GODREJ & BOYCE MANUFACTURING COMPANY LIMITED vs. DY. COMMISSIONER OF INCOME-TAX & ANR.

CIVIL APPEAL No. 7020/2011Supreme Court[2017] 3 S.C.R. 60208 May 2017Bench: 2 JudgesAuthor: RANJAN GOGOI, ASHOK BHUSHAN28 pages
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What did the Supreme Court hold?

The Supreme Court held that Section 14A of the Income Tax Act, 1961, would apply to dividend income on which tax is payable under Section 115-O. The Court reasoned that the plain reading of Section 14A shows that if income does not form part of the total income of the assessee, any expenditure incurred in earning such income cannot be allowed as a deduction. The fact that the dividend-paying company pays tax under Section 115-O does not negate the applicability of Section 14A, as the recipient assessee's income is not includible in its total income. The Court emphasized that the object of Section 14A is to prevent the claim of allowance of expenditure incurred towards earning exempted income. Regarding the second issue for Assessment Year 2002-2003, the Court found that the Revenue had failed to establish any nexus between the expenditure disallowed and the earning of dividend income. The Court noted the absence of new facts or change of circumstances and the lack of compelling reasons to depart from the consistent position taken in earlier assessment years. Therefore, for Assessment Year 2002-2003, the assessee was entitled to the full benefit of claiming dividend income without any deductions. The appeal was allowed, and the High Court's order was set aside subject to the conclusions on the applicability of Section 14A to dividend income under Section 115-O.

What were the facts?

The assessee, Godrej & Boyce Manufacturing Company Limited, is challenging an order related to the disallowance of expenditure incurred in relation to dividend income. The assessment years in question are primarily 1998-1999, 1999-2000, 2001-2002, and 2002-2003. The dispute centers on the applicability of Section 14A of the Income Tax Act, 1961, to dividend income on which tax is payable under Section 115-O. The Assessing Officer disallowed expenditure claimed by the assessee, leading to appeals. The Bombay High Court's decision on the retrospective application of Section 14A(2) and (3) is also a point of contention, though the Supreme Court noted it was being challenged in a separate appeal. The core issue is whether expenditure incurred to earn dividend income, which is not includible in the assessee's total income due to tax paid by the dividend-paying company under Section 115-O, can be disallowed under Section 14A.

What were the issues?

1. Whether Section 14A of the Income Tax Act, 1961, applies to dividend income on which tax is payable under Section 115-O of the Act. (Question of law) Assessee's Contention: The assessee likely argued that since tax on dividend income under Section 115-O is paid by the dividend-paying company and the income is not includible in the recipient's total income, Section 14A, which deals with expenditure in relation to income not forming part of total income, should not apply. They might have relied on the fact that the dividend income itself is tax-free in their hands. Revenue's Contention: The Revenue contended that Section 14A is intended to disallow expenditure incurred to earn any income that does not form part of the total income of the assessee, irrespective of who pays the tax on that income. They argued that the plain language of Section 14A mandates disallowance once the condition of non-inclusion in total income is met. 2. Whether, for Assessment Year 2002-2003, the assessee is entitled to the full benefit of claiming dividend income without any deductions, given the findings in previous assessment years and the absence of new facts or circumstances. (Question of mixed law and fact) Assessee's Contention: The assessee argued that for Assessment Year 2002-2003, the same reasoning applied as in earlier years (1998-1999, 1999-2000, 2001-2002) where it was held that the Revenue failed to establish any nexus between the disallowed expenditure and the earning of dividend income. They emphasized consistency and the lack of compelling reasons for a departure from the settled position. Revenue's Contention: The Revenue likely argued that the Assessing Officer was not satisfied with the assessee's claim for Assessment Year 2002-2003 and that the provisions of Section 14A(2) and (3) read with Rule 8D should apply, or a best judgment assessment was warranted. They might have sought to distinguish the facts or argue that the previous findings did not preclude a different view for the current year.

Which sections of the Income-tax Act were involved?

Section 14A,Section 115-O,Section 115-R,Section 10(33),Section 57,Section 194,Section 195,Section 196C,Section 199

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[2017] 3 S.C.R .. 602 A GODREJ & BOYCE MANUFACTURING COMPANY LIMITED 8 c D E F G H 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 i

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