Dividend income and tax credit provisions excluded section 18A interest under the Indian Income-tax Act.

Dividend income, read with the deeming provisions in section 16(2), section 18(5) and section 49B of the Indian Income-tax Act, 1922, was treated as income in respect of which tax had in law been deducted or paid at the time of payment. On that construction, it fell outside section 18A, which applied only to income not covered by deduction at source under section 18. The Supreme Court therefore held that interest under section 18A(6) could not be levied on dividend income, and the reference was answered in favour of the assessee.

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Issues: Whether dividend income was income in respect of which provision was made under section 18 of the Indian Income-tax Act, 1922 for deduction of income-tax at the time of payment, so that section 18A would not apply and interest under section 18A(6) could not be levied.

Analysis: Section 18A applied only to income not covered by deduction of tax at source under section 18. Dividend income, though not directly covered by the ordinary deduction provisions, was brought within the statutory scheme by section 16(2), section 18(5) and section 49B. Those provisions created a legal fiction under which the tax paid by the company on the dividend was treated as tax paid on behalf of the shareholder, and the shareholder was given credit for it in assessment. The statutory scheme therefore treated the dividend as income in respect of which tax had, in law, been deducted or paid at the time of payment. On that construction, dividend income did not fall within the class of income to which section 18A applied.

Conclusion: The assessee was not liable to pay interest under section 18A(6) in respect of dividend income, and the question referred was answered in the negative in favour of the assessee.

Ratio Decidendi: Dividend income, when read with the deeming provisions governing grossing up and credit for tax paid by the company, is income in respect of which section 18 makes provision for deduction of income-tax at the time of payment, and is therefore excluded from section 18A.

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