India: Section 14A is subject to dividend income tax regardless of dividend distribution tax (DDT) Payment

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Section 14A of the Income Tax Act, 1961 (Act) provides for disallowance of expenditure incurred in relation to income which is not included in the total income of the assessee. The Supreme Court of India in the case of Godrej & Boyce Manufacturing Company Limited v. DCIT (Civil Appeal No. 7020 of 2011), held that disallowance under Section 14A of the Income-tax Act, 1961 (the Act) would apply to dividend income which is subject to dividend distribution tax (DDT).

In that case, the Supreme Court based on the observations and the facts of the case held that the provisions of Section 14A of the Act would apply to dividend income on which tax is payable under Section 115-O of the Act. However, the decision of this Court shall not impact the case of the taxpayer mainly on two grounds. Firstly, the assessing officer was not able to establish any link between the expenditure disallowed and the dividend income earned. Secondly, on similar facts, the Tax Authorities granted the full exemption in earlier years.

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