Godrej & Boyce Manufacturing Company Limited v. Dy. Commissioner of Income-tax & Anr
[Citation -2017-LL-0508]

Citation 2017-LL-0508
Appellant Name Godrej & Boyce Manufacturing Company Limited
Respondent Name Dy. Commissioner of Income-tax & Anr.
Court SUPREME COURT
Relevant Act Income-tax
Date of Order 08/05/2017
Assessment Year 2002-03
Judgment View Judgment
Keyword Tags disallowance of expenditure • deduction of tax at source • additional income-tax • benefit of exemption • interest expenditure • fair market value • tax on dividends • exempted income • tax free income • notional basis


REPORTABLE IN 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 JUDGMENT RANJAN GOGOI, J. 1. appellant Company, incorporated in year 1932, is engaged in business of manufacture of steel furniture, security equipments, typewriters, electrical equipments and host of other related products. It is also promoter of various other companies and invests its funds in such companies in order to maintain control of such concerns as sister concerns. Signature Not Verified Digitally signed by VINOD LAKHINA 2. Date: 2017.05.08 16:53:40 IST Reason: issue in present appeal relates to 2 admissibility or otherwise of deduction of expenditure incurred in earning dividend income which is not includible in total income of Assessee by virtue of provisions of Section 10(33) of Income Tax Act, 1961 (hereinafter referred to as Act ) as in force during relevant Assessment Year i.e. 2002-2003. 3. For Assessment Year 2002-2003, appellant Company filed its return declaring total loss of Rs.45,90,39,210/-. In said return, it had shown income by way of dividend from companies and income from units of mutual funds to extent of Rs.34,34,78,686. Dividend income to extent of 98% of said amount was contributed by Godrej group companies whereas only 0.05% thereof amounting to Rs.1,71,000/- came from non-Godrej group companies. sum of Rs.66,79,000/-, constituting 1.95% of aforesaid dividend income, came from mutual funds. Admittedly, substantial part of appellant's investment in group companies was in form of bonus shares which did not involve any fresh capital investment or outlay. 3 4. other relevant facts which may be taken notice of is that on first day of previous year relevant to Assessment Year 2002-2003 i.e. 1 st April, 2001, investment in shares and mutual funds of appellant company stood at Rs.127.19 crore whereas at end of previous year i.e. as on 31st March, 2002 investment was Rs.125.54 crore. above figures would go to show that there were no fresh investments made during previous year relevant to Assessment Year 2002-2003. In fact, investments had come down to extent noticed above. 5. Furthermore, as against investment of Rs.125.54 crore as on 31st March, 2002, on said date appellant had total of Rs.280.64 crore by way of interest free funds in form of share capital (Rs.6.55 crore) as well as Reserves and Surplus (Rs.274.09 crore). On other hand, as against investment of Rs.127.19 crore on first day of previous year i.e. 1 st April, 2001, appellant had total of Rs.270.51 crore by way of interest free funds in form of share 4 capital (Rs.6.55 crore) and Reserves and Surplus (Rs.263.96 crore). above facts would show that appellant had sufficient interest free funds available for purpose of making investments. 6. At this stage we may go back little in time and start with Assessment Year 1998-1999 wherein appellant's dividend income was Rs.11,41,34,093/-. Assessing Officer notionally allocated Rs.1,47,40,000/- out of total interest expenditure of Rs.34,64,89,000/- as referable to earning of said dividend income and had disallowed such interest expenditure and consequently reduced exemption available under Section 10(33) of Act to net dividend. In appeal, Commissioner of Income Tax (Appeals) allowed exemption of entire dividend income on ground that Assessing Officer had failed to show any nexus between investments in shares and units of mutual funds on one hand and borrowed funds on other. learned Income Tax Appellate Tribunal (hereinafter referred to as Tribunal ) which 5 was moved by Revenue confirmed appellate order. said order had attained finality. 7. For Assessment Years 1999-2000 and 2001-2002 issue with regard to exemption under Section 10(33) of Act was similarly held in favour of assessee by Commissioner of Income Tax (Appeals) and learned Tribunal, once again. Initially, Assessing Officer, in both Assessment Years, had disallowed notionally computed interest expenditure as being relatable to earning of dividend income. said appellate order(s) had also attained finality. For intervening Assessment Year 2000-2001 there was no scrutiny of appellant's return of income. Consequently, dividend income was allowed in full without disallowing any expenditure incurred in relation to earning such income. However, for Assessment Year 2002-2003, Assessing Officer did not allow interest expenditure to extent of Rs.6,92,06,000/- holding same to be attributable to earning dividend income of Rs. 34,34,78,686/- said figure of interest expenditure disallowed was worked out from total interest expenditure for year on 6 notional basis in ratio of cost of investments in shares and units of mutual funds to cost of total assets appearing in balance sheet. Though aforesaid order of Assessing Officer was reversed by Commissioner of Income Tax (Appeals) following earlier orders pertaining to previous Assessment Years, as noticed above, learned Tribunal, in appeal, took different view by its order dated 26 th August, 2009. learned Tribunal held that sub-sections (2) and (3) of Section 14A of Act (inserted by Finance Act, 2006 with effect from 1st April, 2007) were retrospectively applicable to Assessment Year 2002-2003 and, therefore, matter should be remanded to Assessing Officer for recording his satisfaction/findings in light of said sub-sections of Section 14A of Act. This was notwithstanding fact that only disallowance made by Assessing Officer which was reversed in appeal by Commissioner of Income Tax (Appeals) was in respect of interest expenditure what was worked out on notional basis. 7 8. High Court by impugned judgment dated 12th August, 2010, inter alia, held that Section 14A of Act has to be construed on plain grammatical construction thereof and said provision is attracted in respect of dividend income referred to in Section 115-O as such income is not includible in total income of shareholder. Sub-sections (2) and (3) of Section 14A of Act and rule 8D of Income-tax Rules, 1962 (hereinafter referred to as Rules ) would, however, not apply to AY 2002-03 as said provisions do not have retrospective effect. Notwithstanding above High Court upheld remand as made by Tribunal to AO though for slightly different reason as will be noticed hereinafter. We may also notice that High Court in its impugned judgment also held that tax paid under section 115-O of Act is additional tax on that component of profits of dividend distributing company which is distributed by way of dividends and that same is not tax on dividend income of assessee. 8 9. Aggrieved, instant appeal has been filed raising two questions in main which have been summarized by appellant, and we may say accurately, as follows : (a)Irrespective of factual position and findings in case of Appellant, whether 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 Act and income on units of mutual funds on which tax is payable under Section 115-R. (b) Whatever be view on legal aspects, whether on facts and in circumstances of Appellant's case and bearing in mind unanimous findings of lower authorities over considerable 9 period of time (which were accepted by Revenue) there could at all be any question of provisions of Section 14A in appellant's case. 10. We have heard Shri Sohrab E. Dastur, learned Senior Counsel appearing for appellant and Shri Ranjit Kumar, learned Solicitor General appearing for Revenue. 11. At very outset, relevant provisions of Act which will require consideration are extracted below: 2. In this Act, unless context otherwise requires, (22) "dividend" includes (a) any distribution by company of accumulated profits, whether capitalised or not, if such distribution entails release by company to its shareholders of all or any part of assets of company; (b) xxx xxx xxx xxx xxx (c) xxx xxx xxx xxx xxx 10 (d) xxx xxx xxx xxx xxx (e) 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 total income of previous year of any person, any income falling within any of 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 Unit Trust of India established under Unit Trust of India Act, 1963 (52 of 1963); or (iii) income received in respect of 11 units of mutual fund specified under clause (23D) Provided that this clause shall not apply to any income arising from transfer of units of Unit Trust of India or of mutual fund, as case may be xxx xxx xxx xxx xxx 14A. Expenditure incurred in relation to income not includible in total income.- (1) For purposes of computing total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under this Act. (2) Assessing Officer shall determine amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as may be prescribed , if Assessing Officer, having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. 12 (3) provisions of sub-section (2) shall also apply in relation to case where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under this Act: Provided that nothing contained in this section shall empower Assessing Officer either to reassess under section 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under section 154, for any assessment year beginning on or before 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 Assessing Officer, having regard to accounts of assessee of previous year, is not satisfied with- (a) correctness of claim of expenditure made by assessee; or (b) claim made by assessee that no 13 expenditure has been incurred, in relation to income which does not form part of total income under Act for such previous year, he shall determine amount of expenditure in relation to such income in accordance with provisions of sub-rule (2). (2) expenditure in relation to income which does not form part of total income shall be aggregate of following amounts, namely:- (i) amount of expenditure directly relating to income which does not form part of total income; (ii) in case where assessee has incurred expenditure by way of interest during previous year which is not directly attributable to any particular income or receipt, amount computed in accordance with following formula, namely:- x _B_ C Where = amount of expenditure by way of interest other than 14 amount of interest included in clause (i) incurred during previous year; B = average of value of investment, income from which does not or shall not form part of total income, as appearing in balance sheet of assessee, on first day and last day of previous year; C = average of total assets as appearing in balance sheet of assessee, on first day and last day of previous year; (iii)an amount equal to one-half per cent of average of value of investment, income from which does not or shall not form part of total income, as appearing in balance sheet of assessee, on first day and last day of previous year. (3) For purposes of this rule, total assets shall mean, total assets as appearing in balance sheet excluding increase on account of revaluation of assets but 15 including 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 provisions of this section, in addition to income-tax chargeable in respect of total income of 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 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 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 domestic company on its total income computed in accordance with provisions of this Act, tax on distributed profits under sub-section (1) shall be payable by such company. (3) principal officer of domestic company and company shall be liable to pay tax on 16 distributed profits to credit of Central Government within fourteen days from date of (a) declaration of any dividend; or (b)distribution of any dividend; or (c) payment of any dividend, whichever is earliest. (4) tax on distributed profits so paid by company shall be treated as final payment of tax in respect of amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by company or by any other person in respect of amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to company or shareholder in respect of amount which has been charged to tax under sub-section (1) or 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 Unit Trust of India Act, 17 1963 (52 of 1963), any amount of income distributed on or before 31st day of March, 2002 by Unit Trust of India to its unit holders shall be chargeable to tax and Unit Trust of India shall be liable to pay additional income-tax on such distributed income at rate of ten per cent: Provided that nothing contained in this sub-section shall apply in respect of any income distributed to unit holder of open-ended equity oriented funds in respect of any distribution made from such fund for period of three years commencing from 1st day of April, 1999. (2) Notwithstanding anything contained in any other provision of this Act, any amount of income distributed by specified company or 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 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 appellant has argued that Section 14A of Act pertains to disallowance of expenditure 18 relatable to item of income on which tax has not been paid. According to 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 Act whereas returns of units or mutual funds is subjected to tax under Section 115R. fact that tax on such dividend is paid by dividend paying company and not by recipient of dividends, according to learned counsel, is of no consequence. Proceeding further, Shri Dastur has argued that under Section 10(33) of Act, income by way of dividend referred to in Section 115-O of Act or income received in respect of units from UTI or of mutual funds alone is exempted. It is only one specie of dividend income which is exempted under Section 10(33) of 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 dividend paying company, Section 14A will not apply to exclude expenditure incurred to 19 earn such dividend income as said income, really, is not tax-free. 13. Shri Dastur has further argued that there is discernible correlation between Section 10(33) and Section 115-O of Act inasmuch as both Sections were inserted in Act by Finance Act, 1997. When earlier status was restored by Finance Act, 2002 shareholders once again became liable for tax on dividends which position continued until provisions of Section 10(33) of Act [engrafted as Section 10(34)] and Section 115-O were reintroduced by Finance Act, 2003 with effect from 1st April, 2003. It is, therefore, argued that both Sections 10(33) and Section 115-O of Act constitute composite scheme for taxation of dividend income wherein legislative policy is clear that dividend, though to be taxed in hands of company distributing same, is not to be included in total income of recipient Assessee. mere fact that amount is not to be included in total income of recipient Assessee, would not 20 attract provisions of Section 14A of Act, inasmuch as cardinal test is whether dividend income is tax-free or not. person paying tax, according to learned counsel, is not relevant for aforesaid purpose. 14. Shri Dastur has also urged that above position has been accepted by Revenue in its counter affidavit wherein it has been admitted that exemption granted under Section 10(33) is consequent upon collection of tax on dividend income from dividend distributing company under Section 115-O of Act. It is, therefore, argued by Shri Dastur that literal interpretation of Section 14A must be avoided. Reference in this regard is made to case of K.P. Varghese vs. Income-Tax Officer, Ernakulam and Anr.1. It is specifically contended by Shri Dastur that tax on dividend paid is not tax on profits out of which dividend is distributed inasmuch as under Section 115-O of Act dividend can be paid either from accumulated 1 (1981) 131 ITR 597 (SC) 21 profits or current profits. In fact, Section 205 of Companies Act permits payment of dividend out of accumulated profits in year though company may have incurred losses. Furthermore, it is contended that dividend paying company would be charged to tax under Section 115-O of Act even in case where no tax is payable under regular provisions of Act because its entire income, say, is otherwise eligible for deductions. In other words, tax under Section 115-O of Act is payable by dividend paying company even when no tax is payable on income of such company under regular provisions of Act. 15. On other hand, learned Solicitor General of India, who has argued case on behalf of Revenue has laid before Court position of law prior to insertion of Section 14A of Act by Finance Act of 2001. According to learned Solicitor General, insertion of Section 14A in Act was to offset several judicial pronouncements holding that in case of assessee earning income which is both 22 includible and non-includible in total income, entire expenses would be permissible as deduction, including, expenses pertaining to income not includible in total income. learned Solicitor General has drawn attention of Court to Memorandum explaining provisions of Finance Bill, 2001 which is to following effect. Certain incomes which are not includible while computing total income as these are exempt under various provisions of Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that tax incentive given by way of exemptions to certain categories of income is being used to reduce also tax payable on non-exempt income by debiting expenses incurred to earn exempt income against taxable income. This is against basic principles of taxation whereby only net income, that is, gross income minus expenditure, is taxed. On same analogy, exemption is also in respect of net income. Expenses incurred can be allowed only to extent they are relatable to earning of taxable income. Therefore, it is proposed to insert new section 14A so as to clarify intention of Legislature since inception of Income-tax Act, 1961, that no deduction shall be made in respect of any 23 expenditure incurred by assessee in relation to income which does not form part of total income under Income-tax Act. 16. position is made clear by Circular No. 14 issued by C.B.D.T. explaining said purpose of Finance Act, 2001. said Circular has also been placed before Court by learned Solicitor General. 17. learned Solicitor General has also traced history of Amendments to Section 14A of Act and, in particular, to insertion of sub-sections (2) and (3) thereof by Finance Act of 2006. purpose of insertion of sub-sections (2) and (3), as explained in Memorandum explaining provisions of Finance Bill 2006, has also been relied upon by learned Solicitor General, who contends that from said Memorandum it is clear that sub-sections (2) and (3) had been introduced as existing provisions of Section 14A did not provide any method of computation of expenditure incurred to earn income which does not form part of total income. It is, therefore, urged by learned 24 Solicitor General that 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 head Income which do not form part of total Income was actually used to reduce tax payable on total income. 18. Scheme of Income Tax Act, 1961 has been sought to be explained by learned Solicitor General to contend that Section 14 of 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 head Income from Other Sources specifically provided for under Section 56 of Act, dividend income referred to in Section 115-O of Act is excluded from provisions of deductions contained in Section 57 inasmuch as such income does not form part of total income in view of Section 10(33) 25 of Act. learned Solicitor General has argued that Section 14A reiterates fundamental principle enshrined by Act that expenses are allowable only to extent that they have nexus to earning of taxable income or income which forms part of total income. 19. Reliance in this regard is placed on decision of this Court in C.I.T. vs. Walfort Share & Stock Brokers P. Ltd.2 which decision, according to learned Solicitor General, virtually decides issues arising in present case. 20. Referring to Section 115-O of Act, learned Solicitor General had submitted that said section levies additional income tax on profits of company which has been declared and distributed to its shareholders in form of dividend. No credit of such additional income tax paid by company is available either to company or shareholders [Section 115-O(4)]. Such additional income tax paid by company 2 (2010) 326 ITR 1 (SC) 26 does not also enure to benefit of shareholders receiving amount of dividend distributed by such company. amount of such dividend does not form part of tax paid dividend in hands of shareholders. In fact, pointing to provisions of Section 115-O(5) it is argued that under said provisions shareholder cannot claim deduction in respect of dividend received by it/him from dividend paying company on which tax has been paid by said company under Section 115-O(1) of Act. This, according to learned Solicitor General, makes intent of Section 14 crystal clear. liability to pay tax under Section 115-O in respect of dividend is on dividend paying company and shareholder/assessee has no connection with same. Such assessee is not required to include dividend amount in his/its total income for purposes of charge to tax. In such situation, expenditure incurred for earning said income cannot be allowed. 21. There is supplemental argument made by learned Solicitor General based on provisions of 27 Sections 194, 195, 196C and 199 contained in Chapter XVII of Act which deals with Collection and Recovery of Tax including tax on dividend income received by shareholder. It may be convenient, to appreciate what has been argued, to notice what aforesaid provisions of Act actually say. 194. Dividends. principal officer of Indian company or company which has made prescribed arrangements for 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 shareholder, who is resident in India, of any dividend within 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 amount of such dividend, income-tax at rates in force : Provided that no such deduction shall be made in case of shareholder, being individual, if (a) xxx xxx xxx xxx xxx (b) xxx xxx xxx xxx xxx Provided further that provisions of this section shall not apply to such income credited or paid to (a) xxx xxx xxx xxx xxx 28 (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 non-resident, not being company, or to foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under provisions of this Act (not being income chargeable under head "Salaries") shall, at time of credit of such income to account of payee or at time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at 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.- 29 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 transfer of such bonds or Global Depository Receipts is payable to non-resident, person responsible for making payment shall, at time of credit of such income to account of payee or at time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at 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 foregoing provisions of this Chapter and paid to Central Government shall be treated as payment of tax on behalf of person from whose income deduction was made, or of owner of security, or of depositor or of owner of property or of unit-holder, or of shareholder, as case may be. (2) Any sum referred to in sub-section (1A) of section 192 and paid to Central Government shall be treated as tax paid on behalf of person in respect of whose income such payment of tax has been made. (3) Board may, for purposes of giving credit in respect of tax deducted or tax paid in terms of provisions of 30 this Chapter, make such rules as may be necessary, including rules for purposes of giving credit to person other than those referred to in sub-section (1) and sub-section (2) and also assessment year for which such credit may be given. 22. All said provisions, noticeably, exclude dividend received under Section 115-O. As provisions of aforesaid Sections of Act contemplate deduction of tax payable by shareholder on dividend income, however, to exception of dividend income under Section 115-O, it is submitted by learned Solicitor General that it is crystal clear that additional income tax paid under Section 115-O by dividend paying company cannot assume character of tax paid on dividend income by assessee shareholder. position, according to learned Solicitor General, is further fortified by provisions of Section 115-O(4), reference to which has already been made earlier. Specific reference is made to Section 199 of Act which provides for credit to be given for tax deducted at source on dividend paid. If tax paid on 31 dividend under Section 115-O is on income earned by shareholder, Section 199 would have also provided for deduction of tax at source in respect of dividends paid under Section 115-O of Act to assessee, it is contended. 23. Insofar as second issue arising in case is concerned, namely, appellate orders of learned Tribunal for Assessment Years 1998-1999, 1999-2000 and 2001-2002 granting benefit of full deduction on interest expenditure, it is submitted by 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 Finance Act of 2006, Tribunal and High Court was fully justified in remanding matter to Assessing Officer for de novo consideration in light of provisions contained in sub-sections (2) and (3) of Section 14A of Act. 24. object behind introduction of Section 14A 32 of Act by Finance Act of 2001 is clear and unambiguous. legislature intended to check claim of allowance of expenditure incurred towards earning exempted income in situation where assessee has both exempted and non-exempted income or includible or non-includible income. While there can be no scintilla of doubt that if income in question is taxable and, therefore, includible in total income, deduction of expenses incurred in relation to such income must be allowed, such deduction would not be permissible merely on ground that tax on dividend received by assessee has been paid by dividend paying company and not by recipient assessee, when under Section 10(33) of Act such income by way of dividend is not part of total income of recipient assessee. plain reading of Section 14A would go to show that income must not be includible in total income of assessee. Once said condition is satisfied, expenditure incurred in earning said income cannot be allowed to be deducted. section does not contemplate situation where even though income 33 is taxable in hands of dividend paying company same to be treated as not includible in total income of recipient assessee, yet, expenditure incurred to earn that income must be allowed on basis that no tax on such income has been paid by assessee. Such meaning, if ascribed to Section 14A, would be plainly beyond what language of Section 14A can be understood to reasonably convey. 25. reliance placed by Assessee on K.P. Varghese (supra) may now be considered. In K.P. Varghese (supra) interpretation of sub-section (2) of Section 52 of Income Tax Act, 1961 (as it then in force), which is in following terms, came up for consideration before this Court. Consideration for transfer in cases of under-statement. 52 (1) Where person who acquires capital asset from assessee is directly or indirectly connected with assessee and Income-tax Officer has reason to believe that transfer was effected with object of avoidance or reduction of liability of assessee under Section 45, full value of 34 consideration for transfer shall, with previous approval of Inspecting Assistant Commissioner, be taken to be fair market value of capital asset on date of transfer. (2) without prejudice to provisions of Sub-section (1), if in opinion of Income-tax Officer fair market value of capital asset transferred by assessee as on date of transfer exceeds full value of consideration declared by assessee in respect of transfer of such capital assets by amount of not less than fifteen per cent of value declared, full value of consideration for such capital asset shall, with previous approval of Inspecting Assistant Commissioner, be taken to be its fair market value on date of its transfer. Provided that..... 26. On behalf of Assessee, it was contended that literal construction of Section 52(2) of Act, as quoted above, could lead to manifestly unreasonable and absurd consequence. Such consequence as urged by Assessee was appreciated by Court by taking illustration of price in sale agreement of immovable property as on date of agreement and 35 market price thereof as on date of sale which could be at later point of time. If Section 52(2) were to be interpreted literally, 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 Legislature should have thought it fit to impose liability to tax on assessee who is bound by law to carry out his contractual obligation to sell property at agreed price and honestly carries out such contractual obligation. It would indeed be strange if obedience to law should attract levy of tax on income which has neither arisen to assessee nor has been received by him. Accordingly, it was held that: where plain literal interpretation of statutory provision produces manifestly absurd and unjust result which could never have been intended by Legislature, court may modify language used by Legislature or even do some violence to it, so as to achieve obvious intention of Legislature and produce rational construction: Vide Luke v. IRC [1963] AC 557; [1964] 54 ITR 692. 27. We do not see how aforesaid principle of law 36 in K.P. Varghese (supra) can assist Assessee in present case. literal meaning of Section 14A, far from giving rise to any absurdity, appears to be wholly consistent with scheme of Act and object/purpose of levy of tax on income. Therefore, well entrenched principle of interpretation that where words of statute are clear and unambiguous recourse cannot be had to principles of interpretation other than literal view will apply. In this regard, view expressed by this Court in Commissioner of Income Tax-III vs. Calcutta Knitwears, Ludhiana3 may be usefully noticed below: language of taxing statute should ordinarily be read and understood in sense in which it is harmonious with object of statute to effectuate legislative animation. 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 language used and nothing more and nothing less. 28. similar view is to be found in Commissioner of 3 (2014) 6 SCC 444 (para 31) 37 Income-Tax vs. Tara Agencies4 wherein this Court had concluded that: Therefore, legal position seems to be clear and consistent that it is bounden duty and obligation of court to interpret statute as it is. It is contrary to all rules of construction to read words into statute which legislature in its wisdom has deliberately not incorporated. (para 69) 29. off-quoted observations of Rowlatt,J. in case of Cape Brandy Syndicate vs. IRC5 may also be noticed at this juncture. On question arising learned Judge had observed (page 71) that: "...in taxing statute one has to look at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly on language used." 30. While it is correct that Section 10(33) exempts only dividend income under Section 115-O of Act and there are other species of dividend income on which tax is levied under Act, we do not see how said 4 (2007) 292 ITR 444(SC) [At Page 464] 5 [1921] 1 KB 64 38 position in law would assist assessee in understanding provisions of Section 14A in manner indicated. What is required to be construed is provisions of Section 10(33) read in light of Section 115-O of Act. So far as species of dividend income on which tax is payable under Section 115-O of Act is concerned, earning of said dividend is tax free in hands of assessee and not includible in total income of said assessee. If that is so, we do not see how operation of Section 14A of Act to such dividend income can be foreclosed. fact that Section 10(33) and Section 115-O of Act were brought in together; deleted and reintroduced later in composite manner, also, does not assist assessee. Rather, aforesaid facts would countenance situation that so long as dividend income is taxable in hands of dividend paying company, same is not includible in total income of recipient assessee. At such point of time when said position was reversed (by Finance Act of 2002; reintroduced again by Finance Act, 2003), it was assessee who was liable to 39 pay tax on such dividend income. In such situation assessee was entitled under Section 57 of Act to claim benefit of exemption of expenditure incurred to earn such income. Once Section 10(33) and 115-O was reintroduced position was reversed. above, actually fortifies situation that Section 14A of Act would operate to disallow deduction of all expenditure incurred in earning dividend income under Section 115-O which is not includible in total income of assessee. 31. So far as provisions of Section 115-O of Act are concerned, even if it is assumed that additional income tax under aforesaid provision is on dividend and not on distributed profits of dividend paying company, no material difference to applicability of Section 14A would arise. Sub-sections (4) and (5) of Section 115-O of Act makes it very clear that further benefit of such payments cannot be claimed either by dividend paying company or by recipient assessee. provisions of Sections 194, 195, 40 196C and 199 of Act, quoted above, would further fortify fact that dividend income under Section 115-O of Act is special category of income which has been treated differently by Act making same non-includible in total income of recipient assessee as tax thereon had already been paid by dividend distributing company. other species of dividend income which attracts levy of income tax at hands of recipient assessee has been treated differently and made liable to tax under aforesaid provisions of Act. In fact, if argument is that tax paid by dividend paying company under Section 115-O is to be understood to be on behalf of recipient assessee, provisions of Section 57 should enable assessee to claim deduction of expenditure incurred to earn income on which such tax is paid. Such position in law would be wholly incongruous in view of Section 10(33) of Act. 32. brief reference to decision of this Court in Commissioner of Income-Tax vs. Walfort Share and Stock 41 Brokers P. Ltd. (supra) may now be made, if only, to make discussion complete. In Walfort Share and Stock Brokers P. Ltd.(supra) issue involved was: whether in dividend stripping transaction 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 Act? 33. While answering said question this Court considered object of insertion of Section 14A in Income Tax Act by Finance Act, 2001, details of which have already been noticed. Noticing objects and reasons behind introduction of Section 14A of 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 words expenditure incurred in section 14A in context of scheme of Act and, if so read, it is clear that it disallows certain expenditure incurred to earn 42 exempt income from being deducted from other income which is includible in total income for purpose of chargeability to tax. views expressed in Walfort Share and Stock Brokers P. Ltd. (supra), in our considered opinion, yet again militate against plea urged on behalf of Assessee. 34. For aforesaid reasons, first question formulated in appeal has to be answered against appellant-assessee by holding that Section 14A of Act would apply to dividend income on which tax is payable under Section 115-O of Act. 35. We may now deal with second question arising in case. 36. Section 14A as originally enacted by Finance Act of 2001 with effect from 1.4.1962 is in same form and language as currently appearing in sub-section (1) of Section 14A of Act. Sections 14A (2) and (3) of Act were introduced by Finance Act of 2006 with 43 effect from 1.4.2007. finding of Bombay High Court in impugned order that sub-sections (2) and (3) of Section 14A is retrospective has been challenged by Revenue in another appeal which is presently pending before this Court. said question, therefore, need not and cannot be gone into. Nevertheless, irrespective of aforesaid question, what cannot be denied is that requirement for attracting provisions of Section 14A(1) of Act is proof of fact that expenditure sought to be disallowed/deducted had actually been incurred in earning dividend income. Insofar as appellant-assessee is concerned, issues stand concluded in its favour in respect of Assessment Years 1998-1999, 1999-2000 and 2001-2002. Earlier to introduction of sub-sections (2) and (3) of Section 14A of Act, such determination was required to be made by Assessing Officer in his best judgment. In all aforesaid assessment years referred to above it was held that Revenue had failed to establish any nexus between expenditure disallowed and earning of dividend income in question. In appeals arising out 44 of assessments made for some of assessment years aforesaid question was specifically looked into from standpoint of requirements of provisions of sub-sections (2) and (3) of Section 14A of Act which had by then been brought into force. It is on such consideration that findings have been recorded that expenditure in question bore no relation to earning of dividend income and hence assessee was entitled to benefit of full exemption claimed on account of dividend income. 37. We do not see how in aforesaid fact situation different view could have been taken for Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of Act read with Rule 8D of Rules merely prescribe formula for determination of expenditure incurred in relation to income which does not form part of total income under Act in situation where Assessing Officer is not satisfied with claim of assessee. Whether such determination is to be made on application of formula prescribed under Rule 8D or in 45 best judgment of Assessing Officer, what law postulates is requirement of satisfaction in Assessing Officer that having regard to accounts of assessee, as placed before him, it is not possible to generate requisite satisfaction with regard to correctness of claim of assessee. It is only thereafter that provisions of Section 14A(2) and (3) read with Rule 8D of Rules or best judgment determination, as earlier prevailing, would become applicable. 38. In present case, we do not find any mention of reasons which had prevailed upon Assessing Officer, while dealing with Assessment Year 2002-2003, to hold that claims of Assessee that no expenditure was incurred to earn dividend income cannot be accepted and why orders of Tribunal for earlier Assessment Years were not acceptable to Assessing Officer, particularly, in absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing reasonable nexus 46 between expenditure disallowed and dividend income received. That any part of borrowings of assessee had been diverted to earn tax free income despite 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 principle of res judicata would not apply to assessment proceedings under Act, need for consistency and certainty and existence of strong and compelling reasons for departure from settled position has to be spelt out which conspicuously is absent in present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang vs. Commissioner of Income-Tax6. We are aware of fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being unit, what is decided in one year may not apply in following year but where fundamental aspect permeating through different assessment years has been found as fact one way or other and parties have 6 (1992) 193 ITR (SC) 321 [At Page 329] 47 allowed that position to be sustained by not challenging order, it would not be at all appropriate to allow position to be changed in subsequent year. 39. In above circumstances, we are of view that second question formulated must go in favour of assessee and it must be held that for Assessment Year in question i.e. 2002-2003, assessee is entitled to full benefit of claim of dividend income without any deductions. 40. Consequently, appeal is allowed and order of High Court is set aside subject to our conclusions, as above, on applicability of Section 14A with regard to dividend income on which tax is paid under Section 115-O of Act. .........,J. (RANJAN GOGOI) ...........,J. (ASHOK BHUSHAN) NEW DELHI MAY 8, 2017 1 ITEM NO.1A COURT NO.4 SECTION IIIA SUPREME COURT OF INDIA RECORD OF PROCEEDINGS CIVIL APPEAL NO. 7020/2011 GODREJ & BOYCE MANUFACTURING CO.LTD. APPELLANT(S) VERSUS DY.COMMR.OF I.T.MUMBAI & ANR RESPONDENT(S) Date : 08/05/2017 This appeal was called on for pronouncement of judgment today. For Appellant(s) Mr. Rustom B. Hathikhanawala, Adv. For Respondent(s) Mrs. Anil Katiyar, Adv. Mr. Mihir Ashok Mody, Adv. Mr. Sudhanshu Sikkar, Adv. For K. Ashar & Co., AOR Hon'ble Mr. Justice Ranjan Gogoi pronounced judgment of Bench comprising His Lordship and Hon'ble Mr. Justice Ashok Bhushan. appeal is allowed in terms of signed reportable judgment. [VINOD LAKHINA] [ASHA SONI] COURT MASTER COURT MASTER [Signed reportable judgment is placed on file] Godrej & Boyce Manufacturing Company Limited v. Dy. Commissioner of Income-tax & Anr
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