2018 (11) TMI 1340 - HC - Income Tax

Exemption u/s 10(34) claimed - sum received by the assessee from Spirax Marshall (P) Ltd on sale of its shares to the said company under the Scheme of Arrangement, which is treated as deemed dividend under section 2(22)(d) - whether the deemed dividend under Section 2(22)(d) would fall within the purview of Sub-Section 1 of Section 115O? - Held that - An explanation to Section 115Q which existed at the relevant time but which was omitted by the Finance Act, 2018 and provided that for the purposes of the said Chapter (Chapter XIID) which contains Section 115O and 115Q, the expression dividend shall have the same meaning as it given to dividend under Sub-Section (22) of Section 2, but shall not include sub-clause (e) thereof. The plain effect of the explanation, therefore, would be that even the deemed dividend under Section 2(22)(d) of the Act would be covered from the purpose of Chapter XIID. In turn, therefore, such deemed dividend would be one which is referred to Section 115O of the Act. Inescapable conclusion, therefore, would be that such dividend also would be exempt from tax in the hands of the receiver in terms of Section 10(34) of the Act. The contention of the Revenue that the company having not paid such dividend distribution tax, exemption under Section 10(34) should be deprived to the assessee needs to be noted only for rejection. If a certain income is exempt at the hands of receiptant by virtue of statutory provision, unless a provision is made in the statute itself, such exemption cannot be withdrawn only because the payer has not paid tax. The statute has made specific provision for recovery or unpaid tax from the company. - Decided against revenue

Summary

Issues:
1. Whether the income received by the assessee from the sale of shares is deemed dividend under Section 2(22)(d) of the Income Tax Act, 1961?
2. Whether the assessee can claim exemption under Section 10(34) of the Act if the company has not paid additional income-tax under Section 115O?

Analysis:

Issue 1:
The case involved the assessment year 2008-09 where the assessee, an individual, sold shares of a company under a scheme of arrangement. The Revenue contended that the income was deemed dividend under Section 2(22)(d) of the Act. The Tribunal agreed with the Revenue but examined if the income would be exempt under Section 10(34) of the Act. The Revenue challenged this decision, arguing that the company had not paid tax under Section 115O. The assessee claimed the income was capital gain, offered it for tax accordingly, and pointed out that other shareholders in the same group had treated the gain as capital gain without opposition from the Revenue.

Issue 2:
The High Court analyzed Section 2(22)(d), Section 10(34), and Section 115O of the Act. It noted that the explanation to Section 115Q clarified that deemed dividends under Section 2(22)(d) would be covered by Section 115O, making them exempt under Section 10(34) for the receiver. The Court rejected the Revenue's argument that exemption should be denied due to the company not paying dividend distribution tax, stating that unless the statute provides for such withdrawal of exemption, it cannot be done based on the payer's tax payment status. The Court dismissed the tax appeal, emphasizing that the specific provisions in the Act govern the exemption of income.

The judgment highlighted the importance of statutory provisions in determining tax liability and exemption, clarifying the treatment of deemed dividends under the Act. The Court's decision upheld the exemption under Section 10(34) for the assessee, emphasizing the statutory framework's significance in tax matters.