2007 (6) TMI 174 - HC - Income Tax

Summary

Issues Involved:
1. Constitutional validity of sections 115-O(1) and 115-O(3) of the Income-tax Act, 1961.
2. Legislative competence of Parliament to levy additional income-tax on dividends derived from agricultural income.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Sections 115-O(1) and 115-O(3) of the Income-tax Act, 1961:

The petitioners challenged the constitutional validity of sections 115-O(1) and 115-O(3) of the Income-tax Act, 1961, which levy additional income-tax on dividends distributed by domestic companies. They argued that these provisions were ultra vires the Constitution as they imposed a tax on agricultural income, which falls under the exclusive jurisdiction of the State Legislature as per Entry 46 of List II (State List) in the Seventh Schedule of the Constitution.

The court analyzed the provisions of section 115-O, which mandate a domestic company to pay additional income-tax at a specified rate on any amount declared, distributed, or paid by way of dividends. The court noted that the term "dividend" as defined in section 2(22) of the Act includes various distributions by a company, and the tax levied under section 115-O is on the profits distributed by way of dividends, not directly on agricultural income.

The court referred to the Supreme Court's decision in Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC), which held that dividends received by shareholders do not retain the character of agricultural income, even if the profits out of which the dividends are paid were derived from agricultural operations. Therefore, the tax on dividends under section 115-O does not infringe upon the State Legislature's exclusive power to tax agricultural income.

2. Legislative Competence of Parliament to Levy Additional Income-tax on Dividends Derived from Agricultural Income:

The petitioners contended that Parliament lacked the legislative competence to levy additional income-tax on dividends derived from agricultural income, as agricultural income is exclusively taxable by the State Legislature under Entry 46 of List II. They argued that the income derived from growing and manufacturing tea is partly agricultural and partly non-agricultural, and only the non-agricultural portion can be taxed by Parliament.

The court examined the legislative framework, including Article 246 of the Constitution, which delineates the powers of Parliament and State Legislatures. Entry 82 of List I (Union List) empowers Parliament to legislate on "Taxes on income other than agricultural income." The court reiterated that the tax levied under section 115-O is on the distributed profits (dividends) and not directly on agricultural income.

The court referred to several judicial precedents, including CIT v. Khatau Makanji Spg. and Wvg. Co. Ltd. [1960] 40 ITR 189 (SC) and Tata Tea Ltd. v. State of West Bengal [1988] 173 ITR 18 (SC), which supported the view that dividends do not retain the character of agricultural income and can be subjected to tax by Parliament.

The court concluded that the provisions of section 115-O are intra vires the Constitution and within the legislative competence of Parliament. The tax on dividends under section 115-O does not amount to a tax on agricultural income and does not infringe upon the State Legislature's exclusive jurisdiction.

Conclusion:

The court held that Parliament has the legislative competence to enact sections 115-O(1) and 115-O(3) of the Income-tax Act, 1961, and these provisions are not ultra vires the Constitution. The writ petition was dismissed, and the court directed the parties to bear their own costs.