2017 (9) TMI 1300 - SC - Income Tax

Supreme Court affirms tax on dividends not agricultural income under Income Tax Act

Union of India & Others Versus M/s. Tata Tea Co. Ltd. & Another, M/s. Apeejay Surrendra Corporate Service Ltd. And M/s George Williamson (Assam) Ltd. Versus Union of India & Others

Union of India & Others Versus M/s. Tata Tea Co. Ltd. & Another, M/s. Apeejay Surrendra Corporate Service Ltd. And M/s George Williamson (Assam) Ltd. ... Issues Involved:1. Constitutional validity of Section 115O of the Income Tax Act, 1961.2. Legislative competence of Parliament to impose additional income tax on dividends.3. Interpretation of agricultural income and its taxation.4. Application of Rule 8 of the Income Tax Rules, 1962.Issue-wise Detailed Analysis:1. Constitutional Validity of Section 115O:The primary issue in these appeals is the constitutional validity of Section 115O of the Income Tax Act, 1961, as inserted by the Finance Act, 1997. The Calcutta High Court upheld the constitutionality of Section 115O but limited the additional income tax to be charged under Section 115O to only 40% of the income taxable under the Income Tax Act. The Gauhati High Court dismissed the writ petition challenging the same provision, affirming its constitutionality.2. Legislative Competence of Parliament:The petitioners argued that Section 115O imposes additional tax on dividends distributed by companies, which includes agricultural income. They contended that Parliament lacks the legislative competence to tax agricultural income, which falls under the State Legislature's purview as per List II Entry 46 of the Seventh Schedule of the Constitution. The Union of India countered that once the dividend is declared, it no longer retains its character as agricultural income, and Parliament has full legislative competence to enact Section 115O.3. Interpretation of Agricultural Income and Its Taxation:The Court examined whether the additional tax on dividends under Section 115O encroaches upon the State's exclusive power to tax agricultural income. The Court referred to the definition of agricultural income under Article 366 and Section 2(1A) of the Income Tax Act, 1961. It also considered the principles of statutory interpretation and the doctrine of 'pith and substance' to determine whether the legislation falls within the Union List or the State List.4. Application of Rule 8 of the Income Tax Rules, 1962:The Calcutta High Court had applied Rule 8 of the Income Tax Rules, 1962, which states that income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, with 40% deemed to be liable to tax. The Court had held that the additional tax under Section 115O should only apply to 40% of the dividend income. However, the Supreme Court found that the dividend, when declared and distributed, loses its character as agricultural income and becomes taxable in the hands of the company.Conclusion:The Supreme Court upheld the legislative competence of Parliament to enact Section 115O, stating that the provision falls within the ambit of Entry 82 of List I, which covers 'taxes on income other than agricultural income.' The Court emphasized that the dividend, once declared, does not retain its character as agricultural income. Consequently, the Supreme Court allowed the appeals filed by the Union of India (Civil Appeal Nos. 9178 and 9180 of 2012) and dismissed the appeal filed by the writ petitioner (Civil Appeal No. 9179 of 2012). The judgment of the Calcutta High Court limiting the additional tax to 40% of the dividend income was set aside.