Supreme Court: Answering the question as to whether the phrase “income which does not form part of total income under this Act” appearing in Section 14A of the Income Tax Act, 1961 includes within its scope dividend income on shares in respect of which tax is payable under Section 115-O of the Act, the Court held that Section 14A of the Act would apply to dividend income on which tax is payable under Section 115-O of the Act.
The Court said that the object behind the introduction of Section 14A of the Act by the Finance Act of 2001 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. It was further said that a plain reading of Section 14A would 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.
With regard to the species of dividend income on which tax is payable under Section 115-O of the Act, the Court said that the earning of the said dividend is tax free in the hands of the assessee and not includible in the total income of the said assessee. The Court said that even if it is assumed that the additional income tax under Section 115-O 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. It was hence held 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. [Godrej & Boyce Manufacturing Company Ltd. v. Dy. Commissioner of Income Tax, 2017 SCC OnLine SC 549, decided on 08.05.2017]
