Godrej & Boyce Mfg. Co. Ltd. Vs DCIT (Bombay High Court)
The case concerned the interpretation and constitutional validity of Section 14A of the Income-tax Act, 1961, and Rule 8D of the Income-tax Rules in relation to expenditure incurred for earning income not forming part of total income. The assessee challenged the Tribunal’s order, which had remanded the matter to the Assessing Officer for fresh examination under Section 14A(2), and also filed a writ petition challenging the constitutional validity of Section 14A and Rule 8D.
For Assessment Year 2002-03, the assessee filed its return declaring a loss of Rs. 45.90 crores and claimed exemption under Section 10(33) in respect of dividend income of Rs. 34.34 crores. The assessee maintained that no expenditure had been incurred for earning the dividend income and therefore no disallowance under Section 14A was warranted. During assessment proceedings, it explained that a substantial portion of the dividend was received from group companies, that most of the shares were bonus shares or had been acquired several years earlier, that investments were covered by reserves and capital, and that no fresh investments in exempt-income yielding securities had been made during the relevant year.
The Assessing Officer observed that, in a common pool of funds, it was difficult to identify whether investments had been made from internal accruals or borrowed funds. Proceeding on the basis that borrowings could have been reduced had investments not been made, the Assessing Officer apportioned interest expenditure by comparing investments generating dividend income with total assets. On this basis, interest expenditure of Rs. 6.92 crores was attributed to dividend income and disallowed.
