In a significant ruling in Godrej Boyce manufacturing Co. Ltd, the Supreme Court today held that the provisions of section 14A of the Income Tax Act would be applicable to dividend income even if the assessee paid Dividend distribution Tax (DDT) on it.
The substantial question of law raised by the assessee before the Top-Court was that whether deduction is allowable on 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.
The grievance of the assessee was that the AO disallowed interest expenditure and consequently reduced the exemption available under Section 10(33) of the Act to the net dividend by holding that the same was utilized for earning the dividend income. On appeal, the Bombay High Court held that S. 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. It was also observed 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.
It was contended on behalf of the assessee 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. It was further contended that if the tax paid on dividend u/s115-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 u/s 115-O of the Act to the assessee.
The bench observed that the legislative intend behind the insertion of s. 14A was 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. “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.”
The two-judge bench comprising Justice Ranjan Gogoi and Justice Ashok Bhushan said that even if it is assumed that the additional income tax u/s 115O of the Act is on the dividend and not on the distributed profits of the dividend paying company, it would not affect the applicability of s. 14A on such income. In the opinion of the bench, s. 115-O (4) and (5) would clarify that the further benefit of such payments cannot be claimed either by the dividend paying company or by the recipient assessee. Also, the provisions of sections 194,195, 196C and 199 of the Act exclude dividend received under Section 115-O.
It was therefore said 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.”
However, considering the peculiar facts of the case, the bench allowed the claim of deduction to the assessee.
Read the full text of the Judgment below.
