2004 (9) TMI 76 - HC - Income Tax

Whether Tribunal was right in law in allowing credit for tax deducted at source in respect of dividends diverted to the State Government by the assessee? - From a perusal of the order of the Tribunal, it is clear that no tax was deductible at all on the portion of dividend diverted to the State Government as it is not assessable under the Income-tax Act. The entire tax deducted at source clearly pertains to the dividend payable to the assessee and it has been found as a fact that the entire burden of this amount had fallen on the assessee-corporation. The Tribunal has taken a possible view which, in our opinion, is the correct view in the facts and circumstances of the case. At any rate, it is quite evident that even if the Revenue were to succeed, the balance amount would still be refundable as no tax was deductible on the dividend payable to the State Government. Since the burden had been fully borne by the assessee, such refund would also go back to the assessee. Thus, the whole exercise would be an exercise in futility. Thus, we answer the question in the affirmative, i.e., in favour of the assessee

Summary

Issues:
- Whether the Appellate Tribunal was right in allowing credit for tax deducted at source in respect of dividends diverted to the State Government by the assessee?

Analysis:
The judgment pertains to a case where the Income-tax Appellate Tribunal referred a question of law regarding the allowance of credit for tax deducted at source on dividends diverted to the State Government by the assessee. The assessee claimed credit for the entire amount of tax deducted on dividend income, which included a portion diverted to the State Government. The Assessing Officer contended that the credit for tax deducted at source should be allowed proportionately based on the share of dividend assessable in the hands of the joint holders, i.e., the assessee and the State Government. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision.

The Tribunal, however, allowed the assessee's claim by considering the arrangement as a diversion of income, where 2/3rds of the dividends were to be diverted to the State Government and only 1/3rd was assessable in the hands of the assessee. The Tribunal reasoned that since the State Government was not assessable under the Income-tax Act, no tax was required to be deducted at source on the portion of dividend income diverted to the State Government. Therefore, the tax deducted at source on the entire dividend amount pertained to the assessee, and the burden of this tax had entirely fallen on the assessee-corporation.

The High Court, after examining the order of the Tribunal, concurred with the Tribunal's view. It noted that no tax was deductible on the dividend portion diverted to the State Government, and the entire tax deducted at source related to the dividend payable to the assessee. The Court agreed that the assessee had borne the burden of the tax amount, and even if the Revenue were to succeed, the balance amount would be refundable as no tax was deductible on the dividend payable to the State Government. Therefore, the Court held in favor of the assessee, stating that the whole exercise would be futile, and answered the question in the affirmative, favoring the assessee and ruling against the Revenue.