9911796707
TMI Blog2007 (6) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... areholder. Petitioner No.1 owns several tea estates within the State of Assam, wherein it produces green tea leaves by agricultural process and manufactures black tea therefrom in each of its tea estates and sells it in the market. The petitioner also purchases green tea leaves from other tea estates and manufactures black tea and derives income therefrom. Petitioner No.1 is an assessee under the Income-tax Act and necessary assessments have been completed up to the assessment year 1997-98, it duly filed all the returns up to the assessment year 1999- 2000 and paid all taxes either by way of advance tax or by way of tax deducted at source and/or on self-assessment and/or on the basis of demand after finalization of assessments and since the income of the petitioner company is a composite one all the returns showing the income and all the taxes on the said income were paid on the income determined as per rule 8 of the Income-tax Rules, 1962. It is further pleaded that petitioner No.1 is also an assessee under the Assam Agricultural Income-tax Act, 1939, and duly filed returns before the Assam agricultural income-tax authority up to the assessment year 1999-2000. The petitioner-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x payable by it on 60 per cent. of the composite income of Rs. 15,18,78,266 and the total agricultural income-tax payable after necessary calculation amounting to Rs. 4,08,82,977 was duly paid either by way of advance tax or by way of tax deducted at source and/or on self-assessment. The petitioner-company having paid some excess amount, it claimed refund of such amount, in the return so filed. Similarly for the financial year 1998-99, relevant for the assessment year 1999-2000, the income derived from the sale of tea grown and manufactured was Rs. 33,55,02,961,40 per cent. of which Rs. 13,41,01,184 being the income assessable under the Act and 60 per cent. of the said income was Rs. 20,13,01,777 being agricultural income assessable under the Agricultural Income-tax Act aggregated at Rs. 12,17,96,200 with interest paid either by way of advance tax or by way of tax deducted at source and/or on self-assessment. The petitioner-company also filed return under the Agricultural Income-tax Act for the said period declaring agricultural income being 60 per cent. of the composite income amounting to Rs. 10,82,400 claiming necessary deduction admissible under the law. The petitioner-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such income is agricultural income and the remaining portion is non-agricultural income. As per rule 8 of the Income-tax Rules, 1962, the income derived from sale of tea grown and manufactured by the seller is computed as if it is income derived from business and 40 per cent. of such income so computed shall be deemed to be non-agricultural income liable to pay income-tax and the remaining balance of 60 per cent. of the income so computed is to be treated as agricultural income which can be taxed only by the State Legislature under the agricultural income-tax. Parliament has no competence, authority or jurisdiction either to legislate or to impose any tax with respect to such agricultural income. The petitioners have further pleaded that Parliament has no legislative competence to levy additional income-tax upon dividend paid from past agricultural income paid by them and, as such, the said provision of the Act is not a valid piece of legislation legislating on a subject not falling under the Union List and, therefore, is liable to be struck down as ultra vires. Consequently, the petitioners claim for withdrawal of all the levies of additional income-tax for the financial years 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idend paid by a company having certain amount of its income from agriculture, or in other words whether the provisions of section 115-O(1) and section 115-O(3) of the Income-tax Act is an invalid piece of legislation, having been enacted without having any legislative competence of Parliament. Juxtaposing the submissions countenanced by learned counsel for the parties, it further requires to be gone into as to whether the dividends paid by the petitioner-company can be treated as an income paid by the petitioner out of the part of income derived from the agricultural income. For ready and handy reference, the impugned provisions of section 115-O as introduced by the Finance Act, 1997, are quoted hereinbelow. "Section 115-O : Tax on distributed profits of domestic companies.-(1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of June, 1997, whether out of current o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of bonus, to the extent to which the company possesses accumulated profits whether capitalized or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalized or not; (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent. of the voting power, or to any concern in which such shareholder i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r revenue derived from land which is situated in India and is used for agricultural purposes, any income derived from such land by agriculture or the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market or the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause and any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on. On analysis of the incidence of the agricultural income to be fallen under jurisdictional authority of the State Legislature under entry 46 of the State List for enactment any tax relating thereto, such agricultural income must come within the four comers of the definition of agricultu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of dividends or otherwise. In fact and truth dividend is derived from the investment made in the shares of the company and the foundation of it rests on the contractual relations between the company and the shareholder. Dividend is not derived by a shareholder by his direct relationship with the land. There can be no doubt that the initial source which has produced the revenue is land used for agricultural purposes but to give to the words 'revenue derived from land' the unrestricted meaning apart from its direct association or relation with the land, would be quite unwarranted. For example, the proposition that a creditor advancing money or interest to an agriculturist and receiving interest out of the produce of the lands in the hands of the agriculturist can claim exemption of tax upon the ground that it is agricultural income within the meaning of section 4, sub-section (3) (viii), is hardly statable. The policy of the Act as gathered from the various sub-clauses of section 2(1) appears to be to exempt agricultural income from the purview of the Income-tax Act. The object appears to be not to subject to tax either the actual tiller of the soil or any other person getting land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on a passage in Buckley's Companies Act where the etymological meaning of dividend is given as dividendum, the total divisible sum but in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient. This statement does not justify the contention that shareholders are owners of a divisible sum or that they are owners of the property of the company. The proper approach to the solution of the question is to concentrate on the plain words of the definition of agricultural income which connects in no uncertain language revenue with the land from which it directly springs and a stray observation in a case which has no bearing upon the present question does not advance the solution of the question. There is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that it is impossible to say that the additional income tax was properly levied upon the total income, because what was actually taxed was never a part of the total income of the previous year. But if we analyse the provision of section 115-O of the Act, it demonstrates a different picture. As indicated earlier, amended section 115-O(1) starts with a non obstante clause and the dividend paid by the company to be subjected to additional income-tax is either from current or accumulated profits which was not the case before the apex court in Khatau Makanji Spg. and Wvg. Co. Ltd. [1960] 40 ITR 189. The judgment rendered by the apex court is in a different context than that of which we are now seized. Accordingly, the ratio of the aforesaid case is not applicable in the present case. The next case relied on by the petitioners is Tata Tea Ltd. v. State of West Bengal [1988] 173 ITR 18 (SC), to show that the profits earned from the income of a tea estate amounts to agricultural income and if a company suffers loss in a particular year and distributed dividend on the basis of earlier reserves the same cannot be subjected to additional tax as sought to be made as that would amount t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract between the company and the shareholders and the statutory declaration of a dividend at the general meeting of the shareholders. The legal position is that the articles of association bind the company and the shareholders as a statutory covenant, and the immediate and effective source of the dividend is the statutory covenant and not the agricultural operation carried on by the company. It may be that the source of the dividend is the agricultural operation of the company in the ultimate sense but in testing whether the income is agricultural within the meaning of section 2(1) of the Act we must look not to the ultimate or remote source of the income but to the immediate and effective source. This view is borne out by the decision of the judicial committee in CIT v. Kamakhaya Narayan Singh (Raja Bahadur) [1948] 16 ITR 325." The court further reiterated similar principle of law declared by the Judicial Committee holding that: "The same principle is implicit in the decision of the judicial committee in Premier Construction Co. Ltd. v. CIT [1948] 16 ITR 380 (PC). In that case a managing agent was remunerated at 10 per cent. on the annual profits of the company. It was admitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chettiar v. CIT reported in [1959] 35 ITR 322 (Mad). A similar view has been taken by the Madras High Court also in the case of Peirce Leslie and Co. Ltd. v. CIT reported in [1960] 38 ITR 356 and held that the dividends received from plantation companies whose main business was agriculture cannot be said to be agricultural income entitling exemption and negated the contention of the assessee, applying the principle of Mrs. Bacha F. Guzdar [1955] 27 ITR 1. A survey of various judicial pronouncements covering the issue involved, including the ratio of Mrs. Bacha F. Guzdar [1955] 27 ITR 1 as rendered by the apex court, it is no longer res integra that such dividend income though received out of agricultural income does not fall under the category of "agricultural income" within the meaning of law. The constitutional validity of section 115-O of the Act having been challenged by the petitioners assailing the legislative competence of Parliament to enact on the subject covering the dividend income being distributed out of the income derived from agricultural income and the unanimous judicial pronouncement including that of the apex court, as referred to above, having depicted a c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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