IS DIVIDEND DECLARED AND DISTRIBUTED OUT OF AGRICULURAL INCOME LIABLE TO DIVIDEND DISTRIBUTION TAX?

FACTS OF THE CASE

TAXPAYER’S CONTENTION

  • Section 115-O of the IT Act, 1961 imposes tax on dividend distributed by the company which arises out of the income received from agriculture. 60% of the income of the taxpayer is agricultural income which is exempt income as per Rule 8
  • The Parliament has no legislative competence to tax the agricultural income. Section 115-O of the Act overrides the legislative field which is assigned to the State Legislature under List II Entry 46 of 7th Schedule of the Constitution of India.
  • To the maximum extent, the amount of dividend distributed by the company to the extent of 40% on which income tax is charged can only be subject to DDT. The parliament cannot impose tax on agricultural income

TAX DEPARTMENT’S CONTENTION

The dividend which is decided to be distributed by the company to its shareholders no longer remains an agricultural income. The company is being asked to pay additional tax on the amount of dividend distributed by it and not on its agricultural income. The Parliament has full legislative competence to enact Section 115-O of the Act.

SUPREME COURT AFFIRMATION ON CONSTITUTIONAL VALIDITY OF DDT ON COMPOSITE INCOME

  • Section 115-O pertains to declaration, distribution or payment of a dividend by domestic company and imposition of additional tax on the dividend. The Supreme Court held that dividend distributed by a company as a share of its profits declared is not impressed with the character of the profits from which it reaches the hands of the shareholder.
  • The provisions of Section 115-O of the Act are well within the competence of Parliament. To put any limitation in the said provision that additional tax can be levied only on the 40% of the dividend income shall be altering the provision of Section 115-O of the Act for which there is no warrant.

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Prepared By

Sindhu M

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Ankit C Shetty

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