Godrej & Boyce Manufacturing Company Limited Vs DCIT (Supreme Court of India)
The appeal concerned the allowability of deduction of expenditure incurred in earning dividend income that was exempt under Section 10(33) of the Income-tax Act, 1961 for Assessment Year (AY) 2002-03. The appellant company, incorporated in 1932, was engaged in manufacturing various products and also invested in group companies to maintain control over sister concerns. For AY 2002-03, it declared a loss of ₹45.90 crore and disclosed dividend income and mutual fund income aggregating ₹34.34 crore, of which 98% was received from Godrej group companies. A substantial portion of the investments comprised bonus shares involving no fresh capital outlay. During the relevant previous year, investments declined from ₹127.19 crore to ₹125.54 crore, indicating that no fresh investments were made. The company also possessed interest-free funds substantially exceeding its investments.
The Court noted that for AYs 1998-99, 1999-2000 and 2001-02, the Assessing Officer had disallowed notional interest expenditure attributable to dividend income. However, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal had consistently held that the Revenue failed to establish any nexus between borrowed funds and investments, and those appellate orders had attained finality. For AY 2002-03, the Assessing Officer disallowed interest expenditure of ₹6.92 crore by allocating interest on a notional basis according to the ratio of investments to total assets. The Commissioner (Appeals) deleted the disallowance following earlier years, but the Tribunal remanded the matter to the Assessing Officer after holding that Sections 14A(2) and 14A(3), inserted by the Finance Act, 2006, applied retrospectively. The High Court held that Section 14A applied to dividend income covered by Section 115-0, although Sections 14A(2), 14A(3), and Rule 8D were not retrospective, and nevertheless upheld the remand.
