2018 (3) TMI 1528 - HC - Income Tax

Exemption u/s 10(34) eligibility - additional tax under Section 115(O) - deemed dividend u/s 2(22) - Held that - Exemption available from total income, as per Section 10(34), is on any income by way of dividends referred to in Section 115(O) . Section 115(O) specifically speaks of an additional income tax being levied on the amounts disbursed as dividend by a Company. What is exempted from being included in the total income is that amount disbursed by a Company as dividend, which has been taxed under Section 115(O). The explanation puts it beyond any pale of doubt and excludes sub-Clause (e) of Section 2(22) from the expression of dividend for the purposes of Chapter XII-D containing Section 115(O) to 115(Q) . Prior to sub-section (34) of Section 10 dividend was taxable as income in the hands of the recipient. Only in the context of non-additional tax being levied on the Company, declaring and paying dividend, that exemption was granted to the recipient-shareholder. Deemed dividends are not exempted since there is no payment of additional tax under Section 115(O). The revenue is right in contending that the exclusion under Section 10(34) would be applicable only for the amounts, which has suffered tax under Section 115(O). The question of law hence has to be answered in favour of the Revenue

Summary

Issues:
Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividends and its tax implications under Section 10(34) and Section 115(O).

Analysis:
The case involved a major shareholder who received an advance from a company for setting up a nursing college, deemed as a dividend under Section 2(22)(e) of the Income Tax Act, 1961. The question was whether the recipient would be liable to tax for the advance amounts. The appellant argued that since the amount was exempted under Section 10(34) as dividend income, no tax should be levied on the recipient. However, the Revenue contended that only amounts levied with additional income tax under Section 115(O) would be excluded under Section 10(34).

The Court analyzed Section 115(O) which specifies additional income tax on amounts disbursed as dividends by a company. It was clarified that the exemption under Section 10(34) applies to amounts disbursed as dividends that have been taxed under Section 115(O). Deemed dividends are not exempted as there is no payment of additional tax under Section 115(O). The exclusion under Section 10(34) is only applicable for amounts that have suffered tax under Section 115(O). Therefore, the Court ruled in favor of the Revenue, stating that the recipient-shareholder is liable to tax for the deemed dividends received.

In conclusion, the appeal was rejected, and no costs were awarded. The judgment clarified the tax implications of deemed dividends under Section 2(22)(e) and the applicability of exemptions under Section 10(34) and Section 115(O) in such cases.