2017 Supreme(SC) 444

SUPREME COURT OF INDIA
RANJAN GOGOI, ASHOK BHUSHAN, JJ.
Godrej & Boyce Manufacturing Company Limited - Appellant
Versus
Dy. Commissioner of Income-Tax & Anr. - Respondents
Civil Appeal No. 7020 of 2011
Decided On : 08-05-2017

IMPORTANT POINTS
Deduction of expenses in relation of income would be allowable u/s 14A only if the income is taxable and therefore includible in the total income.
When deductions are allowed for previous years, it cannot be denied for subsequent years in identical fact situation.

Headnote:(a) Income Tax Act, 1961 – Section 14A – Legislative intent clear and unambiguous – Deduction of expenses in relation of income – Allowable if the income is taxable and therefore includible in the total income – In case of tax paid by dividend paying company on dividend distributed –

       Dividend income not included in his total income – Cannot claim deduction of expenses in respect of such income. (Para 24)

       (2014) 6 SCC 444; (2007) 292 ITR 444(SC); [1921] 1 KB 64 – Relied upon

       (2010) 326 ITR 1 (SC) – Referred

       (1981) 131 ITR 597 (SC) – Distinguished

       (b) Income Tax Act, 1961 – Section 14A, 10(33) and 115-O – Dividend income u/s 115-O tax free in the hands of assessee – Not includible in his total income – Section 14A of the Act would disallow deduction of expenditure incurred in earning dividend income u/s 115-O – Refer Sections 194, 195, 196C and 199. (Para 30, 31)

       (2010) 326 ITR 1 (SC) – Referred

       (c) Income Tax Act, 1961 – Section 14A (2) and (3) r/w Rule 8D, Income Tax Rules 1962 – Deductions allowed for AY 1998-1999, 1999-2000 and 2001-2002 – Disallowed for AY2002-2003 in identical fact situation – Not permissible. (Para 37)

       Facts of the case:

       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 as in force during the relevant Assessment Year i.e. 2002-2003.

       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.

       For the Assessment Years 1999-2000 and 2001-2002 the issue with regard to exemption under Section 10(33) of the Act was held in favour of the assessee by the Commissioner of Income Tax (Appeals) and the learned Tribunal. Initially, the Assessing Officer, in both the Assessment Years, had disallowed notionally computed interest expenditure as being relatable to the earning of dividend income. 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/- 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 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.

       The High Court by the impugned judgment, 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. Sub-sections (2) and (3) of Section 14A of the Act and rule 8D of the Income-tax Rules, 1962 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. The High Court 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.

       

       Finding of the Court:

       Section 14A of the Act would apply to dividend income on which tax is payable under Section 115-O of the Act.

       The assessee is entitled to the full benefit of the claim of dividend income without any deductions.

       Result: Appeal allowed.