2017 (9) TMI 1300 - SC - Income Tax

Constitutionality of validity Section 115O - the additional tax as levied by Section 115O on the dividend declared, distributed or paid - Calcutta High Court has upheld the constitutionality of Section 115O, but a rider has been put that additional income tax to be charged under Section 115O can only be on 40 per cent of income which is taxable under Income Tax Act. - Held that - This Court in Mrs. Bacha F Guzdar (1954 (10) TMI 2 - SUPREME Court) was considering the nature of dividend income in the hands of shareholders. Under the Income tax Act, 1961 earlier the dividend was taxable at the hands of shareholder. By Finance Act, 1997 it was made taxable in the hand of company when additional tax was imposed. This Court while considering the nature of dividend in the above case held that although when the initial source which has produced the revenue is land used for agricultural purposes but to give to the words revenue derived from land , apart from its direct association or relation with the land, an unrestricted meaning shall be unwarranted. Again as noted above Nalin Behari Lal Singha (1969 (7) TMI 2 - SUPREME Court) observation was made that shares of its profits declared as distributable among the shareholders is not impressed with the character of the profit from which it reaches the hands of the shareholder. We, thus, find substances in the submission of the learned counsel for the Union of India that when the dividend is declared to be distributed and paid to company s shareholder it is not impressed with character of source of its income. The provisions of Section 115O are well within the competence of Parliament. To put any limitation in the said provision as held by the Calcutta High Court that additional tax can be levied only on the 40% of the dividend income shall be altering the provision of Section 115O for which there is no warrant. The Calcutta High Court having upheld the vires of Section 115O no further order was necessary in that writ petition. - Decided in favor of revenue.

Issues Involved:
1. Constitutional validity of Section 115O of the Income Tax Act, 1961.
2. Legislative competence of Parliament to impose additional income tax on dividends.
3. Interpretation of agricultural income and its taxation.
4. Application of Rule 8 of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Section 115O:
The primary issue in these appeals is the constitutional validity of Section 115O of the Income Tax Act, 1961, as inserted by the Finance Act, 1997. The Calcutta High Court upheld the constitutionality of Section 115O but limited the additional income tax to be charged under Section 115O to only 40% of the income taxable under the Income Tax Act. The Gauhati High Court dismissed the writ petition challenging the same provision, affirming its constitutionality.

2. Legislative Competence of Parliament:
The petitioners argued that Section 115O imposes additional tax on dividends distributed by companies, which includes agricultural income. They contended that Parliament lacks the legislative competence to tax agricultural income, which falls under the State Legislature's purview as per List II Entry 46 of the Seventh Schedule of the Constitution. The Union of India countered that once the dividend is declared, it no longer retains its character as agricultural income, and Parliament has full legislative competence to enact Section 115O.

3. Interpretation of Agricultural Income and Its Taxation:
The Court examined whether the additional tax on dividends under Section 115O encroaches upon the State's exclusive power to tax agricultural income. The Court referred to the definition of agricultural income under Article 366 and Section 2(1A) of the Income Tax Act, 1961. It also considered the principles of statutory interpretation and the doctrine of "pith and substance" to determine whether the legislation falls within the Union List or the State List.

4. Application of Rule 8 of the Income Tax Rules, 1962:
The Calcutta High Court had applied Rule 8 of the Income Tax Rules, 1962, which states that income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, with 40% deemed to be liable to tax. The Court had held that the additional tax under Section 115O should only apply to 40% of the dividend income. However, the Supreme Court found that the dividend, when declared and distributed, loses its character as agricultural income and becomes taxable in the hands of the company.

Conclusion:
The Supreme Court upheld the legislative competence of Parliament to enact Section 115O, stating that the provision falls within the ambit of Entry 82 of List I, which covers "taxes on income other than agricultural income." The Court emphasized that the dividend, once declared, does not retain its character as agricultural income. Consequently, the Supreme Court allowed the appeals filed by the Union of India (Civil Appeal Nos. 9178 and 9180 of 2012) and dismissed the appeal filed by the writ petitioner (Civil Appeal No. 9179 of 2012). The judgment of the Calcutta High Court limiting the additional tax to 40% of the dividend income was set aside.

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