Case Note & Summary
The assessee, Godrej & Boyce Mfg. Co. Ltd., filed its income tax return for Assessment Year 2002-03 declaring a loss of Rs. 45.90 crores and claimed a dividend of Rs. 34.34 crores as exempt from total taxable income under Section 10(33) of the Income-tax Act, 1961. The Assessing Officer, during scrutiny, disallowed Rs. 6.92 crores under Section 14A, attributing interest expenditure to dividend income. The Commissioner of Income Tax (Appeals) deleted the disallowance, following earlier Tribunal orders for Assessment Years 1998-99 and 1999-2000, holding no expenditure could be notionally attributed. The Revenue appealed to the Income Tax Appellate Tribunal. The Tribunal, relying on Daga Capital Management Private Limited, held sub-sections (2) and (3) of Section 14A are procedural and retrospective, and remanded the matter to the Assessing Officer to examine the claim under Section 14A(2). The assessee appealed to the Bombay High Court, raising questions about the scope of Section 14A, the power to disallow, and the applicability of Rule 8D. Simultaneously, the assessee filed a writ petition under Article 226 challenging the constitutional validity of Section 14A and Rule 8D as arbitrary under Article 14. The High Court issued Rule on the petition and, with consent, decided to finally dispose of both matters. The court considered the challenges on the applicability of Section 14A to dividend and mutual fund income, the retrospectivity of sub-sections (2) and (3) and Rule 8D, and the constitutional validity. However, the provided excerpt does not contain the court's final order or reasoning on these issues.
Issue of Consideration
Whether Section 14A applies to dividend and mutual fund income, whether sub-sections (2) and (3) of Section 14A and Rule 8D are retrospective and applicable for Assessment Year 2002-03, whether they are arbitrary and ultra vires Article 14 of the Constitution, and whether the Tribunal's remand was warranted on the facts of the case
Law Points
- Section 14A disallows expenditure incurred in relation to income not forming part of total income
- Sub-sections (2) and (3) of Section 14A are procedural and retrospective
- Rule 8D prescribes method for determining disallowance
- Dividend income under Section 10(33) is income not forming part of total income
- Heydon's rule of interpretation
- Constitutional validity under Article 14
Case Details
2010 LawText (BOM) (08) 85
Income Tax Appeal No. 626 of 2010 and Writ Petition No. 758 of 2010
Dr. D. Y. Chandrachud, J. P. Devadhar
Mr. S. E. Dastur, Sr. Advocate with Mr. P. J. Pardiwala, Sr. Advocate, Mr. Nitesh Joshi i/b. Mr. Atul K. Jasani for the Appellant/Petitioner; Mr. Porus F. Kaka, Sr. Advocate with Mr. Divyesh Chawla i/b. Mr. Atul K. Jasani for the Intervenor; Mr. Darius J. Khambata, ASG with Mr. Rohan J. Cama, Mr. J. S. Saluja, Mr. Suresh Kumar and Mr. P. S. Sahadevan for the Respondents
Godrej & Boyce Mfg. Co. Ltd. Mumbai
Dy. Commissioner of Income Tax, Range 10(2), Mumbai & Anr.
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Nature of Litigation
Income tax appeal and writ petition challenging constitutional validity of Section 14A of the Income-tax Act, 1961 and Rule 8D of the Income-tax Rules, 1962
Remedy Sought
The assessee sought to set aside the Tribunal's order remanding the disallowance and to declare Section 14A and Rule 8D unconstitutional
Filing Reason
The Assessing Officer disallowed Rs. 6.92 crores under Section 14A in respect of dividend income; the Commissioner (Appeals) deleted the disallowance; the Tribunal remanded the matter back to the Assessing Officer for fresh examination, against which the assessee appealed. A separate writ petition challenged the vires of the provisions
Previous Decisions
The Tribunal held sub-sections (2) and (3) of Section 14A to be procedural and retrospective, and remanded the case to the Assessing Officer for fresh examination under Section 14A(2). The Commissioner (Appeals) had earlier deleted the disallowance relying on Tribunal orders in the assessee's own case for Assessment Years 1998-99 and 1999-2000
Issues
Whether Section 14A applies to dividend income from shares and income from mutual funds which are not exempt but taxed under Sections 115O and 115R
Whether a literal interpretation of Section 14A leads to unintended consequences and should be avoided
Whether subsections (2) and (3) of Section 14A and Rule 8D are retrospective and can be applied to Assessment Year 2002-03
Whether subsections (2) and (3) of Section 14A are arbitrary and violative of Article 14 of the Constitution
Whether Rule 8D is ultra vires Section 14A(2) and/or arbitrary and violative of Article 14
Whether on the facts, there was any basis for disallowance and whether the Tribunal's remand was justified
Submissions/Arguments
Section 14A was introduced to overcome decisions in Maharashtra Sugar Mills and Rajasthan State Warehousing Corporation; it should not apply to dividend and mutual fund income because such income is not tax-free but taxed in the hands of the company/mutual fund under Sections 115O and 115R
Even if a literal reading of Section 14A covers dividend income, such interpretation leads to absurd consequences and must be rejected by applying Heydon’s rule
Subsections (2) and (3) of Section 14A and Rule 8D are not retrospective and cannot apply to Assessment Year 2002-03
Subsections (2) and (3) of Section 14A are arbitrary and unconstitutional under Article 14
Rule 8D goes beyond Section 14A(2) and is arbitrary and ultra vires the Act
On the facts, the assessee had incurred no actual expenditure to earn the dividend income; the shares were acquired years earlier out of own funds, and the Assessing Officer had no basis to apportion interest; therefore, the Tribunal's remand was unwarranted
Judgment Excerpts
Section 14A(1) of the Income Tax Act, 1961 stipulates that in computing the total income of an assessee, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to “income which does not form part of the total income under this Act.”
Rule 8D of the Income Tax Rules prescribes the method for determining the expenditure incurred in relation to income which does not form part of the total income, where the Assessing Officer is not satisfied with the claim of the assessee. Rule 8D was notified in the Official Gazette of 24 March 2008.
The Tribunal by its judgment impugned in the appeal held, following its decision in the case of Daga Capital Management Private Limited, that subsections (2) and (3) of Section 14A are procedural in nature and have retrospective effect.
By Section 10(33) – as it stood during Assessment Year 2002-03 income by way of dividend referred to in Section 115O was not to be included in computing the total income of any person for a previous year.
Procedural History
The assessee filed its return for Assessment Year 2002-03 on 29 October 2002 declaring a loss of Rs. 45.90 crores and claimed dividend of Rs. 34.34 crores as exempt under Section 10(33). During scrutiny, the Assessing Officer called for explanation and later disallowed Rs. 6.92 crores under Section 14A by apportioning interest expenditure. The Commissioner of Income Tax (Appeals) deleted the disallowance following earlier Tribunal decisions in the assessee's own case for Assessment Years 1998-99 and 1999-2000. The Revenue appealed to the Tribunal. The Tribunal, vide the impugned order, held subsections (2) and (3) of Section 14A to be retrospective and remanded the matter to the Assessing Officer for fresh examination under Section 14A(2). The assessee filed an appeal before the High Court under Section 260A of the Income-tax Act and simultaneously filed a writ petition under Article 226 challenging the constitutional validity of Section 14A and Rule 8D. Notice was issued to the Attorney General, and the High Court proceeded to finally dispose of both matters at the admission stage with the consent of the parties.
Acts & Sections
- Income-tax Act, 1961: 14A(1), 14A(2), 14A(3), 10(33), 115O, 115R
- Income-tax Rules, 1962: Rule 8D
- Constitution of India: Article 14, Article 226
