1977 (1) TMI 7 - HC - Income Tax

Summary

Issues:
1. Taxability of gross foreign dividends received by an Indian company.

Analysis:
The case involved a reference under section 256(1) of the Income Tax Act, 1961, concerning the taxability of foreign dividends received by an Indian company for the assessment year 1966-67. The Income Tax Officer (ITO) had taxed the entire gross amount of foreign dividends received by the company. The Assessee contended before the Appellate Assistant Commissioner (AAC) that only the net dividend should be taxed, as provisions related to grossing up of dividends applied to income tax paid by a company in India, not to tax paid by a foreign company to a foreign government. The AAC upheld the ITO's order, but the Tribunal sided with the Assessee, stating that only the net foreign dividend income was taxable.

The main contention raised by the department's representative was based on section 5(1)(c) of the Income Tax Act, which includes all income accruing or arising outside India to a resident of India in their total income. The representative argued that the dividend income of a shareholder in a foreign company is taxable in India. However, the court rejected this argument, stating that the relevant accounting year had ended before the changes introduced by the English Finance Act, 1965, which mandated taxing gross dividends for shareholders in English companies. The court highlighted that the changes were applicable from the year 1966-67 onwards, whereas the foreign dividend income in question was earned before April 6, 1966, making the amended provisions irrelevant.

In conclusion, the court upheld the Tribunal's decision, ruling that only the net amount of foreign dividends received by the Indian company should be included in its total income for the assessment year 1966-67. The judgment was in favor of the Assessee, and no costs were awarded. Judge DEB concurred with the decision, and the case was closed without any order as to costs.