
General had submitted that the said section levies an additional income tax
on the profits of a company which has been declared and distributed 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-O(4)]. Such additional income tax paid by the
company does not also enure to the benefit of the shareholders receiving
the amount of dividend distributed by such company. The 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-O(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-
O(1) of the Act. This, according to the learned Solicitor General, makes
the intent of Section 14 crystal clear. The liability to pay tax under
Section 115-O 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, the
expenditure incurred 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
shareholder. It may be convenient, to appreciate what has been argued, to
notice what the aforesaid provisions of the Act actually say.
194. Dividends. The principal officer of an Indian company or a company
which has made the prescribed arrangements for the declaration and payment
of dividends (including dividends on preference shares) within India,
shall, before making any payment 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, 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—
(a) xxx xxx xxx xxx xxx
(b) xxx xxx xxx xxx xxx
Provided further that the provisions of this section shall not apply to
such income credited or paid to—
(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-O.”
xxx xxx xxx xxx xxx xxx
195.Other sums.- (1) 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 194LB or section 194LC) or section 194LD 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 force :
Provided that ……….. …… …… ….
Provided further that no such deduction shall be made in respect of any
dividends referred to in section 115-O.
xxx xxx xxx xxx xxx xxx
196C. Income from foreign currency bonds or shares of Indian company.-
Where any income by way of interest or dividends in respect of bonds or
Global Depository Receipts referred to in section 115AC 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 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 rate of ten per cent :
Provided that no such deduction shall be made in respect of any dividends
referred to in section 115-O.”
199. Credit for tax deducted.- (1) Any deduction made in accordance with
the foregoing provisions of this Chapter and paid to the Central Government
shall be treated as a payment of tax on behalf of the 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.
(2) Any sum referred to in sub-section (1A) 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 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 (1) and sub-
section (2) and also the assessment year for which such credit may be
given.
22. All the said provisions, noticeably, exclude dividend received
under Section 115-O. 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-O,
it is submitted by the learned Solicitor General that it is crystal clear
that the additional income tax paid under Section 115-O 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-
O(4), reference to which has already been made earlier. Specific reference
is made to Section 199 of the Act which provides for credit to be given for
the tax deducted at source on dividend paid. If the tax paid on dividend
under Section 115-O is on income earned by the shareholder, Section 199
would have also provided for deduction of tax at source in respect of the
dividends paid under Section 115-O of the Act to the assessee, it is
contended.
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 Solicitor
General that each assessment year has to be reckoned separately; there is
no estoppel and, furthermore, sub-sections (2) and (3) of Section 14A
having been introduced by the Finance Act of 2006, the Tribunal and the
High Court was fully justified in remanding the matter to the Assessing
Officer for a de novo consideration in the light of the provisions
contained in sub-sections (2) and (3) of Section 14A of the Act.
24. The object behind the introduction of Section 14A of the Act by
the Finance Act of 2001 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 income. While there can be
no scintilla of doubt that if the income 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 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 10(33) of the Act
such income by way of dividend is not a part of the total income of the
recipient assessee. A plain reading of Section 14A would go to show that
the income must not be includible in the total income of the assessee. Once
the said condition is satisfied, the expenditure incurred in earning the
said income cannot be allowed to be deducted. The section does 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 assessee. Such a meaning, if
ascribed to Section 14A, would be plainly beyond what the language of
Section 14A can be understood to 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 Tax Act, 1961 (as it then in
force), which is in the following terms, came up for consideration before
this Court.
“Consideration for transfer in cases of under-statement.
52 (1) 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 believe that the transfer was effected with the
object of avoidance or reduction of the liability of the assessee under
Section 45, the full value of the 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 (1), if in the
opinion of the Income-tax Officer the fair market value of a 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 of not 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
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
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
agreement 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 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 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.”
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 it, so as to achieve the obvious intention of
the Legislature and produce a rational construction: Vide Luke v. IRC
[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 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. 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 will apply. In this regard, the view expressed by
this Court in Commissioner of Income Tax-III vs. Calcutta Knitwears,
Ludhiana[3] may be usefully noticed below:
“the language of a taxing statute should 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 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 of Income-Tax
vs. Tara Agencies[4] wherein this Court had concluded that:
“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)
29. The off-quoted observations of Rowlatt,J. in the case of Cape
Brandy Syndicate vs. IRC[5] may also be noticed at this juncture. On the
question arising the learned Judge had observed (page 71) that:
"...in a taxing statute one has to look at what is clearly said. 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 10(33) exempts only dividend
income under Section 115-O 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 10(33) read in the light of Section
115-O of the Act. So far as the species of dividend income on which tax is
payable under Section 115-O 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, 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-O of the Act 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; 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 10(33) and 115-O was
reintroduced the position was reversed. The above, actually fortifies the
situation that Section 14A of the Act would operate to disallow deduction
of all expenditure incurred in earning the dividend income under Section
115-O which is not includible in the total income of the assessee.
31. So far as the provisions of Section 115-O of the Act are
concerned, even if it is assumed that the additional income tax 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-O 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,
quoted above, would further fortify the fact that the dividend income under
Section 115-O 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 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 been treated differently and made liable to tax under the aforesaid
provisions of the Act. In fact, if the argument is that tax paid by the
dividend paying company under Section 115-O 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 10(33) of the Act.
32. A brief reference to the decision of this Court in Commissioner
of Income-Tax vs. Walfort Share and Stock Brokers P. Ltd. (supra) may now
be made, if only, to make the discussion complete. In 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 dividend income exempt under Section
10(33), disallowable under Section 14A of the Act?”
33. While answering the said question this Court considered the
object of insertion of Section 14A in the Income Tax Act by Finance Act,
2001, details of which have already been noticed. Noticing the 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.”
In paragraph 17, this Court went on to observe that:
“Therefore, one needs to read the words “expenditure incurred” in section
14A 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.”
The views expressed in Walfort Share and Stock Brokers P. 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 tax is
payable under Section 115-O 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 of 2001
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)
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, 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 14A(1) 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 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 best judgment. In all the aforesaid
assessment years referred to above 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 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 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. Sub-sections
(2) and (3) of Section 14A of the Act read with Rule 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 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 the provisions of Section 14A(2) and
(3) read with Rule 8D 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 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 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 31.3.2002) remains unproved by any material
whatsoever. While it is true that the principle of res judicata would not
apply to assessment proceedings under the Act, 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. Commissioner of
Income-Tax[6].
“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 through the different assessment years has
been found as a fact 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
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
Court is set aside subject to our conclusions, as above, on the
applicability of Section 14A with regard to dividend income on which tax is
paid under Section 115-O of the Act.
....................,J.
(RANJAN GOGOI)
....................,J.
(ASHOK BHUSHAN)
NEW DELHI
MAY 8, 2017
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[1] (1981) 131 ITR 597 (SC)
[2] (2010) 326 ITR 1 (SC)
[3] (2014) 6 SCC 444 (para 31)
[4] (2007) 292 ITR 444(SC) [At Page 464]
[5] [1921] 1 KB 64
[6] (1992) 193 ITR (SC) 321 [At Page 329]
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