1981 (2) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of foreign dividends in the assessee's total income.
2. Calculation of relief under Section 91 of the Income-tax Act, 1961.
3. Impact of the Finance Act, 1965 (U.K.) on the assessment of foreign dividends.
4. Determination of whether gross or net foreign dividends should be included in the assessee's income.

Issue-wise Detailed Analysis:

1. Inclusion of Foreign Dividends in the Assessee's Total Income:
The primary issue was whether the foreign dividends received by the assessee-company from U.K. companies should be included in the total income at their gross or net amounts. The Income Tax Officer (ITO) initially included the gross dividends in the assessee's total income, asserting that the right to tax credit or refund from the foreign government constituted income. The Appellate Assistant Commissioner (AAC) and the Tribunal, however, held that only the net foreign dividend should be included in the total income. The Tribunal's decision was based on prior rulings and the opinion of U.K. tax consultants.

2. Calculation of Relief Under Section 91 of the Income-tax Act, 1961:
The second issue was whether the relief under Section 91 should be calculated on the gross or net foreign dividends. The AAC and the Tribunal both agreed that relief should be granted on the net amount of foreign dividends included in the total income. This was consistent with the Tribunal's previous decisions and the understanding that only the net amount received by the assessee could be included in its Indian assessment.

3. Impact of the Finance Act, 1965 (U.K.) on the Assessment of Foreign Dividends:
The Finance Act, 1965 (U.K.) introduced changes that affected the assessment of foreign dividends. The court noted that the Finance Act of 1965 came into effect from April 6, 1966, and did not cover the first assessment year in question (1966-67). The Act provided that dividends and other distributions from a U.K. company would not be chargeable to Corporation tax but would be chargeable to income-tax under Schedule F. The court observed that, even after the Finance Act, 1965, it was only the net income that was includible in the total income of an assessee under the I.T. Act, 1961.

4. Determination of Whether Gross or Net Foreign Dividends Should Be Included in the Assessee's Income:
The court examined whether the gross or net foreign dividends should be included in the assessee's income. The court referred to Section 5 of the I.T. Act, 1961, which deals with the scope of total income, and concluded that only the net income received by the assessee should be included. The court also considered the provisions of Section 8, Section 194, and Section 198 of the I.T. Act, 1961, which deal with dividend income and the deduction of tax at source. It was held that the declaration of dividends did not create a right to the gross amount in favor of the shareholder, as the company was obliged to deduct tax at source.

Conclusion:
The court concluded that only the net amount of foreign dividends should be included in the assessee's total income and that relief under Section 91 of the Income-tax Act, 1961, should be granted on the net amount. The questions referred to the court were answered in the affirmative and in favor of the assessee for all the assessment years in question (1966-67, 1967-68, and 1968-69). The parties were ordered to bear their own costs.