The case involves the interpretation and application of the Income Tax Act, 1961 provisions, particularly regarding the taxation of dividend income and the deduction of expenses incurred in earning exempted ...
No Acts & Articles mentioned in this case
Page 1 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
Page 2 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
Page 3 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.
1
st
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 31
st
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 31
st
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
Page 4 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. 1
st
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
Page 5 (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
Page 6 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 26
th
Page 7 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
1
st
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 12
th
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
Page 8 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 :
Page 9 “(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
Page 10 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—
(a)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;
(b) xxx xxx xxx xxx xxx
(c) xxx xxx xxx xxx xxx
(d) xxx xxx xxx xxx xxx
(e) xxx xxx xxx xxx xxx
but "dividend" does not include—
……………
xxx xxx xxx xxx xxx
Page 11 (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
Page 12 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
Page 13 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 Notifica -
tion 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
Page 14 (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
Page 15 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
Page 16 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—
Page 17 (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
Page 18 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
Page 19 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
Page 20 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 1
st
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,
Page 21 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
(1981) 131 ITR 597 (SC)
Page 22 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
Page 23 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
Page 24 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
Page 25 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
Page 26 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
Page 27 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
(2010) 326 ITR 1 (SC)
Page 28 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
Page 29 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
Page 30 (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.
Page 31 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
Page 32 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
Page 33 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
Page 34 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
Page 35 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
Page 36 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.
Page 37 (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
Page 38 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
Page 39 692.
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
(2014) 6 SCC 444 (para 31)
Page 40 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:
(2007) 292 ITR 444(SC) [At Page 464]
[1921] 1 KB 64
Page 41 "...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
Page 42 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
Page 43 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
Page 44 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
Page 45 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
Page 46 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
Page 47 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
Page 48 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
Page 49 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,
Page 50 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
Page 51 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
(1992) 193 ITR (SC) 321 [At Page 329]
Page 52 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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