High Court affirms Tribunal's decision on tax burden for dividends diverted to State Govt.

The High Court upheld the Tribunal's decision, ruling in favor of the assessee. It held that the tax deducted at source on dividends diverted to the State Government pertained to the assessee, as the State Government was not assessable under the Income-tax Act. The Court determined that the assessee had borne the tax burden entirely, making any further tax collection futile. Consequently, the Court answered in the affirmative, favoring the assessee and ruling against the Revenue.

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Issues:
- Whether the Appellate Tribunal was right in allowing credit for tax deducted at source in respect of dividends diverted to the State Government by the assesseeRs.

Analysis:
The judgment pertains to a case where the Income-tax Appellate Tribunal referred a question of law regarding the allowance of credit for tax deducted at source on dividends diverted to the State Government by the assessee. The assessee claimed credit for the entire amount of tax deducted on dividend income, which included a portion diverted to the State Government. The Assessing Officer contended that the credit for tax deducted at source should be allowed proportionately based on the share of dividend assessable in the hands of the joint holders, i.e., the assessee and the State Government. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision.

The Tribunal, however, allowed the assessee's claim by considering the arrangement as a diversion of income, where 2/3rds of the dividends were to be diverted to the State Government and only 1/3rd was assessable in the hands of the assessee. The Tribunal reasoned that since the State Government was not assessable under the Income-tax Act, no tax was required to be deducted at source on the portion of dividend income diverted to the State Government. Therefore, the tax deducted at source on the entire dividend amount pertained to the assessee, and the burden of this tax had entirely fallen on the assessee-corporation.

The High Court, after examining the order of the Tribunal, concurred with the Tribunal's view. It noted that no tax was deductible on the dividend portion diverted to the State Government, and the entire tax deducted at source related to the dividend payable to the assessee. The Court agreed that the assessee had borne the burden of the tax amount, and even if the Revenue were to succeed, the balance amount would be refundable as no tax was deductible on the dividend payable to the State Government. Therefore, the Court held in favor of the assessee, stating that the whole exercise would be futile, and answered the question in the affirmative, favoring the assessee and ruling against the Revenue.

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