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TMI Blog2006 (7) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... income is within the domain of the State and not the Union. Hence, the Union is not empowered to levy tax on agricultural income which is within the domain of the State. In the case of tea companies 60 per cent, of the income is considered to be agricultural income and exempt from payment of income-tax. As such the tea companies are required to pay income-tax on 40 per cent, of their net income. By the Finance Bill 1997-98, the Union proposed an additional income-tax on the distributed profits in the corporate sector in case any company decides to declare dividend and thereby distributes profits amongst the shareholders. By the said Bill levy of tax on dividend in the hands of the shareholders was withdrawn. Paragraphs 100-101 of the speech of the hon'ble Finance minister on the floor as reported in [1997] 224 ITR (St.) 9, page 23 is quoted below: "100. Another area of vigorous debate over many years relates to the issue of tax on dividends. I wish to end this debate. Hence, I propose to abolish tax on dividends in the hands of the shareholder. 101. Some companies distribute exorbitant dividends. Ideally, they should retain the bulk of their profits and plough them into fresh i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n charged to tax under sub-section (1) or the tax thereon." The writ petitioners challenged the introduction of section 115-O on the ground that it was ultra vires the Constitution. Such submission of the writ petitioners were negated by the learned single judge by the judgment and order dated September 20, 2001. Judgment and order impugned: On a perusal of the judgment of the learned single judge it appears to us that the learned single judge rejected the contentions of the appellants to the extent that imposition of additional income-tax on the dividend was not ultra vires unless it was found that such tax was a tax upon agricultural income in disguise. The learned judge held that income on dividend declared by a tea company and income of a tea company could not be equated. His Lordship relied upon the case of Mrs. Bacha F. Guzdar v. CIT reported in [1955] 27 ITR 1 (SC). His Lordship dismissed the writ petition mainly relying on the principle laid down in the Bacha case [1955] 27 ITR 1 (SC). His Lordship also negated the submission of the writ petitioners that levy of such additional income-tax had, in fact, frustrated the object of the Legislature to exempt the shareholders f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Kerala [1963] 48 ITR (SC) 83; (v) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC); and (vi) Tata Tea Ltd. v. State of West Bengal [1988] 173 ITR 18 (SC). Contention of the Revenue: Mr. Tapas Hazra, learned counsel appearing for the respondents, contended that imposition of additional income-tax was permitted by the Constitution. The Union was within its power to impose such additional tax on the assessee. The income from dividend could not have any nexus with agricultural income or industrial income. Hence, the learned judge was right in dismissing the writ petition relying on Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC). Law as decided in precedents: On a plain reading of the decisions cited before us our understanding of the law is as follows: Agricultural income was not within the purview of legislative competence of Parliament. In the case of tea companies to avoid complication in accounting procedure rule 8 of the Income-tax Rules provided for a taxing formula suggesting exemption of 60 per cent, of the net income as agricultural income and the rest 40 per cent, as industrial income on which tax is to be levied. Income of a tea company and income of a shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his additional tax is found to have been put on any agricultural income it is liable to be struck down. In this back drop, let us examine section 115-O. As we have observed earlier, additional tax per se was not violative of the provisions of the Constitution. It is for the Union to impose income-tax upon the assessee. Similarly it has power to impose additional tax too. On a grammatical construction of this section it would appear that the tax was levied on the company and not on the shareholder. Hence, his Lordship's decision relying on Mrs. Bacha F. Guzdar case [1955] 27 ITR 1 (SC) was not the correct proposition of law. Under rule 8 of the Income-tax Rules the net income of the tea companies for the purpose of the Income-tax Act is 40 per cent, of the total income meaning thereby "X" company having various industrial and commercial activities except tea growing and manufacturing would have to pay tax at the prescribed rate on the total net income whereas "Y" company being a tea company despite having other activities, would pay tax on 40 per cent, of the total net income. A tea company is liable to pay tax at the prescribed rate on 40 per cent. total net income. If there is a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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