2006 (7) TMI 129 - HC - Income Tax

Provision of section 115-O - additional income-tax - appellant tried to contend that since the additional tax was only on part of the income which relates to declaration of dividend there could not be any mechanism provided for segregation of such income, as such distribution of profit would also include agricultural income. We are unable to appreciate such contention of the appellants. If a tea company has a net income of Rs. 100, Rs. 40 would be liable to income-tax at the prescribed rate and the assessee would be assessed accordingly. By virtue of section 115-O if the company declares Rs. 50 for distribution amongst the shareholders it would have a proportionate liability. - in case the company decides to distribute a part of the income, company would be charged on Rs. 40 for income-tax and on Rs. 50 for additional income-tax on proportionate basis held that provision of section 115-O is constitutional

Issues Involved
1. Constitutionality of Section 115-O of the Income-tax Act, 1961.
2. Applicability of additional income-tax on distributed profits by tea companies.
3. Double taxation concerns.
4. Legislative competence of Parliament to impose tax on agricultural income.
5. Proportionality and rationality of the tax imposed under Section 115-O.

Detailed Analysis

Constitutionality of Section 115-O
The writ petitioners challenged the introduction of Section 115-O on the ground that it was ultra vires the Constitution. The learned single judge rejected this contention, stating that the imposition of additional income-tax on dividends was not ultra vires unless it was found to be a disguised tax on agricultural income. The judge relied on the case of Mrs. Bacha F. Guzdar v. CIT, holding that income on dividends declared by a tea company and the income of a tea company could not be equated.

Applicability of Additional Income-Tax on Distributed Profits by Tea Companies
The appellants argued that additional tax, levied at a flat rate of 10%, was imposed on the amount distributed as dividends, which included agricultural income, and was therefore illegal. They contended that this tax was contrary to Rule 8 of the Income-tax Rules, 1962, which exempts 60% of the income as agricultural income. The court, however, held that Section 115-O imposes additional tax on the company and not on the shareholders, and this was not violative of the Constitution. The intention of the Government, as inferred from the Finance Minister's speech, was to levy additional tax on companies that distribute profits instead of reinvesting them.

Double Taxation Concerns
The appellants contended that the additional tax resulted in double taxation since the company was already taxed on its net income. The court negated this argument, stating that the additional tax was a separate incidence on the company for distributing profits and not a tax on the same income already taxed.

Legislative Competence of Parliament to Impose Tax on Agricultural Income
The appellants argued that since agricultural income is within the domain of the State, the Union could not levy tax on it. The court acknowledged that agricultural income is not within the legislative competence of Parliament. However, it held that the additional tax under Section 115-O was on the company's act of distributing dividends and not directly on agricultural income. Therefore, it did not violate the legislative competence of Parliament.

Proportionality and Rationality of the Tax Imposed under Section 115-O
The appellants argued that the tax was arbitrary and irrational, particularly because it required payment within 14 days of declaring or distributing dividends. The court found no irrationality in this requirement. However, the court agreed with the appellants that the additional tax should be levied only on the 40% of the income that is taxable under the Income-tax Act, not on the entire amount distributed as dividends. Thus, if a company declares Rs. 50 as dividends, additional tax should be levied on Rs. 20 (40% of Rs. 50).

Conclusion
The judgment and order of the learned single judge were set aside. The court held that Section 115-O is constitutional but clarified that the additional tax should be levied only on the taxable portion of the distributed profits. The appeals were disposed of without any order as to costs.

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