Case: Godrej and Boyce Manufacturing Company Limited Vs. Dy. Commissioner of Income Tax and Ors

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 appellants 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 appellants 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 appellants 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.

Court's reasoning:
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.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.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.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 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.