1978 (5) TMI 2 - SC - Income Tax

Double Taxation Relief - assessee is a resident company carrying on business of general insurance who held shares of U.K. based joint stock companies - all the requirements of section 49D have been satisfactorily established by the assessee - held that assessee could be said to have paid income-tax in U.K. by deduction or otherwise in respect of the net dividends so as to be eligible for the relief contemplated by section 49D

Summary

Issues Involved:
1. Eligibility for relief under Section 49D of the Indian Income-tax Act, 1922.
2. Interpretation of "income-tax paid by deduction or otherwise" in the context of U.K. tax law.
3. Determination of whether the dividend income is considered doubly taxed income.
4. Application of the Explanation to Section 49D regarding the rate of tax in the foreign country.

Issue-wise Detailed Analysis:

1. Eligibility for Relief under Section 49D:
The primary issue was whether the assessee, a resident company with dividend income from U.K. based joint stock companies, could claim relief under Section 49D of the Indian Income-tax Act, 1922. Section 49D provides relief for income arising outside the taxable territories if income-tax has been paid in the foreign country by deduction or otherwise. The court examined whether the assessee met the conditions stipulated in Section 49D, which include proving that the income accrued outside the taxable territories and that income-tax was paid in the foreign country.

2. Interpretation of "Income-tax Paid by Deduction or Otherwise":
The controversy centered on whether the deduction of income-tax from dividends as shown in the dividend voucher constituted payment of income-tax by the assessee by deduction or otherwise in the U.K. The court discussed the U.K. tax law, where the company pays tax on its profits and may optionally deduct tax at the standard rate from the dividends paid to shareholders. The court noted that under U.K. law, dividends are considered "franked income," meaning they have already borne tax at the source and are not subject to further income-tax in the hands of the shareholders.

3. Determination of Doubly Taxed Income:
The court examined whether the dividend income received by the assessee was considered doubly taxed income. It was established that the dividends had borne tax in the hands of the paying company and were treated as franked income in the hands of the assessee. The court referenced several U.K. cases and legal interpretations, concluding that the dividends were deemed to have been taxed in the hands of the assessee in the U.K., thus satisfying the requirement of being doubly taxed income under Section 49D.

4. Application of the Explanation to Section 49D:
The Explanation to Section 49D defines the "rate of tax of the said country" as the income-tax and super-tax actually paid in that country. The court discussed the mechanics of calculating the relief, noting that the rate of tax in the U.K. for dividend income is the standard rate at which the company deducts tax from dividends. The court clarified that the assessee had paid tax at the standard rate, which is the rate of tax of the foreign country for the purposes of Section 49D. The court also addressed the revenue's contention that the relief mechanism would be complicated due to the optional nature of tax deduction in the U.K., but concluded that the rate of tax could be worked out with certainty.

Conclusion:
The court concluded that all requirements of Section 49D, read with its Explanation, were satisfactorily established by the assessee. The High Court's decision to grant relief under Section 49D was affirmed. The appeal was dismissed with costs, and the judgment was consistent with prior decisions by the Bombay High Court and the Gujarat High Court.

Appeal dismissed.