2001 (9) TMI 74 - HC - Income Tax

Summary

Issues Involved:
1. Constitutionality of sections 115-0(1) and 115-0(3) of the Income-tax Act, 1961.
2. Legislative competence of Parliament to levy tax on agricultural income.
3. Applicability of rule 8 of the Income-tax Rules, 1962.
4. Nature and character of dividend income.
5. Allegation of double taxation.
6. Compliance with section 115-0(3) within the stipulated time.
7. Violation of Article 14 of the Constitution.

Summary:

1. Constitutionality of sections 115-0(1) and 115-0(3) of the Income-tax Act, 1961:
The petitioner challenged the vires of sections 115-0(1) and 115-0(3) of the Income-tax Act, 1961, regarding the levy of additional income-tax on profits distributed as dividends, arguing that it includes agricultural income which is beyond Parliament's legislative competence.

2. Legislative competence of Parliament to levy tax on agricultural income:
The petitioner argued that Parliament has no legislative competence to levy any tax on agricultural income, which is within the State Legislature's jurisdiction under entry No. 46 of List II read with article 246(3) of the Constitution. The court acknowledged that agricultural income is exempt from income-tax under the Income-tax Act, 1961.

3. Applicability of rule 8 of the Income-tax Rules, 1962:
Rule 8 stipulates that 40% of the income from tea grown and manufactured is taxable as business income, while 60% is agricultural income. The petitioner contended that additional income-tax on dividends should only apply to the non-agricultural portion of the income.

4. Nature and character of dividend income:
The court held that dividends are distinct from agricultural income and are derived from the investment in shares, not directly from agricultural operations. The Supreme Court's decision in Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC) was cited to support this view.

5. Allegation of double taxation:
The petitioner argued that section 115-0 results in double taxation, contrary to the legislative intent to avoid such a scenario. The court rejected this argument, stating that the additional income-tax on dividends does not change the nature of the tax on the company's profits.

6. Compliance with section 115-0(3) within the stipulated time:
The petitioner claimed that compliance with section 115-0(3) within 14 days of declaring or paying dividends is impossible without completing the computation of non-agricultural income under rule 8. The court did not find this argument sufficient to declare the provision unconstitutional.

7. Violation of Article 14 of the Constitution:
The petitioner argued that section 115-0 is unreasonable, unfair, and unjust, thus violating Article 14 of the Constitution. The court dismissed this argument, stating that the provision applies uniformly to all companies and does not violate the principle of equality.

Conclusion:
The court held that section 115-0 is constitutionally valid and dismissed the writ petition. The interim order was extended for three weeks to allow for further consideration by higher authorities.