Some vital aspects not contended at all or not emphasized on behalf of Godrej Boyce Mfg. Co. Ltd resulting into ruling that section 14A applies to exempted dividend though taxed u/s 115O. A fit case for review and reconsideration

[CA DEV KUMAR KOTHARI]

Judgment considered in this write-up:

GODREJ & BOYCE MANUFACTURING COMPANY LIMITED Versus DY. COMMISSIONER OF INCOME-TAX & ANR. 2017 (5) TMI 403 - SUPREME COURT OF INDIA  Civil Appeal No. 7020 of 2011  Dated: - 08 May 2017

Vide judgment dated  - 08 May 2017 (supra.) honourable Supreme Court of India has held that disallowance under S.14A shall be applicable in relation to  exempted dividend earned by a shareholder, even though tax was paid at distribution stage by the company who declared and distributed dividend.

There seems no such ruling by the Supreme Court in relation to exempted  dividend received from Mutual Funds on which tax is levied u/s 115R and is paid by the Mutual Funds.

With due regards to senior counsels who appeared in this case and also those who appeared before Tribunal and High Court in this matter, it appears that there has been vital lacking in raising many vital contentions relevant for consideration to decide the issue.

An attempt is made to analyse such aspects:

Provisions considered/ mentioned:

In the questions we find reference to sections 14A, 115 O and 115R. There is no reference to provisions of S.4 and relevant Finance Act, under which tax is charged on various type of income- called ‘total income’ for levy of income-tax.

 On reading of the judgment we find that provisions of sections  2 (22), 2 (24) , 10(33), 14A 57, 115AC, 115 O, 115R , 194, 195, 196C and 199 have been mentioned and considered in the judgment.

Provisions not considered/ not mentioned:

On reading of the judgment we find that provisions of section 4 read with relevant  Finance Act which imposes tax on ‘total income’ of different types including tax u/s 115O and 115R have not been considered.

Important difference between two expressions / sentences used in S.14A, and Rule 8D applicable to shareholder and companies about total income or chargeable income and scope of S.14A have not at all been contended or emphasised so far as appears from reading of the judgment.

Crucial wordings and aspects of  S.14A not pressed:

We find two sets of wordings in the sub-section (1) these are given in first column and in second column significance is discussed:

Words uses	Significance
total income under this Chapter,	This expression is used in relation to total income of assessee which is computed as per provisions of the Chapter IV that is Sections 14- 59.
which does not form part of the total income under this Act.	Here 'total income under this Act' means any income on which tax is not imposed under the entire Act whether directly or indirectly.
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	The AO can determine disallowable expenditure only when any 'income does not form part of total income under the Act' and not merely when any income is not included in total income of assessee.

We find use of first expressions 'total income under this chapter' which is used in relation to computation of 'total income of assessee'  which is to be computed under Chapter IV.

We find that the second expression 'total income under this Act' used in sub-section (1) and (2) both, and also in relevant Rules, this expression means chargeable or taxable income under the entire Income-tax Act.

If it was intended only in relation to the assessee whose income is to be computed, then similar expression could have been used that is 'which does not form part of total income under this chapter or 'which does not form part of total income of assessee' instead of words 'which does not form part of the total income under this Act.

The Income tax Act is a self contained and integrated code. As per scheme of the Act, some incomes are taxable in hands of the recipient of income whereas some items of  incomes are taxable in hands of person who pays or distribute income. When a tax is finally collected (that is not in nature of tax deducted or collected on behalf of recipient of income) at distribution stage, then the income in respect of which such tax is collected is nothing but tax on total  income under the Act.

 Therefore, it cannot be said that such income does not form part of total income under this Act. The tax u/s 115O is a final tax and it is charged as per provisions of Finance Act. 

forms part of 'total income under this Act', and a taxable income is computed, and tax is imposed and collected, then S.14A will not at all be applicable in relation to such income which has already been include in taxable income in some other scheme of imposing tax on income.

On reading of reported judgments and on discussion in groups and tax authorities, it is found that the above aspect has not been considered and even contended in any reported case, so far our reading could cover reported judgments.

The contention that Dividend referred to in Section 115O constitute ‘total income’  under the Act, was contended for first time before the Supreme Court. Even in case of Godrej this contention was not raised before the High Court, although contention was raised that tax has been levied u/s 115O.

Though this contention was raised before the Supreme court,  however,  two different expressions  used in  S.14A  and relevant Rules, as pointed out  table earlier and discussion was not pressed or emphasized before the Supreme court.

 Purpose of S.14A not properly explained and emphasized:

14A was introduced to overcome judgments of the Supreme Court in case of CIT vs. Indian Bank Ltd. (1964 (10) TMI 14 - SUPREME Court in which interest on tax free bond was exempted,  CIT vs. Maharashtra Sugar Mills Ltd. 1971 (8) TMI 14 - SUPREME Court (agricultural income in course of business of sugar mill was fully exempted under IT Act) and Rajasthan Warehousing Corpn. Vs. CIT  2000 (2) TMI 5 - SUPREME Court{ full exemption u/s 10(29) was allowed . In these cases exempted income were derived in course of business of and there was no tax in any other manner direct or indirect or on some other party who paid such income.

In respect of such incomes there was no condition at all similar to in case of dividend exempted u/s 10(38).

For example in respect of agricultural income there was no condition that exemption is subject to levy of tax on agricultural income by State Government.

In respect of interest on tax free bonds also there was no condition that income-tax was paid by the person who paid interest.

In respect of exempted  income  earned by  Rajasthan Warehousing Corporation  also there was no condition hat  tax was paid by person who paid exempted income to assessee in that case.

Therefore, reasons for insertion of S.14A are not at all applicable in relation to dividend which is exempted with a condition that tax is levied u/s 115 O.

Dividend on which such tax is not levied is still taxable under the Act in hands of shareholder.

Investment in shares was not merely to earn dividend:

Whether investment in shares is for earning low yield income by way of dividend?   Is an important aspect which was not at all contended?

Whether, earning of exempted dividend is at option of shareholder, so that one can say that investment has been made to earn dividend? 

No, dividend declaration is in discretion of Board of Directors of companies and exemption is dependent on taxation policies at relevant time.

Therefore, it is wrong to say that shares are purchased to earn dividend.

Though exact data could not be found, it is estimated that in our country hardly about 1% of companies are paying dividend regularly. Major part of companies pays dividend very casually (when need arises to impress investors for raising more funds). If we go by data available on websites of NSE we find that dividend yield is hardly around 1%. For such low yield , it cannot be said that investment is made and held to continue to earn dividend.

In case of Godrej Boyce, the yield was higher because investment was made in group companies and major part of holding was at very low cost due to acquisition of shares in initial stage at low price ( at par or some premium) and also there was accumulation of shares by way of bonus shares allotted by companies. Such situations are rare.

Therefore, in case of Godrej also it may not be  perfectly correct  to say that investments were made to earn dividend.     

Exception: only in case shares are purchased cum dividend and few days before record date, perhaps, if facts so warrant, it can be a case of buying shares to earn dividend. In such situation, if one book loss, by selling such shares, after record date, when price falls due to dividend declared, there exist provisions to disallow loss to the extent of exempted dividend earned.

Expenses are incurred to hold and carry business assets

and not merely to earn dividend:

Investing into any capital assets, and managing them and dealing in them is a business activity. When any asset including shares, units, bonds, debentures , are held as an investment and capital asset, the adventure will be an adventure or concern in nature of commerce.

This is adventure or concern  in nature of commerce and is business within meaning under section 2(13) and section 28 of the Income-tax Act, 1961.

Therefore, expenses like storage charges, safe keeping charges, depository charges, insurance, safe keeping, security, rent rates and local taxes, interest on capital borrowed, accounting and auditing, managerial expenses etc. are for holding,and carrying capital assets. Therefore such expenses are not for earning of dividend or other exempted income.

Such expenses are normal, recurring expenses to carry business of investments income or loss form which can fall under different heads of income like income from business , capital gains and other sources.

In case of Godrej before the Supreme Court also all investments constituted adventure in nature of commerce and concern in nature of commerce.   Expenses were normal business expenses of such business. These expenses had hardly anything to earn dividend. As discussed earlier, earning of dividend is subject to precondition of  declaration of dividend by company. Therefore, it cannot be said that expenses are incurred to earn dividend.

Dividend is earned when company declare dividend. After that realisation of dividend and accounting of the same are also to preserve assets of company and not to earn dividend. This difference is required to be considered.

Therefore, we find that many important aspects were not contended. If such aspects were contended, perhaps the ruling could be that S.14A is not applicable in relation to exempted dividend u/s 10(33).

Therefore, the judgment of the Supreme Court is suitable for a review and reconsideration.