Monday, May 8, 2017

GODREJ & BOYCE MANUFACTURING COMPANY LIMITED V/s.DY. COMMISSIONER OF INCOME-TAX & ANR. -MAY 8, 2017

  REPORTABLE

            IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 7020 OF 2011


GODREJ & BOYCE MANUFACTURING
COMPANY LIMITED                          ...APPELLANT

                            VERSUS

DY. COMMISSIONER OF INCOME-TAX
& ANR.                                        ...RESPONDENTS


                               J U D G M E N T

RANJAN GOGOI, J.


1.          The  appellant  Company,  incorporated  in  the  year  1932,  is
engaged  in  the  business  of  manufacture  of  steel  furniture,  security
equipments, typewriters, electrical equipments and a host of  other  related
products.  It is also a promoter of various other companies and invests  its
funds in such companies in order to maintain control  of  such  concerns  as
sister concerns.

2.          The issue in the present appeal relates to the admissibility  or
otherwise of deduction of expenditure incurred in  earning  dividend  income
which is not includible in the total income of the  Assessee  by  virtue  of
the provisions of Section 10(33) of the Income Tax  Act,  1961  (hereinafter
referred to as “the Act”) as in force during the  relevant  Assessment  Year
i.e. 2002-2003.

3.          For the Assessment  Year  2002-2003,  the  appellant  –  Company
filed its return declaring a total loss of Rs.45,90,39,210/-.  In  the  said
return, it had shown income by way of dividend  from  companies  and  income
from units of mutual funds  to  the  extent  of  Rs.34,34,78,686.   Dividend
income to the extent of 98% of  the  said  amount  was  contributed  by  the
Godrej group companies whereas only 0.05% thereof amounting to Rs.1,71,000/-
  came  from  non-Godrej  group  companies.   A   sum   of   Rs.66,79,000/-,
constituting 1.95% of  the  aforesaid  dividend  income,  came  from  mutual
funds.  Admittedly, a substantial part of the appellant's investment in  the
group companies was in the form of bonus shares which did  not  involve  any
fresh capital investment or outlay.

4.          The other relevant facts which may be taken notice  of  is  that
on the first day of the previous year relevant to the Assessment Year  2002-
2003 i.e. 1st April, 2001, the investment in shares and mutual funds of  the
appellant company stood at  Rs.127.19  crore  whereas  at  the  end  of  the
previous year i.e. as on 31st  March,  2002  the  investment  was  Rs.125.54
crore.  The above figures  would  go  to  show  that  there  were  no  fresh
investments made during the previous year relevant to  the  Assessment  Year
2002-2003.  In fact, the investments had come down  to  the  extent  noticed
above.

5.          Furthermore, as against the investment of Rs.125.54 crore as  on
31st March, 2002, on the said date the appellant had a total  of   Rs.280.64
crore  by way of interest free funds in the form of share  capital  (Rs.6.55
crore) as well as Reserves and  Surplus  (Rs.274.09  crore).  On  the  other
hand, as against the investment of Rs.127.19 crore on the first day  of  the
previous year i.e. 1st April, 2001, the appellant had a total  of  Rs.270.51
crore by way of interest free funds in the form of  share  capital  (Rs.6.55
crore) and Reserves and Surplus (Rs.263.96 crore).  The  above  facts  would
show that the appellant had sufficient interest  free  funds  available  for
the purpose of making investments.

6.          At this stage we may go back a little in  time  and  start  with
the Assessment Year 1998-1999 wherein the appellant's  dividend  income  was
Rs.11,41,34,093/-.    The    Assessing    Officer    notionally    allocated
Rs.1,47,40,000/- out of the total interest expenditure of  Rs.34,64,89,000/-
as referable to the earning of the said dividend income and  had  disallowed
such interest expenditure and consequently reduced the  exemption  available
under Section 10(33) of  the  Act  to  the  net  dividend.  In  appeal,  the
Commissioner of  Income  Tax  (Appeals)  allowed  exemption  of  the  entire
dividend income on the ground that the Assessing Officer had failed to  show
any nexus between the investments in shares and units  of  mutual  funds  on
the one hand and the borrowed funds on the other.  The  learned  Income  Tax
Appellate Tribunal (hereinafter referred to as “Tribunal”) which  was  moved
by the Revenue confirmed the appellate order. The said  order  had  attained
finality.
7.    For the Assessment  Years  1999-2000  and  2001-2002  the  issue  with
regard to exemption under Section 10(33) of the Act was  similarly  held  in
favour of the assessee by the Commissioner of Income Tax (Appeals)  and  the
learned Tribunal, once again. Initially, the Assessing Officer, in both  the
Assessment Years, had disallowed notionally  computed  interest  expenditure
as being relatable to the earning of dividend income.   The  said  appellate
order(s) had also attained finality. For  the  intervening  Assessment  Year
2000-2001 there was  no  scrutiny  of  the  appellant's  return  of  income.
Consequently, the dividend income was allowed in  full  without  disallowing
any expenditure incurred in relation to earning such income.   However,  for
the Assessment Year 2002-2003, the Assessing Officer did not allow  interest
expenditure to the  extent  of  Rs.6,92,06,000/-  holding  the  same  to  be
attributable to earning the dividend income of Rs. 34,34,78,686/-  The  said
figure of interest expenditure disallowed was  worked  out  from  the  total
interest expenditure for the year on a notional basis in the  ratio  of  the
cost of the investments in shares and units of mutual funds to the  cost  of
the total assets appearing in  the  balance  sheet.   Though  the  aforesaid
order of the Assessing Officer was reversed by the  Commissioner  of  Income
Tax (Appeals) following  the  earlier  orders  pertaining  to  the  previous
Assessment Years, as noticed above, the learned Tribunal, in appeal, took  a
different view by its order dated 26th August, 2009.  The  learned  Tribunal
held that sub-sections (2) and (3) of Section 14A of the  Act  (inserted  by
the  Finance  Act,  2006  with   effect   from   1st   April,   2007)   were
retrospectively applicable to the Assessment Year 2002-2003 and,  therefore,
the matter should be remanded to the Assessing  Officer  for  recording  his
satisfaction/findings in the light of the said sub-sections of  Section  14A
of the Act.   This was notwithstanding the fact that the  only  disallowance
made  by  the  Assessing  Officer  which  was  reversed  in  appeal  by  the
Commissioner of Income Tax (Appeals) was in respect of interest  expenditure
what was worked out on a notional basis.

8.          The High Court by  the  impugned  judgment  dated  12th  August,
2010, inter alia, held that Section 14A of the Act has to be construed on  a
plain grammatical construction thereof and the said provision  is  attracted
in respect of dividend income referred to in Section 115-O  as  such  income
is not includible in the total income of the shareholder.  Sub-sections  (2)
and (3) of Section 14A of the Act and rule 8D of the Income-tax Rules,  1962
(hereinafter referred to as “the Rules”) would, however, not  apply  to  the
AY 2002-03  as  the  said  provisions  do  not  have  retrospective  effect.
Notwithstanding the above the High Court upheld the remand as  made  by  the
Tribunal to the AO though  for  a  slightly  different  reason  as  will  be
noticed hereinafter.  We  may  also  notice  that  the  High  Court  in  its
impugned judgment also held that the tax paid under  section  115-O  of  the
Act is an additional tax on that component of the profits  of  the  dividend
distributing company which is distributed by way of dividends and  that  the
same is not a tax on dividend income of the assessee.

9.          Aggrieved,  the  instant  appeal  has  been  filed  raising  two
questions in the main which have been summarized by the  appellant,  and  we
may say accurately, as follows :

“(a)Irrespective of the factual position and findings in  the  case  of  the
Appellant, whether the phrase “income which does  not  form  part  of  total
income under this Act” appearing in Section 14A includes  within  its  scope
dividend income on shares in respect of which tax is payable  under  Section
115-O of the Act and income on  units  of  mutual  funds  on  which  tax  is
payable under Section 115-R.
(b)   Whatever be the view on the legal aspects, whether on  the  facts  and
in the circumstances of  the  Appellant's  case  and  bearing  in  mind  the
unanimous findings of the lower authorities over a  considerable  period  of
time (which were accepted  by  the  Revenue)  there  could  at  all  be  any
question of the provisions of Section 14A in the appellant's case.”

10.         We have heard Shri Sohrab  E.  Dastur,  learned  Senior  Counsel
appearing for  the  appellant  and  Shri  Ranjit  Kumar,  learned  Solicitor
General appearing for the Revenue.

11.         At the very outset, the relevant provisions  of  the  Act  which
will require a consideration are extracted below:

“2. In this Act, unless the context otherwise requires,—

(22) "dividend" includes—

any distribution by a company of accumulated  profits,  whether  capitalised
or not, if such distribution entails the  release  by  the  company  to  its
shareholders of all or any part of the assets of the company;

 xxx xxx xxx xxx xxx

 xxx xxx xxx xxx xxx

 xxx xxx xxx xxx xxx

 xxx xxx xxx xxx xxx

but "dividend" does not include—……………


                             xxx xxx xxx xxx xxx


(24) "income" includes—

(i) profits and gains ;

(ii) dividend ;

(iia) ………………”


                             xxx xxx xxx xxx xxx


10.  Incomes not included in total income.- In computing  the  total  income
of a previous year of any person, any  income  falling  within  any  of  the
following clauses shall not be included-

                             xxx xxx xxx xxx xxx

(33) any income by way of-

(i) dividends referred to in section 115-O; or

(ii) income received in respect of  units  from  the  Unit  Trust  of  India
established under the Unit Trust of India Act, 1963 (52 of 1963); or

(iii) income received in respect of the units of  a  mutual  fund  specified
under clause (23D)

Provided that this clause  shall  not  apply  to  any  income  arising  from
transfer of units of the Unit Trust of India or of a  mutual  fund,  as  the
case may be”

|xxx xxx xxx xxx xxx                                                |
|                                                                   |
|14A. Expenditure incurred in relation to income not includible in  |
|total income.-                                                     |
|(1) For the purposes of computing the total income under this      |
|Chapter, no deduction shall be allowed in respect of expenditure   |
|incurred by the assessee in relation to income which does not form |
|part of the total income under this Act.                           |
|(2) The Assessing Officer shall determine the amount of expenditure|
|incurred in relation to such income which does not form part of the|
|total income under this Act in accordance with such method as may  |
|be prescribed , if the Assessing Officer, having regard to the     |
|accounts of the assessee, is not satisfied with the correctness of |
|the claim of the assessee in respect of such expenditure in        |
|relation to income which does not form part of the total income    |
|under this Act.                                                    |
|(3) The provisions of sub-section (2) shall also apply in relation |
|to a case where an assessee claims that no expenditure has been    |
|incurred by him in relation to income which does not form part of  |
|the total income under this Act:                                   |
|                                                                   |
|Provided that nothing contained in this section shall empower the  |
|Assessing Officer either to reassess under section 147 or pass an  |
|order enhancing the assessment or reducing a refund already made or|
|otherwise increasing the liability of the assessee under section   |
|154, for any assessment year beginning on or before the 1st day of |
|April, 2001.                                                       |
|                                                                   |
|Rule 8D.- (introduced by CBDT Notification No.45/2002 dated        |
|24.03.2008.                                                        |
|“Method for determining amount of expenditure in relation to income|
|not includible in total income.                                    |
|8D.(1) Where the Assessing Officer, having regard to the accounts  |
|of the assessee of a previous year, is not satisfied with-         |
|(a) the correctness of the claim of expenditure made by the        |
|assessee; or                                                       |
|(b) the claim made by the assessee that no expenditure has been    |
|incurred, in relation to income which does not form part of the    |
|total income under the Act for such previous year, he shall        |
|determine the amount of expenditure in relation to such income in  |
|accordance with the provisions of sub-rule (2).                    |
|(2) The expenditure in relation to income which does not form part |
|of the total income shall be the aggregate of following amounts,   |
|namely:-                                                           |
|(i) the amount of expenditure directly relating to income which    |
|does not form part of total income;                                |
|(ii) in a case where the assessee has incurred expenditure by way  |
|of interest during the previous year which is not directly         |
|attributable to any particular income or receipt, an amount        |
|computed in accordance with the following formula, namely:-        |
|A x _B_                                                            |
|C                                                                  |
|Where A = amount of expenditure by way of interest other than the  |
|amount of interest included in clause (i) incurred during the      |
|previous year;                                                     |
|B = the average of value of investment, income from which does not |
|or shall not form part of the total income, as appearing in the    |
|balance sheet of the assessee, on the first day and the last day of|
|the previous year;                                                 |
|C = the average of total assets as appearing in the balance sheet  |
|of the assessee, on the first day and the last day of the previous |
|year;                                                              |
|(iii)an amount equal to one-half per cent of the average of the    |
|value of investment, income from which does not or shall not form  |
|part of the total income, as appearing in the balance sheet of the |
|assessee, on the first day and the last day of the previous year.” |
|(3) For the purposes of this rule, the ‘total assets’ shall mean,  |
|total assets as appearing in the balance sheet excluding the       |
|increase on account of revaluation of assets but including the     |
|decrease on account of revaluation of assets.”                     |
|                                                                   |

115-O. Tax on distributed profits of domestic companies.-

(1) Notwithstanding anything contained in any other provision  of  this  Act
and subject to the provisions of this section, in addition  to  the  income-
tax chargeable in respect of the total income of a domestic company for  any
assessment year, any amount declared, distributed or paid  by  such  company
by way of dividends (whether interim or otherwise) on or after the  1st  day
of April, 2003, whether out of  current  or  accumulated  profits  shall  be
charged  to  additional  income-tax  (hereafter  referred  to  as   tax   on
distributed profits) at the rate of fifteen per cent.

(1A) xxx xxx xxx xxx xxx

(1B) xxx xxx xxx xxx xxx


(2) Notwithstanding that no income-tax is payable by a domestic  company  on
its total income computed in accordance with the  provisions  of  this  Act,
the tax on distributed profits under sub-section (1)  shall  be  payable  by
such company.

(3) The principal officer of the domestic company and the company  shall  be
liable to pay the tax on distributed profits to the credit  of  the  Central
Government within fourteen days from the date of—

(a)   declaration of any dividend; or

 (b)  distribution of any dividend; or

(c)   payment of any dividend,

whichever is earliest.

(4) The tax on distributed profits so paid by the company shall  be  treated
as the final payment of tax in respect of the amount  declared,  distributed
or paid as dividends and no further credit therefor shall be claimed by  the
company or by any other person in respect of the amount of tax so paid.

(5) No deduction under any other provision of this Act shall be  allowed  to
the company or a shareholder  in  respect  of  the  amount  which  has  been
charged to tax under sub-section (1) or the tax thereon.

(6) xxx xxx xxx xxx xxx

(7)   xxx xxx xxx xxx xxx

(8) xxx xxx xxx xxx xxx”


                           xxx xxx xxx xxx xxx xxx

“115R. Tax on distributed  income  to  unit  holders.-  (1)  Notwithstanding
anything contained in any other provisions of this Act  and  section  32  of
the Unit Trust of India Act,  1963  (52  of  1963),  any  amount  of  income
distributed on or before the 31st day of March, 2002 by the  Unit  Trust  of
India to its unit holders shall be chargeable to tax and the Unit  Trust  of
India shall be liable to  pay  additional  income-tax  on  such  distributed
income at the rate of ten per cent:

Provided that nothing contained in this sub-section shall apply  in  respect
of any income distributed to a unit holder  of  open-ended  equity  oriented
funds in respect of any distribution made from such fund  for  a  period  of
three years commencing from the 1st day of April, 1999.

(2) Notwithstanding anything contained in any other provision of  this  Act,
any amount of income distributed by the specified company or a  Mutual  Fund
to its unit holders shall be chargeable to tax and  such  specified  company
or Mutual Fund  shall  be  liable  to  pay  additional  income-tax  on  such
distributed income at the rate of—

(i) xxx xxx xxx xxx xxx

(ii) xxx xxx xxx xxx xxx

(iii) xxx xxx xxx xxx xxx


                        xxx xxx xxx  xxx xxx xxx xxx


12.         Shri Sohrab E. Dastur, learned Senior Counsel appearing for  the
appellant has argued that Section 14A of the Act  pertains  to  disallowance
of expenditure relatable to an item of income on  which  tax  has  not  been
paid. According  to  the  learned  counsel,  Section  14A  applies  only  in
situations where income is tax free; non-taxable and there is  no  incidence
of tax per se.  Dividend on shares is subjected to tax under  Section  115-O
of the Act whereas returns of units or mutual  funds  is  subjected  to  tax
under Section 115R.  The fact that the tax on such dividend is paid  by  the
dividend  paying  company  and  not  by  the  recipient  of  the  dividends,
according  to  the  learned  counsel,  is  of  no  consequence.   Proceeding
further, Shri Dastur has argued  that  under  Section  10(33)  of  the  Act,
income by way of dividend referred to in Section 115-O of the Act or  income
received in respect of units from the  UTI  or  of  mutual  funds  alone  is
exempted.  It is only one specie of dividend income which is exempted  under
Section 10(33) of the Act whereas other species of such  (dividend)  income,
say for example, dividend from foreign companies is  still  liable  to  tax.
As tax has already been paid  on  such  dividend,  though  by  the  dividend
paying company, Section 14A will not apply to exclude  expenditure  incurred
to earn such dividend income as the said income, really,  is  not  tax-free.


13.         Shri Dastur has further  argued  that  there  is  a  discernible
correlation between Section 10(33) and Section 115-O of the Act inasmuch  as
both the Sections were inserted in the Act by the Finance  Act,  1997.  When
the earlier status was restored by the Finance Act, 2002  shareholders  once
again became liable for tax on dividends which position continued until  the
provisions of Section 10(33) of the Act [engrafted as  Section  10(34)]  and
Section 115-O were reintroduced by the Finance Act, 2003  with  effect  from
1st April, 2003.  It is, therefore, argued that  both  the  Sections  10(33)
and Section 115-O of the Act constitute a composite scheme for  taxation  of
dividend income wherein the  legislative  policy  is  clear  that  dividend,
though to be taxed in the hands of the company  distributing  the  same,  is
not to be included in the total income of the recipient Assessee.  The  mere
fact that the amount is not to be  included  in  the  total  income  of  the
recipient Assessee, would not attract the provisions of Section 14A  of  the
Act, inasmuch as the cardinal test is whether the dividend  income  is  tax-
free or not.  The person paying the tax, according to the  learned  counsel,
is not relevant for the aforesaid purpose.

14.         Shri Dastur has also urged that  the  above  position  has  been
accepted by the Revenue  in  its  counter  affidavit  wherein  it  has  been
admitted that the exemption granted under Section 10(33) is consequent  upon
collection of tax on dividend income from the dividend distributing  company
under Section 115-O of the Act.  It is, therefore,  argued  by  Shri  Dastur
that a literal interpretation of Section 14A must be avoided.  Reference  in
this regard is made to the case of K.P.  Varghese  vs.  Income-Tax  Officer,
Ernakulam and Anr.[1].  It is specifically contended  by  Shri  Dastur  that
tax on the dividend paid is not a tax on profits out of  which  dividend  is
distributed inasmuch as under Section   115-O of the  Act  dividend  can  be
paid either from accumulated profits or current profits.  In  fact,  Section
205 of the  Companies Act permits payment of  dividend  out  of  accumulated
profits  in  the  year  though  the  company  may  have   incurred   losses.
Furthermore, it is contended that  the  dividend  paying  company  would  be
charged to tax under Section 115-O of the Act  even in a case where  no  tax
is payable under the regular  provisions  of  the  Act  because  its  entire
income, say, is otherwise eligible  for  deductions.  In  other  words,  tax
under Section 115-O of the Act is payable by  the  dividend  paying  company
even when no tax is payable on the income of such company under the  regular
provisions of the Act.

15.         On the other hand, the learned Solicitor General of  India,  who
has argued the case on behalf of the Revenue has laid before the  Court  the
position of law prior to insertion of Section 14A of the Act by the  Finance
Act of 2001. According to the learned Solicitor General,  the  insertion  of
Section 14A in  the  Act  was  to  offset  several  judicial  pronouncements
holding that in case of an assessee earning income which is both  includible
and non-includible in  the  total  income,  the  entire  expenses  would  be
permissible as deduction,  including,  expenses  pertaining  to  income  not
includible in the total income. The learned Solicitor General has drawn  the
attention of the Court to the Memorandum explaining the  provisions  of  the
Finance Bill, 2001 which is to the following effect.

“Certain incomes which are not includible while computing the  total  income
as these are exempt under various provisions of the  Act.  There  have  been
cases where deductions have been claimed in respect of such  exempt  income.
This in effect means that the tax incentive given by way  of  exemptions  to
certain categories of income is being used to reduce also  the  tax  payable
on the non-exempt income by debiting  the  expenses  incurred  to  earn  the
exempt income against taxable income. This is against the  basic  principles
of taxation whereby only the net income, that is,  gross  income  minus  the
expenditure, is taxed. On  the  same  analogy,  the  exemption  is  also  in
respect of the net income. Expenses incurred can  be  allowed  only  to  the
extent they are relatable to the earning of taxable  income.  Therefore,  it
is proposed to insert a new section 14A so as to clarify  the  intention  of
the Legislature since the inception of the Income-tax  Act,  1961,  that  no
deduction shall be made in  respect  of  any  expenditure  incurred  by  the
assessee in relation to income which does not form part of the total  income
under the Income-tax Act.”

16.         The position is made clear by Circular  No.  14  issued  by  the
C.B.D.T. explaining the said purpose of the  Finance  Act,  2001.  The  said
Circular has also been placed before the  Court  by  the  learned  Solicitor
General.

17.         The learned Solicitor General has also  traced  the  history  of
the Amendments to Section  14A  of  the  Act  and,  in  particular,  to  the
insertion of sub-sections (2) and (3) thereof by the Finance  Act  of  2006.
The purpose of insertion of sub-sections (2) and (3), as  explained  in  the
Memorandum explaining the provisions of the  Finance  Bill  2006,  has  also
been relied upon by the learned Solicitor General, who  contends  that  from
the said Memorandum it is clear that  sub-sections  (2)  and  (3)  had  been
introduced as the existing provisions of Section 14A  did  not  provide  any
method of computation of expenditure incurred to earn an income  which  does
not form a part of the total income. It is, therefore, urged by the  learned
Solicitor General that the legislative intent behind  enactment  of  Section
14A and sub-sections (2) and (3) thereof was to combat situations where  tax
incentives given by way of non-inclusion of different categories  of  income
under the head “Income which do not form  part  of  the  total  Income”  was
actually used to reduce the tax payable on the total income.

18.         The Scheme of the Income Tax Act, 1961 has  been  sought  to  be
explained by the learned Solicitor General to contend  that  Section  14  of
the Act provides for five heads  of  income  i.e.  ‘Income  from  Salaries’;
‘Income from House Property’; ‘Income from Profits & Gains  of  Business  or
Profession’; ‘Income from Capital Gains’; and ‘Income from  Other  Sources’.
It is contended that even though Income from dividend falls under  the  head
“Income from Other Sources” specifically provided for under  Section  56  of
the Act, dividend income  referred  to  in  Section  115-O  of  the  Act  is
excluded from the provisions of deductions contained in Section 57  inasmuch
as such income does not form a part of the total income in view  of  Section
10(33) of the Act. The learned Solicitor General  has  argued  that  Section
14A reiterates a fundamental principle enshrined by the  Act  that  expenses
are allowable only to the extent that they have a nexus to  the  earning  of
taxable income or income which forms a part of the total income.

19.         Reliance in this regard is placed on the decision of this  Court
in C.I.T.  vs. Walfort Share & Stock  Brokers  P.  Ltd.[2]  which  decision,
according to the learned Solicitor General,  virtually  decides  the  issues
arising in the present case.


20.         Referring to Section 115-O of the  Act,  the  learned  Solicitor
General had submitted that the said section levies an additional income  tax
on the profits of a company which has been declared and distributed  to  its
shareholders in the form of dividend. No credit of  such  additional  income
tax paid  by  the  company  is  available  either  to  the  company  or  the
shareholders [Section 115-O(4)]. Such additional  income  tax  paid  by  the
company does not also enure to the benefit  of  the  shareholders  receiving
the amount of dividend distributed by  such  company.  The  amount  of  such
dividend does not form part of  tax  paid  dividend  in  the  hands  of  the
shareholders. In fact, pointing to the provisions of Section 115-O(5) it  is
argued that under the said provisions a shareholder cannot  claim  deduction
in respect of the  dividend  received  by  it/him  from  a  dividend  paying
company on which tax has been paid by the said company  under  Section  115-
O(1) of the Act. This, according to the  learned  Solicitor  General,  makes
the intent of Section 14 crystal clear.  The  liability  to  pay  tax  under
Section 115-O in respect of the dividend is on the dividend  paying  company
and the shareholder/assessee has  no  connection  with  the  same.  Such  an
assessee is not required to include the dividend  amount  in  his/its  total
income for the  purposes  of  charge  to  tax.  In  such  a  situation,  the
expenditure incurred for earning the said income cannot be allowed.

21.         There is a supplemental argument made by the  learned  Solicitor
General based  on  the  provisions  of  Sections  194,  195,  196C  and  199
contained in Chapter XVII of  the  Act  which  deals  with  “Collection  and
Recovery  of  Tax”  including  tax  on  dividend  income   received   by   a
shareholder. It may be convenient, to appreciate what has  been  argued,  to
notice what the aforesaid provisions of the Act actually say.
194. Dividends. The principal officer of an  Indian  company  or  a  company
which has made the prescribed arrangements for the declaration  and  payment
of dividends  (including  dividends  on  preference  shares)  within  India,
shall, before making any payment in cash or before  issuing  any  cheque  or
warrant in respect of any dividend or  before  making  any  distribution  or
payment to a shareholder, who is resident in India, of any  dividend  within
the meaning of sub-clause (a) or sub-clause (b) or sub-clause  (c)  or  sub-
clause (d) or sub-clause (e) of clause (22) of section 2,  deduct  from  the
amount of such dividend, income-tax at the rates in  force :

Provided that no such deduction shall be made in the case of a  shareholder,
being an individual, if—

(a) xxx xxx xxx xxx xxx

(b) xxx xxx xxx xxx xxx

Provided further that the provisions of this  section  shall  not  apply  to
such income credited or paid to—

(a) xxx xxx xxx xxx xxx

(b) xxx xxx xxx xxx xxx

(c) xxx xxx xxx xxx xxx

Provided also that no such  deduction  shall  be  made  in  respect  of  any
dividends referred to in Section 115-O.”

                           xxx xxx xxx xxx xxx xxx



195.Other sums.- (1) Any person responsible for paying  to  a  non-resident,
not being a company, or to  a  foreign  company,  any  interest  (not  being
interest referred to in section 194LB or section 194LC) or section 194LD  or
any other sum chargeable under the provisions of this Act (not being  income
chargeable under the head "Salaries") shall, at the time of credit  of  such
income to the account of the payee or at the  time  of  payment  thereof  in
cash or by the issue of a cheque or draft or by any  other  mode,  whichever
is earlier, deduct income-tax thereon at the rates in force :


Provided that ……….. …… …… ….

Provided further that no such deduction shall be  made  in  respect  of  any
dividends referred to in section 115-O.


                           xxx xxx xxx xxx xxx xxx


196C. Income from foreign currency bonds or shares of Indian company.-

Where any income by way of interest or dividends  in  respect  of  bonds  or
Global Depository Receipts referred to in section 115AC or by way  of  long-
term capital gains arising  from  the  transfer  of  such  bonds  or  Global
Depository Receipts is payable to a  non-resident,  the  person  responsible
for making the payment shall, at the time of credit of such  income  to  the
account of the payee or at the time of payment thereof in  cash  or  by  the
issue of a cheque or draft or by  any  other  mode,  whichever  is  earlier,
deduct income-tax thereon at the rate of ten per cent :

Provided that no such deduction shall be made in respect  of  any  dividends
referred to in section 115-O.”

199. Credit for tax deducted.- (1) Any deduction  made  in  accordance  with
the foregoing provisions of this Chapter and paid to the Central  Government
shall be treated as a payment of tax on behalf  of  the  person  from  whose
income the deduction was made, or of the owner of the security,  or  of  the
depositor or of the owner of property or  of  the  unit-holder,  or  of  the
shareholder, as the case may be.
(2) Any sum referred to in sub-section (1A) of section 192 and paid  to  the
Central Government shall be treated as the tax paid on behalf of the  person
in respect of whose income such payment of tax has been made.
(3) The Board may, for the purposes of  giving  credit  in  respect  of  tax
deducted or tax paid in terms of the provisions of this Chapter,  make  such
rules as may be necessary, including the rules for the  purposes  of  giving
credit to a person other than those referred to in sub-section (1) and  sub-
section (2) and also the assessment  year  for  which  such  credit  may  be
given.

22.       All the said provisions,  noticeably,  exclude  dividend  received
under Section 115-O. As the provisions of the aforesaid Sections of the  Act
contemplate deduction of tax payable by  the  shareholder  on  the  dividend
income, however, to the exception of dividend income  under  Section  115-O,
it is submitted by the learned Solicitor General that it  is  crystal  clear
that the additional income tax paid under  Section  115-O  by  the  dividend
paying company cannot assume the character of tax paid  on  dividend  income
by  the  assessee  shareholder.  The  position,  according  to  the  learned
Solicitor General, is further fortified by the provisions  of  Section  115-
O(4), reference to which has already been made earlier.  Specific  reference
is made to Section 199 of the Act which provides for credit to be given  for
the tax deducted at source on dividend paid. If the  tax  paid  on  dividend
under Section 115-O is on income earned  by  the  shareholder,  Section  199
would have also provided for deduction of tax at source in  respect  of  the
dividends paid under Section 115-O  of  the  Act  to  the  assessee,  it  is
contended.

23.         Insofar as the second issue arising in the  case  is  concerned,
namely, the appellate orders of the  learned  Tribunal  for  the  Assessment
Years 1998-1999, 1999-2000  and  2001-2002  granting  the  benefit  of  full
deduction on interest expenditure, it is submitted by the learned  Solicitor
General that each assessment year has to be reckoned  separately;  there  is
no estoppel and, furthermore,  sub-sections  (2)  and  (3)  of  Section  14A
having been introduced by the Finance Act of  2006,  the  Tribunal  and  the
High Court was fully justified in remanding  the  matter  to  the  Assessing
Officer for  a  de  novo  consideration  in  the  light  of  the  provisions
contained in sub-sections (2) and (3) of Section 14A of the Act.

24.         The object behind the introduction of Section 14A of the Act  by
the Finance Act of 2001 is clear and unambiguous. The  legislature  intended
to check the claim of allowance  of  expenditure  incurred  towards  earning
exempted income in a situation where an assessee has both exempted and  non-
exempted income or includible or non-includible income. While there  can  be
no scintilla of doubt that  if  the  income  in  question  is  taxable  and,
therefore, includible  in  the  total  income,  the  deduction  of  expenses
incurred in relation to such an  income  must  be  allowed,  such  deduction
would not be permissible merely on the ground that the tax on  the  dividend
received by the assessee has been paid by the dividend  paying  company  and
not by the recipient  assessee,  when  under  Section    10(33) of  the  Act
such income by way of dividend is not a part of  the  total  income  of  the
recipient assessee. A plain reading of Section 14A would  go  to  show  that
the income must not be includible in the total income of the assessee.  Once
the said condition is satisfied, the expenditure  incurred  in  earning  the
said income  cannot  be  allowed  to  be  deducted.  The  section  does  not
contemplate a situation where even though  the  income  is  taxable  in  the
hands of the  dividend  paying  company  the  same  to  be  treated  as  not
includible  in  the  total  income  of  the  recipient  assessee,  yet,  the
expenditure incurred to earn that income must be allowed on the  basis  that
no tax on such income has been paid by the  assessee.  Such  a  meaning,  if
ascribed to Section 14A, would  be  plainly  beyond  what  the  language  of
Section 14A can be understood to reasonably convey.

25.         The reliance placed by the Assessee  on  K.P.  Varghese  (supra)
may now be considered.  In K.P. Varghese (supra) the interpretation of  sub-
section (2) of Section 52 of the  Income  Tax  Act,  1961  (as  it  then  in
force), which is in the following terms, came up  for  consideration  before
this  Court.
“Consideration for transfer in cases of under-statement.



52 (1) Where the person who acquires a capital asset  from  an  assessee  is
directly or indirectly  connected  with  the  assessee  and  the  Income-tax
Officer has reason to believe  that  the  transfer  was  effected  with  the
object of avoidance or reduction of the  liability  of  the  assessee  under
Section 45, the full value of the  consideration  for  the  transfer  shall,
with the previous approval of  the  Inspecting  Assistant  Commissioner,  be
taken to be the fair market value of the capital asset on the  date  of  the
transfer.



(2) without prejudice to the  provisions  of  Sub-section  (1),  if  in  the
opinion of the Income-tax Officer the fair market value of a  capital  asset
transferred by an assessee as on the date of the transfer exceeds  the  full
value of the consideration declared  by  the  assessee  in  respect  of  the
transfer of such capital assets by an amount of not less  than  fifteen  per
cent of the value declared, the full value of  the  consideration  for  such
capital asset shall, with the previous approval of the Inspecting  Assistant
Commissioner, be taken to be its fair  market  value  on  the  date  of  its
transfer.

      Provided that.....”


26.         On behalf of the Assessee,  it  was  contended  that  a  literal
construction of Section 52(2) of the Act, as quoted above, could lead  to  a
manifestly unreasonable and absurd consequence.  Such consequence  as  urged
by the Assessee was appreciated by the Court by taking the  illustration  of
the price in a sale agreement of immovable property as on the  date  of  the
agreement and the market price thereof as on the  date  of  the  sale  which
could be at a later point of time. If Section 52(2) were to  be  interpreted
literally, the Assessee would be required to pay tax on capital gains  which
had not occurred to him.  It was, therefore, held:
“It is difficult to conceive of any  rational  reason  why  the  Legislature
should have thought it fit to impose liability to tax on an assessee who  is
bound by law to carry out his contractual obligation to  sell  the  property
at the agreed price and honestly carries out  such  contractual  obligation.
It would indeed be strange if obedience to the law should attract  the  levy
of tax on income which has neither arisen  to  the  assessee  nor  has  been
received by him.”

Accordingly, it was held that:
“where the plain literal interpretation of a statutory provision produces  a
manifestly absurd and unjust result which could never have been intended  by
the Legislature, the court may modify the language used by  the  Legislature
or even “do some violence” to it, so as to achieve the obvious intention  of
the Legislature and produce  a  rational  construction:  Vide  Luke  v.  IRC
[1963] AC 557; [1964] 54 ITR 692.


27.         We do not see  how  the  aforesaid  principle  of  law  in  K.P.
Varghese (supra) can assist the Assessee in the present case.   The  literal
meaning of Section 14A, far from giving rise to any  absurdity,  appears  to
be wholly consistent with the scheme of the Act and  the  object/purpose  of
levy of  tax  on  income.   Therefore,  the  well  entrenched  principle  of
interpretation  that  where  the  words  of  the  statute  are   clear   and
unambiguous recourse cannot be had to  principles  of  interpretation  other
than the literal view will apply. In this  regard,  the  view  expressed  by
this Court  in  Commissioner  of  Income  Tax-III  vs.  Calcutta  Knitwears,
Ludhiana[3] may be usefully noticed below:
“the language of a taxing statute should ordinarily be read  and  understood
in the sense in which it is harmonious with the object  of  the  statute  to
effectuate the legislative animation. A taxing statute  should  be  strictly
construed; common sense approach, equity, logic, ethics  and  morality  have
no role to play. Nothing is to be read in, nothing is  to  be  implied;  one
can only look fairly at the language  used  and  nothing  more  and  nothing
less.

28.          A similar view is to be found  in  Commissioner  of  Income-Tax
vs. Tara Agencies[4]  wherein this Court had concluded that:
“Therefore, the legal position seems to be clear and consistent that  it  is
the bounden duty and obligation of the court to interpret the statute as  it
is. It is contrary to all  rules  of  construction  to  read  words  into  a
statute  which  the  legislature  in  its  wisdom   has   deliberately   not
incorporated.” (para 69)


29.         The off-quoted observations of Rowlatt,J. in the  case  of  Cape
Brandy Syndicate vs. IRC[5]  may also be noticed at this juncture.   On  the
question arising the learned Judge had observed (page 71) that:
"...in a taxing statute one has to look at what is clearly  said.  There  is
no room for any intendment. There is no equity about  a  tax.  There  is  no
presumption as to a tax. Nothing  is  to  be  read  in,  nothing  is  to  be
implied. One can only look fairly on the language used."



30.         While it is correct that Section 10(33)  exempts  only  dividend
income under Section 115-O of  the  Act  and  there  are  other  species  of
dividend income on which tax is levied under the Act, we do not see how  the
said position  in  law  would  assist  the  assessee  in  understanding  the
provisions of Section 14A in the manner indicated. What is  required  to  be
construed is the provisions of Section 10(33) read in the light  of  Section
115-O of the Act. So far as the species of dividend income on which  tax  is
payable under Section 115-O of the Act is  concerned,  the  earning  of  the
said dividend is tax free in the hands of the assessee  and  not  includible
in the total income of the said assessee. If that is so, we do not  see  how
the operation of Section 14A of the Act  to  such  dividend  income  can  be
foreclosed.  The fact that Section 10(33) and Section 115-O of the Act  were
brought in together; deleted and reintroduced later in a  composite  manner,
also, does not assist  the  assessee.  Rather,  the  aforesaid  facts  would
countenance a situation that so long as the dividend income  is  taxable  in
the hands of the dividend paying company, the same is not includible in  the
total income of the recipient assessee. At such point of time when the  said
position was reversed (by the Finance Act of  2002;  reintroduced  again  by
the Finance Act, 2003), it was the assessee who was liable  to  pay  tax  on
such dividend income. In such a situation the assessee  was  entitled  under
Section 57 of the Act to claim  the  benefit  of  exemption  of  expenditure
incurred  to  earn  such  income.  Once  Section  10(33)   and   115-O   was
reintroduced the position was reversed.  The above, actually  fortifies  the
situation that Section 14A of the Act would operate  to  disallow  deduction
of all expenditure incurred in earning the  dividend  income  under  Section
115-O which is not includible in the total income of the assessee.

31.         So far as the  provisions  of  Section  115-O  of  the  Act  are
concerned, even if it is assumed that the additional income  tax  under  the
aforesaid provision is on the dividend and not on  the  distributed  profits
of the dividend paying company, no material difference to the  applicability
of Section 14A would arise. Sub-sections (4) and (5)  of  Section  115-O  of
the Act makes it very clear  that  the  further  benefit  of  such  payments
cannot be claimed either by the dividend paying company or by the  recipient
assessee. The provisions of Sections 194, 195, 196C  and  199  of  the  Act,
quoted above, would further fortify the fact that the dividend income  under
Section 115-O of the Act is a special category  of  income  which  has  been
treated differently by the Act making the same non-includible in  the  total
income of the recipient assessee as tax thereon had  already  been  paid  by
the dividend distributing company. The  other  species  of  dividend  income
which attracts levy of income tax at the hands  of  the  recipient  assessee
has been treated differently and made liable  to  tax  under  the  aforesaid
provisions of the Act. In fact, if the argument is  that  tax  paid  by  the
dividend paying company under Section 115-O is to be  understood  to  be  on
behalf of the recipient  assessee,  the  provisions  of  Section  57  should
enable the assessee to claim deduction of expenditure incurred to  earn  the
income on which such tax is paid.  Such a position in law  would  be  wholly
incongruous in view of Section 10(33) of the Act.

32.         A brief reference to the decision of this Court in  Commissioner
of Income-Tax vs. Walfort Share and Stock Brokers P. Ltd.  (supra)  may  now
be made, if only, to make the discussion complete.   In  Walfort  Share  and
Stock Brokers P. Ltd.(supra) the issue involved was: “whether in a  dividend
stripping transaction the loss on sale  of  units  could  be  considered  as
expenditure in relation to earning of dividend income exempt  under  Section
10(33), disallowable under Section 14A of the Act?”

33.         While answering the said  question  this  Court  considered  the
object of insertion of Section 14A in the Income Tax  Act  by  Finance  Act,
2001, details of which have already been noticed.  Noticing the objects  and
reasons behind introduction of Section 14A of the Act this Court held that:
“Expenses allowed can only be in respect of earning of taxable income.”

In paragraph 17, this Court went on to observe that:
“Therefore, one needs to read the words “expenditure  incurred”  in  section
14A in the context of the scheme of the Act and, if so  read,  it  is  clear
that it disallows certain expenditure incurred to earn  exempt  income  from
being deducted from other income which is includible in the  “total  income”
for the purpose of chargeability to tax.”

The views expressed in Walfort Share and Stock Brokers P. Ltd.  (supra),  in
our considered opinion, yet again militate against the plea urged on  behalf
of the Assessee.

34.         For the aforesaid reasons, the first question formulated in  the
appeal has to be answered against the  appellant-assessee  by  holding  that
Section 14A of the Act would apply  to  dividend  income  on  which  tax  is
payable under Section 115-O of the Act.

35.         We may now deal with the second question arising in the case.

36.         Section 14A as originally enacted by the  Finance  Act  of  2001
with effect from 1.4.1962 is in the same  form  and  language  as  currently
appearing in sub-section (1) of Section 14A of the  Act.  Sections  14A  (2)
and (3) of the Act were introduced by the Finance Act of  2006  with  effect
from 1.4.2007. The finding of the Bombay High Court in  the  impugned  order
that sub-sections (2) and (3) of  Section  14A  is  retrospective  has  been
challenged by the Revenue in  another  appeal  which  is  presently  pending
before this Court. The said question, therefore,  need  not  and  cannot  be
gone into.  Nevertheless,  irrespective  of  the  aforesaid  question,  what
cannot be denied is that the requirement for attracting  the  provisions  of
Section 14A(1) of the Act is proof of the fact that the  expenditure  sought
to  be  disallowed/deducted  had  actually  been  incurred  in  earning  the
dividend income. Insofar as the appellant-assessee is concerned, the  issues
stand concluded in its favour in respect of the Assessment Years  1998-1999,
1999-2000 and 2001-2002. Earlier to the  introduction  of  sub-sections  (2)
and (3) of Section 14A of the Act, such a determination was required  to  be
made by the Assessing Officer in his best judgment.  In  all  the  aforesaid
assessment years referred to above it was held that the Revenue  had  failed
to establish any nexus between the expenditure disallowed  and  the  earning
of the dividend income in question.  In  the  appeals  arising  out  of  the
assessments made for some of the assessment  years  the  aforesaid  question
was specifically looked into from the standpoint of the requirements of  the
provisions of sub-sections (2) and (3) of Section 14A of the Act  which  had
by then been brought into force.  It is on such consideration that  findings
have been recorded that the expenditure in question bore no relation to  the
earning of the dividend income and hence the assessee was  entitled  to  the
benefit of full exemption claimed on account of dividend income.

37.         We do not see how in the aforesaid fact  situation  a  different
view could have been taken for the Assessment Year  2002-2003.  Sub-sections
(2) and (3) of Section 14A of the Act read with Rule 8D of the Rules  merely
prescribe a formula for determination of expenditure  incurred  in  relation
to income which does not form part of the total income under the  Act  in  a
situation where the Assessing Officer is not satisfied  with  the  claim  of
the assessee. Whether such determination is to be  made  on  application  of
the formula prescribed under  Rule  8D  or  in  the  best  judgment  of  the
Assessing  Officer,  what  the  law  postulates  is  the  requirement  of  a
satisfaction in the Assessing Officer that having regard to the accounts  of
the assessee, as placed before him, it  is  not  possible  to  generate  the
requisite satisfaction with regard to the correctness of the  claim  of  the
assessee. It is only thereafter that the provisions of  Section  14A(2)  and
(3) read with Rule 8D of the Rules or  a  best  judgment  determination,  as
earlier prevailing, would become applicable.

38.         In the present case, we do not find any mention of  the  reasons
which had prevailed upon the  Assessing  Officer,  while  dealing  with  the
Assessment Year 2002-2003, to hold that the claims of the Assessee  that  no
expenditure was incurred to earn the dividend income cannot be accepted  and
why the orders of the Tribunal for the earlier  Assessment  Years  were  not
acceptable to the Assessing Officer, particularly, in  the  absence  of  any
new fact or change of circumstances. Neither any basis  has  been  disclosed
establishing a reasonable nexus between the expenditure disallowed  and  the
dividend income received.  That any part of the borrowings of  the  assessee
had been diverted to earn  tax  free  income  despite  the  availability  of
surplus or interest free funds available (Rs. 270.51 crores as  on  1.4.2001
and Rs. 280.64 crores as on 31.3.2002)  remains  unproved  by  any  material
whatsoever.  While it is true that the principle of res judicata  would  not
apply to assessment proceedings under the Act, the need for consistency  and
certainty and existence of strong and compelling  reasons  for  a  departure
from a settled position has to be spelt out which  conspicuously  is  absent
in the present case.  In this regard we may remind  ourselves  of  what  has
been observed by this  Court  in  Radhasoami  Satsang  vs.  Commissioner  of
Income-Tax[6].
“We are aware of the fact that  strictly  speaking  res  judicata  does  not
apply to income tax proceedings. Again, each assessment year being  a  unit,
what is decided in one year may not apply in the following year but where  a
fundamental aspect permeating through the  different  assessment  years  has
been found as a fact one way or the other  and  parties  have  allowed  that
position to be sustained by not challenging the order, it would  not  be  at
all appropriate to allow the position to be changed in a subsequent year.”

39.         In the above circumstances, we are of the view that  the  second
question formulated must go in favour of the assessee and it  must  be  held
that for the Assessment Year in question i.e.  2002-2003,  the  assessee  is
entitled to the full benefit of the claim of  dividend  income  without  any
deductions.

40.         Consequently, the appeal is allowed and the order  of  the  High
Court  is  set  aside  subject  to  our  conclusions,  as  above,   on   the
applicability of Section 14A with regard to dividend income on which tax  is
paid under Section 115-O of the Act.

                                                     ....................,J.
                                                              (RANJAN GOGOI)


                                                     ....................,J.
                                                             (ASHOK BHUSHAN)
NEW DELHI
MAY 8, 2017
-----------------------
[1]    (1981) 131 ITR 597 (SC)
[2]    (2010) 326 ITR 1 (SC)
[3]    (2014) 6 SCC 444 (para 31)
[4]     (2007) 292 ITR 444(SC) [At Page 464]
[5]    [1921] 1 KB 64
[6]    (1992) 193 ITR (SC) 321 [At Page 329]

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