Dividend income treatment under section 18A: penal interest applies except for income-tax deemed paid on dividends under section 18(5).

Whether dividend income may be excluded under the advance-tax shortfall rule is addressed by construing the advance-tax provisions with the list of incomes subject to deduction at source and the fiction of deemed tax payment on dividends. The commentary explains that section 18(5) creates only a deemed income-tax payment in respect of dividends and therefore only that deemed income-tax may be excluded when applying the eighty per cent comparison in section 18A(6); super-tax and any tax not covered by the deemed payment remain within the advance-tax computation. Operatively, penal interest under section 18A(6) is payable to the extent the deemed payment does not cover tax on dividends.

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Issues: Whether dividend income of a resident assessee falls within the scope of section 18 of the Income-tax Act for the purposes of section 18A, and whether the assessee is liable to pay penal interest under section 18A(6) for excluding dividend income (or part thereof) from his advance-tax estimate.

Analysis: Section 18A(1) requires advance payment of tax in respect of income for which provision is not made under section 18 for deduction of income-tax at source; section 18A(2) permits an assessee called upon to pay advance tax to submit his own estimate; section 18A(6) makes an assessee liable to pay penal interest where tax paid on the basis of such estimate is less than eighty per cent of the tax determined on regular assessment, "so far as such tax relates to income to which the provisions of section 18 do not apply." Section 18 categorically lists heads of income subject to deduction at source (sub-sections (2) to (3D)) and separately provides in section 18(5) that the amount by which dividend is grossed up under section 16(2) shall be treated as payment of income-tax on behalf of the shareholder (a fiction applying only to income-tax, not super-tax). Reading section 18A(6) in context with subsections (1) and (2) shows the eighty per cent comparison must be applied between tax paid on the assessee's estimate and tax determined on regular assessment after excluding from the latter the amount of tax that relates to income covered by section 18 (i.e., tax deducted at source or tax to be treated as paid by operation of section 18). Because section 18(5) effects only a deemed payment of income-tax (not super-tax) in respect of dividends, the exclusion under section 18A(6) can extend only to that amount of income-tax so deemed paid, and not to super-tax on dividends; consequently dividend income cannot be wholly excluded from the computation under section 18A(6).

Conclusion: The assessee is liable to pay penal interest under section 18A(6) in respect of dividend income to the extent that section 18(5) does not operate (i.e., super-tax and any tax not covered by the deemed payment). In favour of Revenue.

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