2021 (12) TMI 463 - HC - Income Tax

Exemption from tax under Section 115-O - Tax on distributed profit / Dividend Tax - additional income-tax payable on profits of a domestic company under Section 115-O - Scope of Section 50 of the Small Industries Developments Bank of India Act, 1989 (hereinafter referred to as the SIDBI Act), which exempts Petitioner from payment of income tax on any income, profits or gains derived or any amount received by Petitioner - Whether amount declared, distributed or paid by Petitioner by way of dividend does not fall under the category of income, profits or gains derived or any amount received by Petitioner? - HELD THAT - In the case of Petitioner, no total income is computed at all under the said Act, in view of the overall overriding effect of Section 50 of the SIDBI Act. The use of the expression no income- tax is payable in Section 115-O(1A) of the said Act also presupposes that the subject company is indeed chargeable to income-tax on its total under Section 4 of the said Act. Section 115-O(1A) of the said Act applies only to a case where the subject company is chargeable to income-tax u/s.4 of the said Act. Section 115-O(1A) of the said Act does not apply to a case where the subject company is not chargeable to income-tax due to an overriding non-obstante provision contained in Section 50 of the SIDBI Act. Dividend is defined in Section 2(22) of the IT Act to, inter alia, include any distribution by a company of accumulated profits, which entails releasing any assets by the company to its shareholders. In terms of Explanation 2 to Section 2(22) of the said Act, the expression accumulated profits includes all company profits up to the date of distribution or payment thereof. It appears that the transfer of profits of Petitioner to IDBI in terms of Section 29(2) of SIDBI Act entails payment by Petitioner to IDBI. This payment or distribution of Petitioner's liquid assets constitutes dividend distributed by Petitioner out of its accumulated profits as envisaged under Section 2(22)(a) of the IT Act. It needs to be noted that the charge under sub-section (1) of Section 115-O of the said Act is on the company's profits, more specifically on that part of the profits which is declared, distributed or paid by way of dividend. The charge under sub-section (1) of Section 115-O of the said Act is not on income by way of dividend in the shareholder's hands. Therefore, the additional income-tax payable on profits of a domestic company under Section 115-O of the said Act is not a tax on dividend. In our considered opinion, the amount distributed or paid by way of dividend falls in the category of income, profit or gains derived. Once it is held that the amount distributed or paid by Petitioner by way of dividend falls in the category of profits under Section 50 of the SIDBI Act, on any income, profits, gains derived or any amount received, Petitioner shall not be liable to pay income tax or any other tax in the relevant years. Therefore Petitioner was not liable to pay additional income tax under Section 115-O of the said Act. In the circumstances, Petitioner's payments under protest need to be refunded to the Petitioner

Issues Involved:
1. Legality of the order dated 17/2/2003 regarding the applicability of Section 115-O of the Income Tax Act, 1961 to the Petitioner.
2. Interpretation of Section 50 of the Small Industries Developments Bank of India Act, 1989 (SIDBI Act).
3. Refund of income tax paid under protest by the Petitioner under Section 115-O of the Income Tax Act, 1961.

Detailed Analysis:

1. Legality of the Order Dated 17/2/2003:
The petition challenges the legality of the order dated 17/2/2003, wherein the respondent clarified that any amount declared, distributed, or paid by the Petitioner by way of dividend does not fall under the category of income, profits, or gains derived or any amount received by the Petitioner and thus, no exemption from tax under Section 115-O of the Income Tax Act, 1961 is available to the Petitioner. The principal ground of challenge is based on Section 50 of the SIDBI Act, which exempts the Petitioner from the payment of income tax on any income, profits, or gains derived or any amount received by the Petitioner.

2. Interpretation of Section 50 of the SIDBI Act:
Section 50 of the SIDBI Act contains a non-obstante clause that gives it an overriding effect over the provisions of the Income Tax Act in respect of any income, profits, gains derived, or any amount received by the company. The court noted that a non-obstante clause is generally appended to a section to give the enacting part of the section an overriding effect over the provision in the same or other Act mentioned in the non-obstante clause. The Supreme Court in Central Bank of India v. State of Kerala (2009) 4 SCC 94 observed that a non-obstante clause is generally incorporated in a statute to give overriding effect to a particular section of the statute as a whole. The object of the SIDBI Act is to establish the Small Industries Development Bank of India as the principal financial institution for the promotion, financing, and development of industry in the small-scale sector, and the grant of exemption from payment of income tax was to provide an impetus to achieve these objects in the formative years.

3. Refund of Income Tax Paid Under Protest:
The Petitioner argued that Section 50 of the SIDBI Act exempts it from the payment of any income tax or any other tax regarding any income, profits, or gains derived or any amount received by the Petitioner. The court noted that Section 115-O of the Income Tax Act imposes a tax on the company on the amount of dividend declared, distributed, or paid, irrespective of whether the recipient has received the dividend as income chargeable to tax or not. However, the court held that the amount distributed or paid by way of dividend falls in the category of income, profit, or gains derived under Section 50 of the SIDBI Act. Therefore, the Petitioner shall not be liable to pay income tax or any other tax in the relevant years, and the payments made under protest need to be refunded to the Petitioner.

Conclusion:
The court concluded that the Petitioner is not liable to pay additional income tax under Section 115-O of the Income Tax Act due to the overriding effect of Section 50 of the SIDBI Act. Consequently, the court ordered the refund of the tax amounts paid under protest for the assessment years 1997-98 to 2000-01.

Order:
1. The impugned order dated 17/2/2003 is quashed and set aside.
2. Respondent No.1 is directed to issue necessary instructions to refund the tax amounts paid for the assessment years 1997-98 to 2000-01.
3. It is declared that the Petitioner was not liable to pay tax under Section 115-O on the amounts of profits transferred to IDBI and on the dividend paid to its shareholders for the relevant assessment years.

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