GODREJ & BOYCE MANUFACTURING COMPANY LIMITED versus DY. COMMISSIONER OF INCOME-TAX & ANR.
[2017] 3 S.C.R. 602, Supreme Court of India, 2017
Outcome: Appeal(s) allowed (Granted)
Segment: Facts
[2017] 3 S.C.R .. 602 
A 
GODREJ & BOYCE MANUFACTURING COMPANY LIMITED 
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v. 
DY. COMMISSIONER OF INCOME-TAX & ANR. 
(Civil Appeal No. 7020of2011) 
MAYOS,2017 
[RANJAN GOGOi AND ASHOK BHUSHAN, JJ.] 
Income Tax Act, 1961 - s. 14A - Expenditure incurred in 
relation to income not includible in total income - Phrase ''income 
which does not form part of total income under this Act" in s. l 4A -
Scope of - If includes dividend income on shares in respect of 
which tax is payable u!s. 115-0 and income on units of 111utual funds 
on which tax is payable u/s. 115-R - Held: s.14A would apply to 
dividend income on which tax is payable u/s. 115-0-: Pliiin reading 
of s.14A shows 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 - Thus, s. l 4A would operate to disallow deduction 
of all expenditure incurred in earning the dividend income uls. 115-0 
which is not includible in the total income of the assessee - On facts 
and in the circu111stances of the assessee s case, for the assessment 
year in question, the assessee is entitled to the benefit of clai111 of 
dividend income without any deduction - ss.115-0, 115-R. 
Allowing the appeal, the Court 
HELD: 1.1 The object behind the introduction of Section 
14A of the Income Tax Act, 1961 by the Finance Act of 2001 is 
clear and unambiguous. The legislature intended
to check the 
claim of allowance of expenditure incurred to.wards 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 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 
permissi.ble 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 
602
GODREJ & BOYCE MANUFACTURJNG COMPANY LTD. v. 
603 
DY. COMMISSIONER OF INCOME-TAX 
10(33) of the Act such income by way of dividend is not a part of A 
the total income of the recipient asscssee. A plain reading of 
Section 14A would go to show that the income must not be 
includible in the total income of the asscssce. Once the said 
condition is satisfied, the expenditure incurred in earning the 
said income cannot be allowed to be deducted. The Section does 
B 
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 asscssee. Such a meaning, if ascribed to Section 14A, would 
be plainly beyond what the language of Section 14A can be 
understood to reasonably convey. [Para 24] '(622-C-G] 
1.2 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 would apply. [Para 27] [624-C-D] 
1.3 While it is correct that Section 10(33) exempts only 
dividend income under Section
115-0 of the Act and there arc 
other species of dividend income on which tax is levied under 
the Act, it cannot be seen how the said position in law would 
assist the asscsscc 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-
0 of the Act. So far as the species of dividend income on which 
tax is payable under Section 115-0 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, it cannot be seen how the operation of Section 14A, of the 
Act to such dividend income can be foreclosed. The fact that 
Section 10(33) and Section 115-0 of the Act were brought in 
together; deleted and reintroduced later in a composite manner, 
also, does not assist the assessce. Rather, the said facts would 
countenance a situation that so long as the dividend income is 
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SUPREME COURT REPORTS 
[2017] 3 S.C.R. 
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 115-0 was reintroduced the position was reversed. The above, 
actually fortify the situation that Section 14A of the Act would 
operate to disallow deduction of all expenditure incurred in 
C . earning the dividend income under Section 115-0 which is not 
includible in the total income of the assessee.[Para 30)(625-B-F] 
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1.4 Even if it is assumed that the additional income tax under 
Section 115-0 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 115-0 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, would further fortify 
the fact that the dividend income under Section 115-0 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 said provisions of the Act. [Para 31) [625-G-H; 
626-A-B) 
1.5 The first question is answered against the assessee by 
holding that Section 14A would apply to dividend income on which 
tax is payable under Section 115-0. [Para 34] [627-B] 
1.6 Section 14A as originally enacted by the Finance Act of 
2001 with effect from 1:4.1962 is in the same fonn and language 
as currently appearing in sub-section (1) of Section 14A of the 
Act. Sections 14A (2) and (3) were introduced by the Finance Act 
of 2006 with effect from 1.4.2007. It cannot be denied is that the
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
DY. COMMISSIONER OF INCOME-TAX 
requirement for attracting the provisions of Section 14A(l) 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, such a determination 
was required to be made by the Assessing Officer in his best 
judgment. In all the said assessment years, 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 said question was specific.ally · 
looked into from the standpoint of the requirements of the 
provisions of sub-sections (2) and (3) of Section 14A which had 
by then been brought into force. It is on such consideration that 
findings were recorded that the expenditure bore no relation to 
the earning of the dividend income and hence, assessee was 
entitled to the b.enefit of full exemption claimed on account of 
dividend income. [Para 36] [627-C-G] 
1. 7 It cannot be seen how in the said 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 
605 
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to generate the requisite satisfaction with regard to· the . 
0 
correctness of the claim of the assessee. It is only thereafter that 
the provisions of Section 14A(2) and (3) read with Rule 8D or a 
best judgment determination, as earlier prevailing, would become 
applicable. [Para 37] [627-H; 628-A-C] 
1.8 In the instant case, there is no mention of the reasons 
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SUPREME COURT REPORTS 
[2017]3 S.C.R. 
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 was disclosed 
establishing a reasonable nexus between the expenditure 
disallowed and the dividend income received. That any 1)art of 
the borrowings of the assessee had been diverted to earn tax 
free income despite the availability of surplus or interest free 
funds availabl~ remains unproved by any material whatsoever. 
While it is true that the principle of res judicttla would not apply 
to assessment proceedings under the Act, the need for 
consistency and c~rtainty and existence of strong and compelling 
reasons for a departure from a settled position has to be spelt 
out which clearly is absent. [Para 38) [628-D-l<'] 
1.9 The second question formulated is answered in favour 
of the assessee and for the Assessment Year 2002-2003, the 
assessee is entitled to the full benefit of the claim of dividend 
income without any deductions. [Para 39) [629-B-C] 
1.10 The order of the High Court is set aside subject to 
tl~e aforesaid conclusions. [Para 40] [629-C) 
K.P. Varghese v.
Income-Tax ()ffice1~ Ernakulam and 
Anr. (1981) 131 ITR 597 (SC); C.l I v. Walfort Share 
& Stock Brokers P. I.Ad. (2010) 326 ITR 1 (SC); 
Commissioner of Income Tax-III vs. Calcutta Knifll'ears, 
Ludhiana (2014) 6 SCC 444; Commissioner of Income-
Tax vs. Tara Agencies (2007) 292 ITR 444 (SC); 
Radhasoami Satsang vs. Co111111issio11er of Income-Tax 
(1992) 193 ITR (SC) 321 - referred to. 
Cape Brandy Syndicate vs. !RC [1921] 1 KB 64 -
referred to. 
Case Law Reference 
(1981) 131 ITR 597 (SC) 
(2010) 326 ITR 1 (SC) 
referred to 
Para 14 
referred to 
Para 19
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
607 
DY. COMMISSIONER OF INCOME-TAX 
(2014) 6 sec 444 
(2007) 292 ITR 444 (SC) 
(1992) 193 ITR (SC) 321 
referred to 
Para 27 
referred to 
Para 28 
referred to 
Para 38 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7020 
A 
of201 I. 
B 
From the Judgment and Order dated 12.08.20I 0 of the High Cou11 
ofBombay in Income Tax Appeal No. 626 of2010. 
Sohrab E. Dastur, Percy J. Pardiwalla, Sr. Advs., Nitesh Joshi, 
Rustom B. Hathikhanawala, Advs. for the Appellant. 
The Judgment of the Com1 was delivered by 
RANJAN GOGOi, J. I. The appellant C~mpany, 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 o(the Assessee by virtue of 
the provisions of Section I 0(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 extentof98% of the said amount was contributed 
by the Godrej group companies whereas only 0.05% thereof amounting 
to Rs.l,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 
im'.estment 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 
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[2017] 3 S.C.R. 
A 
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 
B 
Assessment Year 2002-2003. In fact, the investments had come down 
· to the extent noticed above. 
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5. Furthermore, as against the investment ofRs.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. 1"April,200 I, the appellant had a total ofRs.2 70.51 
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
ofRs.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 I 0(33) of the Act to the net dividend. 
In appeal, the Commissioner oflncome 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
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.] 
Assessment Year 2000-200 I 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 orderofthe Assessing Officer 
was reversed by the Commissioner oflncome 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 26m August, 2009. The learned Tribunal held that sub-sections (2) 
and (3) of Section l 4A of the Act (inserted by the Finance Act, 2006 
with effect from I" 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 1 ight of the said sub-sections
of Section I 4A 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 Com1 by the impugned judgment dated 12'
11 August, 
20 I 0, inter alia, held that Section I 4A 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 115-0 as such income 
is not includible in the total income of the shareholder. Sub-sections (2) 
and (3) of Section I 4A of the Act and rule SD of the Income-tax Rules, 
1962 (hereinafter referred to as "the Rules") would, however, not apply 
to the A Y 2002-03 as the said provisions do not have retrospective effect. 
Notwithstanding the above the High Com1 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 U 5-0 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. 
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[2017] 3 S.C.R. 
A 
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 
B 
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 
115-0 of the Act and income on units of mutual funds on 
which tax is payable under Section 115-R. 
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(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-
( a) any distribution by a company of accumulated profits, 
whether capitalised or not, if such distribution entails the 
release
by the company to its shareholders of all or any 
part of the assets of the company; 
(b) xxx xxx xxx xxx xxx 
( c) xxx xxx xxx xxx xxx 
( d) xxx xxx xxx xxx xxx 
( e) xxx xxx xxx xxx xxx 
but "dividend" does not include-
xxx xxx xxx xxx xxx
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
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DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.] 
(24) "income" includes-
A 
(i) profits and gains ; 
(ii) dividend; 
(iia) .................. " 
xxx xxx xxx xxx xxx 
I 0. 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 115-0; or 
(ii) income received in respect ofunits from the Unit Trust of 
India established under the Unit Trust oflndiaAct, 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 oflndia or of a mutual 
fund, as the case may be" 
xxx xxx xxx xxx xxx 
14A. Expenditure incurred in relation to ii1come not includible in 
total income.-
( I) 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 
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SUPREME COURT REPORTS 
[2017] 3 S.C.R. 
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 
B 
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 
c 
refund already made or otherwise increasing the liability of 
the assessee under section 1 54, for any assessment year 
beginning on or before the l st day of April, 2001. 
Rule 80.-(introduced by CBDTNotification No.45/2002 dated -
24.03.2008. 
D 
"Method for determining amount of expenditure in relation to 
income not includible in total income. 
E 
F 
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8D.(J) Where the Assessing Officer, having regard to the 
accounts oft he 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 sucll 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 
H _ 
way of interest during the previous year which is not directly
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
613 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.] 
attributable to any particular income or receipt, an amount 
A 
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." 
115-0. Tax on distributed profits of domestic companies.-
(!) 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. 
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SUPREME COURT REPORTS 
( l A) xxx xxx xxx xxx xxx 
(I B) xxx xxx xxx xxx xxx 
[2017] 3 S.C.R. 
(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 ofany 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 
"l l5R. Tax on distributed income to unit holders.- (I) 
Notwithstanding anythii:ig contained in any other provisions of 
this Act and section 32 of the Unit Trust oflndia Act, 1963 (52 
of l
963), any amount of income distributed on or before the 31st 
day of March, 2002 by the Unit Trust ofindia to its unit holders
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
615 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.] 
shall be chargeable to tax and the Unit Trust of India shall be 
A 
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 
B 
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 
C 
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 l 4A 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 I 4A applies 
only in situations where income is tax free; non-taxable and there is no 
incidence 9f tax per se. Dividend on shares is subjected to tax under 
Section 115-0 of the Act whereas returns of units or mutual funds is 
subjected
to tax under Section l l 5R. 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 I I 5-0 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 I 0(33) of the Act whereas other species of 
such (dividend) income, say for example, dividend from foreign companies 
is still liable to tax. ·As):ax has already been paid on such dividend, 
though by the dividend paying company, Section 14A will not apply to 
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exclude expenditure incu~red 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 I 0(33) and Section 115-0 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 I 0(33) of the Act 
[engrafted as Section I 0(34)] and Section 115-0 were reintroduced by 
the Finance Act, 2003 with effect from 1" April, 2003. It is, therefore, 
argued that both the Sections 10(33) and Section 115-0 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 recipientAssessee, would 
not attract the provisions of Section I 4A 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. 
I 4. Shri Dastur has also urged that the abov~ position has been 
accepted by the Revenue in
its counter affidavit wherein it has been 
admitted tha~ the exemption granted under Section I 0(33) is consequent 
upon collection of tax on dividend income from the dividend distributing 
company under Section 115-0 of the Act. It is, therefore, argued by 
Shri Dastur that a I iteral interpretation of Section 14A must be avoided. 
Reference in this regard is made to the case of K.P. Varghese vs. 
Income-Tax Office1; Ernakulam and Anr. 1• It is specifically contended 
by Shri Dasturthat.tax on the dividend paid is not a tax on profits out of 
which dividend is distributed inasmuch as under Section 115~0 of the 
Act dividend can be paid either from accumulated profits or current 
profits. hrfact, 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 115-0 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 
I (1981) 131 ITR597(SC)
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.] 
deductions. In other words, tax under Section 115-0 oftheAct 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 l 4A 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. 
"Ce11ain 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 I 4A 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 fonn pm1 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, 200 I. The said 
Circular has also been placed before the Court by the learned Solicitor 
General. 
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17. The learned Solicitor General has also traced the history of 
the Amendments to Section l 4A of the·Act and, in particular, to the 
insertion of sub-sections (2) and (3) thereof by the Finance Act of2006. 
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 l 4A 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 pait 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 S.ection 14 
of the Act provides for five heads of income i.e. 'Jn come from Salaries'; 
'Income from House Prope1ty'; '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 115-0 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 l 0(33) of the Act. The learned 
Solicitor General has argued that Section I 4A reiterates a fundamental 
prinqiple enshrined by the Act that e~penses 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./.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 115-0 of the Act, the learned Solicitor 
General had submitted that the said section levies an additional income 
H 
' (2010) 326 !TR I (SC)
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
619 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.] 
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 115-0(4 )]. Such additional income tax paid by 
the company does not also enure to the benefit of the shareliolders 
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 
115-0(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 115-0(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 115-0 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 in~urred 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 provi£ions of the Act actually say. 
194. Dividends. The principal officer of an Indian company or a 
company which has made the prescribed a1Tangements 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-
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(a) xxx xxx xxx xxx xxx 
(b) xxx xxx xxx xxx xxx 
(2017] 3 S.C.R. 
Provided further thatthe 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 115-0." 
xxx xxx xxx xxx xxx xxx 
195.0ther sums.- (I) 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 l 94LB or section 
194LC) or section l 94LD 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 115-0. 
xxx xxx xxx xxx xxx xxx 
l 96C. Income from foreign currency bonds or shares of Indian 
company.-
Where any income by way ofinterest or dividends in respect 
of bonds or Global Depository Receipts referred to in section 
l 15AC 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
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
621 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOI, J.] 
mode, whichever is earlier, deduct income-tax thereon at 
A 
the rate of ten per cent : 
Provided that no such deduction shall be made in respect 
of any dividends referred to in section 115-0." 
199. Credit for tax deducted.-(!) 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 behalfofthe 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 (lA) 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 (l) 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 115-0. 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 115-0, it is submitted by the learned Solicitor General that it is 
crystal clear that the additional income tax paid under Section 115-0 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 115-0(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 115-0 is on income earned by the 
shareholder, Section 199 would have also provided for ded_liction of tax 
at source in respect of the dividends paid under Section 115-0 of the 
Act to the assessee, it is contended. 
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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 Sol,fcitor 
General that each assessment year has to be reckoned separat~Jy; there . 
is no estoppel and, furthermore, sub-sections (2) and (3)ofSection l 4A 
having been introduced by the FinanceAct of2006, theTribunal and the 
High Court was fully justified in remanding the matter to the Assessing 
Officer for a de nova consideration in the light of the provisions contained 
in sub-sections (2) and (3) of Section l 4A of the Act. 
24. The object behind the introduction of Section 14A of the Act 
by the Finance Act of 200 I 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 
I 
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 I 0(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 l 4A would go to show thatthe income must not be includible in 
the total income of the assessee. Once the said condition is satisfied, the 
expenditure incurred in earningthe 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 s1whJincome has been paid by the 
assessee. Such a meaning, if ascribed to Section l 4A, would be plainly 
beyond what the language of Section l 4A 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 TaxAct, 1.961 (as it then in 
force), which is in the following terms, came up fqr co11sideration before 
this Court.
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
623 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.] 
"Consideration for transfer in cases of under-statement. 
A 
52 (f) 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 belit;ve that the transfer 
was effected with the object 6f 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 (I), if in 
the opinion of the Income-tax Officer the fair 1narket 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 ofnot 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 ~greement 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." 
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A 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 
B 
it, so as to achieve the obvious intention of the Legislature and 
produce a .rational construction: Vide Luke v. !RC [1963] AC 
557; [1964] 54 ITR 692. 
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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 l 4A, 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 ofinterpretation other 
than the literal view will apply. In this regard, the view expressed by this 
D Court in Commissioner of Income Tax-111 vs. Calcutta Knitwears. 
Ludhiana' may be usefully noticed below: 
"the language of a taxing statute shouid 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 
E 
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. 
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28. A similar view is to be found in Commissioner oflncome-
Tax vs. Tara Agencies• wherein this Cou1t 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 ofRowlatt,J. in the case of Cape 
Brandy Syndicate vs. IRC5 may also be noticed at this juncture. On 
the question arising the learned Judge had observed (page 71) that: 
'(2014) 6 sec 444 (para 31) 
'(2007) 292 !TR 444(SC) [At Page 464) 
'[1921) 1KB64
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
625 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.] 
" .. .in a taxing statute one has to look at what is clearly said. 
A 
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 I 0(33) exempts only dividend 
income under Section 115-0 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 I 0(33) read in the light of Section 
115-0 of the Act. So far as the species of dividend income on which tax 
is payable under Section 115-0 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. Ifthat 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 115-0 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 
I 0(33) and 115-0 was reintroduced the position was reversed~ The 
above, actually fortifies the situation that Section I 4A of the Act would 
operate to disallow deduction of all expenditure incurred in earning the 
dividend income under Section 115-0 which is not includible in the total 
income of the assessee. 
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31. So far as the provisions of Section 115-0 of the Act are 
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concerned, even if it is assumed that the additional income ta" 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 115-0 
of the Act makes it very clear that the further benefit of such payments 
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cannot be claimed either by the dividend paying company or by the 
recipient assessee. The provisions of Sections 194, 195, I 96C and I 99 
of the Act, quoted above, would further fortify the fact that the dividend 
income under Section 115-0 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 bee.n treated differently and made 
liable to tax under the aforesaid provisions of the Act. In fact, if the 
argume1lt is that tax paid by the dividend paying company under Section 
115-0 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 
I 0(3 3) of the Act. 
32. A briefreference to the decision of this Com1 in Commissioner 
of Income-Tax vs. Wal/Ort Share and Stock Brokers P Ltd. (supra) 
may now be made, if only, to make the discussion complete. Jn 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 I 0(33), disallowable under 
Section J 4A of the Act?" 
33. While answering the said question this Court considered the 
object of insertion of Section I 4A in the Jncome Tax Act by Finance 
Act, 200 l, 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." 
Jn paragraph 17, this Court went on to observe that: 
"Therefore, one needs to read the words "expenditure incurred" 
in section I 4A 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."
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
627 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOI, J.] 
The views expressed in Walfort Share and Stock Brokers P. 
A 
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 
B 
tax is payable under Section 115-0 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 of2001 
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_ l 4A( I) 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 
bestj udgment. 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 
c 
D 
E 
F 
G 
view could have been taken for the Assessment Year 2002-2003. 
H
628 
A 
B 
c 
D 
E 
F 
G 
SUPREME COURT REPORTS 
[2017] 3 S.C.R. 
Sub-sections (2) and (3) of Section 14A of the Act read with Rule 80 of 
the Rules merely prescribe a formula for determination of expenditure 
incurred in relation to income which does not fon11 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 80 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. Jt is only thereafter that the provisions of Section 
l4A(2) and (3) read with Rule 80 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 
3 l .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 Aet, 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. Co111111issioner oflncome-
Tax6. 
"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 
H 
'· (1992) 193 ITR(SC)321 [AtPage329]
GODREJ & BOYCE MANUFACTURING COMPANY LTD. v. 
629 
DY. COMMISSIONER OF INCOME-TAX [RANJAN GOGOi, J.] 
through the different assessment years has been found as a fact 
A 
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 
B 
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 
C 
Court is set aside subjectto our conclusions, as above, on the applicability 
of Section 14A with regard to dividend income on which tax is paid 
under Section 115-0 of the Act. 
Nidhi Jain 
Appeal allowed.