S. 14A, Rule 8D & Daga Capital: Judgement Pronounced!

The Bombay High Court today (12.8.2010) pronounced judgement in Godrej & Boyce vs. DCIT, the lead matter challenging the judgement of the Special Bench of the Tribunal in ITO vs. Daga Capital 117 ITD 169 on the applicability of s. 14A & Rule 8D.

The core aspects of the judgement are the following:

(a) The argument that s. 14A does not apply to shares and units because (i) the income there from is not “tax-free” in view of the ‘dividend distribution tax’ paid by the payer & (ii) the potentiality of taxable income arising on sale thereof is not acceptable because the dividend distribution tax is paid by the company u/s 115-O on its own account and not on behalf of the shareholder;

(b) Section 14A(2) & (3) are constitutionally valid;

(c) Rule 8D is NOT ultra vires s. 14A;

(d) As Rule Rule 8D was introduced w.e.f. 24.3.2008, it is prospective and applies for AY 2008-09 and onwards;

(e) For assessment years where Rule 8D is not applicable, the AO has to apply s. 14A on a “reasonable basis”;

(f) On facts, the matter was remanded to the AO for reconsideration in the light of the law laid down.