TMI Blog2017 (5) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Thus holding that Section 14A of the Act would apply to dividend income on which tax is payable under Section 115-O of the Act the first question formulated in the appeal has to be answered against the appellant-assessee. Application of Section 14A r.w.rule 8D - whereas in the earlier years AO did not make any disallowance - Held that:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der to maintain control of such concerns as sister concerns. 2. The issue in the present appeal relates to the admissibility or otherwise of deduction of expenditure incurred in earning dividend income which is not includible in the total income of the Assessee by virtue of the provisions of Section 10(33) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) as in force during the relevant Assessment Year i.e. 2002-2003. 3. For the Assessment Year 2002-2003, the appellant Company filed its return declaring a total loss of ₹ 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 ₹ 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 ₹ 1,71,000/- came from non-Godrej group companies. A sum of ₹ 66,79,000/-, constituting 1.95% of the aforesaid dividend income, came from mutual funds. Admittedly, a substantial part of the appellant's investment in the group companies was in the form of bonus shares which did not involve any fresh capital investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act was similarly held in favour of the assessee by the Commissioner of Income Tax (Appeals) and the learned Tribunal, once again. Initially, the Assessing Officer, in both the Assessment Years, had disallowed notionally computed interest expenditure as being relatable to the earning of dividend income. The said appellate order(s) had also attained finality. For the intervening Assessment Year 2000-2001 there was no scrutiny of the appellant's return of income. Consequently, the dividend income was allowed in full without disallowing any expenditure incurred in relation to earning such income. However, for the Assessment Year 2002-2003, the Assessing Officer did not allow interest expenditure to the extent of ₹ 6,92,06,000/- holding the same to be attributable to earning the dividend income of ₹ 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 Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and income on units of mutual funds on which tax is payable under Section 115-R. (b) Whatever be the view on the legal aspects, whether on the facts and in the circumstances of the Appellant's case and bearing in mind the unanimous findings of the lower authorities over a considerable period of time (which were accepted by the Revenue) there could at all be any question of the provisions of Section 14A in the appellant's case. 10. We have heard Shri Sohrab E. Dastur, learned Senior Counsel appearing for the appellant and Shri Ranjit Kumar, learned Solicitor General appearing for the Revenue. 11. At the very outset, the relevant provisions of the Act which will require a consideration are extracted below: 2. In this Act, unless the context otherwise requires,- ( 22 ) dividend includes- (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 x ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- A x _B_ C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon. (6) xxx xxx xxx xxx xxx (7) xxx xxx xxx xxx xxx (8) xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx 115R. Tax on distributed income to unit holders.- (1) Notwithstanding anything contained in any other provisions of this Act and section 32 of the Unit Trust of India Act, 1963 (52 of 1963), any amount of income distributed on or before the 31st day of March, 2002 by the Unit Trust of India to its unit holders shall be chargeable to tax and the Unit Trust of India shall be liable to pay additional income-tax on such distributed income at the rate of ten per cent: Provided that nothing contained in this sub-section shall apply in respect of any income distributed to a unit holder of open-ended equity oriented funds in respect of any distribution made from such fund for a period of three years commencing from the 1st day of April, 1999. (2) Notwithstanding anything contained in any other provision of this Act, any amount of income distributed by the specified company or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lear that dividend, though to be taxed in the hands of the company distributing the same, is not to be included in the total income of the recipient Assessee. The mere fact that the amount is not to be included in the total income of the recipient Assessee, would not attract the provisions of Section 14A of the Act, inasmuch as the cardinal test is whether the dividend income is tax-free or not. The person paying the tax, according to the learned counsel, is not relevant for the aforesaid purpose. 14. Shri Dastur has also urged that the above position has been accepted by the Revenue in its counter affidavit wherein it has been admitted that the exemption granted under Section 10(33) is consequent upon collection of tax on dividend income from the dividend distributing company under Section 115-O of the Act. It is, therefore, argued by Shri Dastur that a literal interpretation of Section 14A must be avoided. Reference in this regard is made to the case of K.P. Varghese vs. Income-Tax Officer, Ernakulam and Anr . 1981 131 ITR 597 (SC) . It is specifically contended by Shri Dastur that tax on the dividend paid is not a tax on profits out of which dividend is distributed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. 16. The position is made clear by Circular No. 14 issued by the C.B.D.T. explaining the said purpose of the Finance Act, 2001. The said Circular has also been placed before the Court by the learned Solicitor General. 17. The learned Solicitor General has also traced the history of the Amendments to Section 14A of the Act and, in particular, to the insertion of sub-sections (2) and (3) thereof by the Finance Act of 2006. The purpose of insertion of sub-sections (2) and (3), as explained in the Memorandum explaining the provisions of the Finance Bill 2006, has also been relied upon by the learned Solicitor General, who contends that from the said Memorandum it is clear that sub-sections (2) and (3) had been introduced as the existing provisions of Section 14A did not provide any method of computation of expenditure incurred to earn an income which does not form a part of the total income. It is, therefore, urged by the learned Solicitor General ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t claim deduction in respect of the dividend received by it/him from a dividend paying company on which tax has been paid by the said company under Section 115-O(1) of the Act. This, according to the learned Solicitor General, makes the intent of Section 14 crystal clear. The liability to pay tax under Section 115-O in respect of the dividend is on the dividend paying company and the shareholder/assessee has no connection with the same. Such an assessee is not required to include the dividend amount in his/its total income for the purposes of charge to tax. In such a situation, the expenditure incurred for earning the said income cannot be allowed. 21. There is a supplemental argument made by the learned Solicitor General based on the provisions of Sections 194, 195, 196C and 199 contained in Chapter XVII of the Act which deals with Collection and Recovery of Tax including tax on dividend income received by a shareholder. It may be convenient, to appreciate what has been argued, to notice what the aforesaid provisions of the Act actually say. 194. Dividends. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of ten per cent : Provided that no such deduction shall be made in respect of any dividends referred to in section 115-O. 199. Credit for tax deducted .- (1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of property or of the unit-holder, or of the shareholder, as the case may be. (2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made. (3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rules for the purposes of giving credit to a person other than those referred to in sub-section (1) and sub-section (2) and also the assessment year for which such credit may be given. 22. All the said provisions, noticeably, exclude dividend recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived by the assessee has been paid by the dividend paying company and not by the recipient assessee, when under Section 10(33) of the Act such income by way of dividend is not a part of the total income of the recipient assessee. A plain reading of Section 14A would go to show that the income must not be includible in the total income of the assessee. Once the said condition is satisfied, the expenditure incurred in earning the said income cannot be allowed to be deducted. The section does not contemplate a situation where even though the income is taxable in the hands of the dividend paying company the same to be treated as not includible in the total income of the recipient assessee, yet, the expenditure incurred to earn that income must be allowed on the basis that no tax on such income has been paid by the assessee. Such a meaning, if ascribed to Section 14A, would be plainly beyond what the language of Section 14A can be understood to reasonably convey. 25. The reliance placed by the Assessee on K.P. Varghese (supra) may now be considered. In K.P. Varghese (supra) the interpretation of sub-section (2) of Section 52 of the Income Tax Act, 1961 (as it then in force) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that: where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction: Vide Luke v. IRC [1963] AC 557; [1964] 54 ITR 692. 27. We do not see how the aforesaid principle of law in K.P. Varghese (supra) can assist the Assessee in the present case. The literal meaning of Section 14A, far from giving rise to any absurdity, appears to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income. Therefore, the well entrenched principle of interpretation that where the words of the statute are clear and unambiguous recourse cannot be had to principles of interpretation other than the literal view will apply. In this regard, the view expressed by this Court in Commissioner of Income Tax-III vs. Calcutta Knitwears, Ludhiana (2014) 6 SCC 444 (para 31) may be usefully noticed below: the language of a taxing statute should ordinarily be read and u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituation 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of chargeability to tax. The views expressed in Walfort Share and Stock Brokers P. Ltd. (supra), in our considered opinion, yet again militate against the plea urged on behalf of the Assessee. 34. For the aforesaid reasons, the first question formulated in the appeal has to be answered against the appellant-assessee by holding that Section 14A of the Act would apply to dividend income on which tax is payable under Section 115-O of the Act. 35. We may now deal with the second question arising in the case. 36. Section 14A as originally enacted by the Finance Act of 2001 with effect from 1.4.1962 is in the same form and language as currently appearing in sub-section (1) of Section 14A of the Act. Sections 14A (2) and (3) of the Act were introduced by the Finance Act of 2006 with effect from 1.4.2007. The finding of the Bombay High Court in the impugned order that sub-sections (2) and (3) of Section 14A is retrospective has been challenged by the Revenue in another appeal which is presently pending before this Court. The said question, therefore, need not and cannot be gone into. Nevertheless, irrespective of the aforesaid question, what cannot be denied is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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 ₹ 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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