1980 (9) TMI 49 - HC - Income Tax

Summary

Issues involved:
1. Whether the dividend tax on the entire amount of dividend paid by the assessee was rightly levied for the assessment years 1964-65 and 1965-66, which included subvention amounts from the State Government?
2. Whether the provisions of section 154 of the Income-tax Act, 1961, were rightly applied to the case of the assessee in the assessment year 1964-65?
3. Whether the profit on the redemption of the loan bonds of the assessee was liable to be taxed as a capital gain?

Summary:
The High Court of Madhya Pradesh addressed a reference under section 256(1) of the Income Tax Act, 1961, regarding the levy of dividend tax and capital gains on the redemption of loan bonds by the assessee. The assessee, a Corporation established by the State Government, distributed dividends partly from profits and partly from subvention amounts. The Income Tax Officer (ITO) rectified the assessment order for 1964-65, applying section 154 of the Act, to include dividend amounts as taxable. The Tribunal upheld the ITO's decision, leading to the reference to the High Court.

Regarding the first issue, the Tribunal assumed the dividend paid by the Corporation was taxable without citing any relevant provision. The High Court noted that there was no specific provision in the Finance Act, 1964, for taxing dividends distributed by a company. As the law treated the assessee as a company for income tax purposes, the Tribunal's decision to levy dividend tax was deemed unjustified. Therefore, the High Court held that the dividend tax on the amount paid by the assessee for the assessment years 1964-65 and 1965-66 was not rightly levied.

On the second issue, since the first question was answered in the negative, the High Court did not find it necessary to address the application of section 154 of the Income-tax Act, 1961, to the case of the assessee in the assessment year 1964-65.

Regarding the third issue, the Tribunal correctly identified the profit on the redemption of loan bonds as a capital gain since the bonds were capital assets of the assessee. The High Court affirmed this decision, stating that the profit earned on surrendering the bonds was rightly taxed as capital gains.

In conclusion, the High Court ruled against the levy of dividend tax on the assessee for the mentioned assessment years, declined to address the application of section 154, and upheld the taxation of the profit on the redemption of loan bonds as capital gains. The parties were directed to bear their own costs in the reference.