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TMI Blog2017 (5) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 appellant's 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the intervening Assessment Year 2000-2001 there was no scrutiny of the appellant's return of income. Consequently, the dividend income was allowed in full without disallowing any expenditure incurred in relation to earning such income. However, for the Assessment Year 2002-2003, the Assessing Officer did not allow interest expenditure to the extent of Rs. 6,92,06,000/- holding the same to be attributable to earning the dividend income of Rs. 34,34,78,686/- 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 retros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (24) "income" includes- (i) profits and gains ; (ii) dividend ; (iia) .................." xxx xxx xxx xxx xxx 10. 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 refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 a Mutual Fund to its unit holders shall be chargeable 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 Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 inasmuch as under Section 115-O of the Act dividend can be paid either from accumulated profits or current profits. In fact, 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-O of the Act even in a case where no tax is payable under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 part 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 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 amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... older, 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 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, accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntemplate 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), which is in the following terms, came up for consideration before this Court. "Consideration for transfer in cases of under-statement. 52 (1) 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 believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45, the full value of the consideration for the transfer shall, with the previo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative animation. A taxing 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. 28. A similar view is to be found in Commissioner of Income-Tax vs. Tara Agencies (2007) 292 ITR 444(SC) [At Page 464] wherein this Court had concluded that: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduced 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 ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang vs. Commissioner of Income-Tax (1992) 193 ITR (SC) 321 [At Page 329]. "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 through the different assessment years has been found as a fact 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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