2025 (4) TMI 1094 - HC - Income Tax

Accrual of incom e - income from the interim dividend - year of assessment - HELD THAT - There is no dispute that when the income from interim dividend was declared on 14.03.2002 by the Company during Financial Year 2001-2002 relevant to the Assessment Year 2002-2003 the interim dividend referred to in Section 115(o) was exempt from tax in the hands of the Appellant/Assessee. The fact also remains that dividend tax was also paid by the aforesaid Company on 22.03.2002. The facts on record indicate that the income accrued from the interim dividend was unconditionally made available by the Company to its shareholders during the Financial Year 2001-2002 relevant to the Assessment Year 2002-2003 itself though the amount accruing as income from the interim dividend was actually paid to the Appellant/Assessee by way of cheque only on 23.04.2002 during the Financial Year 2001-2002 relevant to the Assessment Year 2002-2003. This is evident from a reading of Section 8(b) of the Act as it stood during the period in dispute. When Section 10(33) and 115(o) of the Act are read in conjunction with Section 8(b) of the Income Tax Act 1961 it is clear that for the purpose of total income of an assessee any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend was unconditionally made available by that company to the member who is entitled to it. Merely because the Appellant/Assessee has received the aforesaid interim dividend on 23.04.2002 during the Financial Year 2002-2003 assessable during the Assessment Year 2003-04 by which time the exemption under Section 10(33) of the Act was deleted would not mean that the aforesaid interim dividend income has to be taxed in the hands of the Appellant/Assessee as such dividend had already suffered tax on 22.03.2002 in the hands of the Company. The exemption for income occurring from interim dividend under Section 10(33) of the Act was available to the Appellant/Assessee during the Financial Year 2001-2002 relevant to the Assessment Year 2002-03 as the right to receive the interim dividend had accrued in the hands of the Appellant/Assessee even though the amount was actually received only on 23.04.2002 during the Financial Year 2002- 03 relevant to the Assessment Year 2003-04. Validity of reopening of assessment - The subsequent Assessment Order dated 28.06.2007 passed under Section 143(3) r/w Section 147 of the Act was contrary to the decision of Kelvinator of India 2010 (1) TMI 11 - SUPREME COURT wherein as held Assessing Officer has power to reopen the assessment of income of the Assessee only if there is tangible material to come to a conclusion that income has escaped from assessment. Assessee appeal allowed.

Summary

The core legal questions considered by the Court in this appeal pertain to the validity of reopening an income tax assessment under Section 147 of the Income Tax Act, 1961 ("the Act"), the proper year of taxation of an interim dividend under Section 8(b) of the Act, and the applicability of exemption provisions relating to dividend income, particularly in light of amendments to Sections 10(33) and 115(o) of the Act. Specifically, the issues were:

1. Whether the reopening of the assessment under Section 147 of the Act was valid and did not amount to a mere change of opinion regarding the original assessment passed under Section 143(3).

2. Whether the interim dividend amounting to Rs. 10,26,100/- was rightly denied exemption under Section 8(b) of the Act for the Assessment Year 2003-04.

3. Whether the interim dividend should be taxed in the relevant assessment year despite the company having paid dividend distribution tax under Section 115(o) in the previous year.

Issue 1: Validity of Reopening Assessment under Section 147

The legal framework governing reopening of assessments under Section 147 requires the Assessing Officer to have tangible material indicating that income has escaped assessment. The Supreme Court's ruling in CIT v. Kelvinator of India emphasized that reopening cannot be based on a mere change of opinion but must be supported by new information or evidence.

In this case, the Tribunal held that the reopening was within four years and was based on reasons set out in the Assessing Officer's letter dated 05.02.2007, thereby satisfying the requirements under the Act. The Tribunal relied on the jurisdictional High Court's decision in Apollo Hospital Enterprises Ltd., which upheld the validity of reassessment notices issued within four years even when based on carry forward and set-off issues.

The Court noted that the original assessment order did not mention the interim dividend income, indicating no prior opinion was formed on that income. The reopening was triggered by audit party observations, and the Supreme Court's ruling in CIT v. P.V.S. Beedies Pvt. Ltd. confirmed that reopening based on factual errors pointed out by internal audit parties is permissible.

Applying these principles, the Court found the reopening valid as it was based on tangible material and not a mere change of opinion. The Assessing Officer's reasons were adequately recorded, and the reopening was within the statutory period.

Issue 2: Year of Taxation of Interim Dividend and Denial of Exemption under Section 8(b)

The pivotal statutory provision is Section 8(b) of the Act, which deems any interim dividend to be the income of the previous year in which the amount is unconditionally made available by the company to the entitled member. The Court emphasized the plain and unambiguous language of this provision, citing authoritative rulings by the Gujarat and Kerala High Courts that taxing statutes must be interpreted according to their ordinary grammatical meaning without adding or omitting words.

The Supreme Court's decisions in Mohammad Ali Khan and Padmasundara Rao reinforced this textualist approach, holding that legislative intent is to be gathered from the words used and no reading-in of extraneous provisions is permissible when the statute is clear.

Factually, the interim dividend was declared on 14.03.2002 and was unconditionally made available to the assessee on that date, although the actual payment by cheque occurred on 23.04.2002. The Court relied heavily on the Supreme Court's decision in Rampur Distillery and Chemicals Co. Ltd., which held that dividend income is taxable in the year it is paid, credited, or deemed to be paid or credited, not merely when it becomes due. The Court observed that the right to receive the dividend arose on the declaration date, which was during the Financial Year 2001-2002 relevant to Assessment Year 2002-2003.

Therefore, the dividend income accrued in the earlier year and was exempt under Section 10(33) as it stood then. The subsequent receipt of the dividend cheque in the next financial year (2002-2003) did not alter the year of accrual for tax purposes under Section 8(b).

The Court also noted that the assessee maintained mercantile accounting, further supporting that income accrued when the dividend was declared and unconditionally made available, not when physically received.

Thus, the denial of exemption under Section 8(b) for the Assessment Year 2003-2004 was incorrect, as the income had already accrued and was exempt in the earlier year. The Court rejected the Revenue's contention that the dividend should be taxed in the year of receipt.

Issue 3: Taxability Despite Dividend Distribution Tax Paid under Section 115(o)

The legislative history reveals that Section 10(33) exempted dividend income in the hands of shareholders while imposing a dividend distribution tax on companies under Section 115(o). This exemption was in force during the Financial Year 2001-2002 but was deleted with effect from 01.04.2003 by the Finance Act, 2002.

The Court observed that the dividend was declared and tax paid by the company within the earlier financial year when the exemption was in force. Although the actual receipt of the dividend by the assessee occurred in the subsequent financial year, the income had accrued in the earlier year and was exempt.

The Court further noted that the exemption was reintroduced from 01.04.2004 by Finance Act, 2003, indicating the legislative intent to exempt dividend income in the hands of shareholders, subject to tax at the company level.

Accordingly, taxing the interim dividend in the hands of the assessee in the later assessment year, merely because of the timing of receipt, would result in double taxation contrary to the statutory scheme and legislative intent.

Additional Considerations and Treatment of Competing Arguments

The appellant argued that the reopening was a change of opinion and hence invalid, relying on the Supreme Court's ruling in Kelvinator. The Court rejected this, observing that reopening was based on new information and audit party observations, not a mere change of opinion.

The appellant also relied on several High Court decisions including Marico Ltd., and CIT v. Bharat General Reinsurance Co. Ltd., supporting the view that dividend income accrues when unconditionally made available and that exemption under Section 10(33) applied.

The Revenue cited various decisions supporting reopening and taxation of dividend income in the year of receipt, but the Court found these inapplicable given the specific facts and statutory provisions, especially the clear language of Section 8(b) and the Supreme Court's authoritative rulings.

The Court also drew an analogy from excise law jurisprudence (W.P.I.L. Ltd v. Commissioner of Central Excise) to highlight that clarificatory notifications or amendments do not alter the substantive rights retrospectively but clarify the position, supporting the appellant's contention regarding exemption applicability.

Conclusions

The Court concluded that the reopening of the assessment under Section 147 was invalid as it was based on a mere change of opinion and not on tangible material indicating escaped income. Further, the interim dividend income accrued and was taxable in the earlier assessment year when unconditionally made available to the assessee, and was exempt under Section 10(33) as it stood then.

The subsequent receipt of the dividend cheque in the later year did not alter the year of accrual or taxability. Taxing the interim dividend in the later year would amount to double taxation, especially since dividend distribution tax was paid by the company in the earlier year.

Accordingly, the impugned reassessment order and the Tribunal's decision upholding it were set aside, and the appeal was allowed in favour of the assessee.

Significant holdings and principles established:

"The language of the provision as reproduced above is plain, clear and unambiguous... INTERPRETATION OF TAXING STATUES - WORDS TO BE GIVEN PLAIN GRAMMATICAL MEANING."

"The intention of the Legislature is primarily to be gathered from the language used. Just as it is not permissible to add words or to fill in a gap or lacuna, similarly it is of universal application that effort should be made to give meaning to each and every word used by the Legislature."

"The legislature had not made dividend income taxable in the year in which it becomes due: by express words of the statute, it is taxable only in the year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed."

"Reopening of assessment on the basis of factual error pointed out by internal audit party is permissible under law."

"Merely because the Appellant/Assessee has received the aforesaid interim dividend on 23.04.2002 during the Financial Year 2002-2003, assessable during the Assessment Year 2003-04, by which time the exemption under Section 10(33) of the Act was deleted would not mean that the aforesaid interim dividend income has to be taxed in the hands of the Appellant/Assessee as such dividend had already suffered tax on 22.03.2002 in the hands of the Company."

"The reopening of assessment under Section 147 cannot be sustained as it was based on a mere change of opinion without tangible material."