Foreign dividend taxation applies only to net income where source-country tax is deducted before accrual, with double tax relief available.

Dividend received by a resident shareholder from foreign companies was taxable in India only on the net amount after the foreign tax deducted at source, because the deducted tax component was not income that accrued or arose to the assessee under the Income-tax Act, 1961. Reading sections 5, 8, 194, 198 and 199 together, the Court treated the statutory deduction as occurring before accrual to the shareholder. On that basis, the net dividend alone formed the doubly taxed income, and relief under section 91 was available on that net amount.

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Issues: Whether the dividend income received from U.K. companies was includible in the assessee's total income on the net amount or the gross amount, and whether relief under section 91 of the Income-tax Act, 1961, was admissible on the amount so included.

Analysis: The Court held that, on the scheme of the Income-tax Act, 1961, dividend income received by a resident shareholder from a foreign company could not be treated as accruing to the shareholder in respect of the tax component that the foreign law required to be deducted at source. Sections 8, 194, 198 and 199 showed that the statutory deduction at source operated at the stage of declaration and payment, and the amount deducted was not income that accrued to the assessee. The Court reaffirmed that section 5(1)(c) covered income that actually accrued or arose, not income merely deemed to accrue. On that basis, only the net dividend was includible. Having so held, the Court further held that the net amount was the relevant doubly taxed income and relief under section 91 was available on that net amount.

Conclusion: The assessee succeeded on both questions: only the net dividend was taxable in India, and relief under section 91 was admissible on that net amount.

Final Conclusion: The reference was answered in favour of the assessee by holding that the foreign dividend was assessable only net of the foreign tax deduction and that double taxation relief was available accordingly.

Ratio Decidendi: Where foreign dividend is subjected to statutory deduction at source under the foreign taxing regime, the tax component does not accrue as income to a resident shareholder under the Indian Income-tax Act, 1961, and relief against double taxation is allowable on the net income actually included.

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