2019 (1) TMI 1144 - HC - Income Tax

Court Upholds Tax Law Interpretation on Differential Treatment for Residents vs. Non-Residents

Rajan Bhatia Versus Central Board of Direct Taxes & Anr.

The court dismissed the writ petition challenging the constitutional validity of the proviso to Section 10(34) of the Income Tax Act. It upheld the ... Assessment of dividend income - Proviso to Section 10(34) read and along-with with the provisions of Section 115BBDA - hostile discrimination between a resident assessee and a non-resident assessee - Held that:- Government has the right to identify the persons who have to be taxed. Legislature and executive enjoy greater latitude in the field of tax and economic legislation because of the complexities involved as compared to laws touching civil rights such as freedom of speech, religion etc. Taxation invariably is a matter of policy and the court is not to examine and comment on the wisdom of such decisions. Further, there is a presumption in favour of constitutional validity of law made by the Parliament or State Legislature. Taxation statutes are normally not struck down on the ground of under-classification Companies have to pay dividend tax whenever they pay dividend to the shareholders. This would explain and justify the reason why companies have been left out from the purview of Section 115BBDA. If companies were liable to pay tax under this section, it would have led to cascading effect when dividend is finally paid to the shareholders, be it, an individual, HUF or a firm i.e. the ‘specified assessee’ who are liable to pay tax under Clause (a) to Section 115BBDA of the Act. Similarly, the argument that non-residents have been left-out is an argument of under-classification. Non-residents who invest in India contribute and help in growth of industrialization, job creation and economic progress. Non-residents have options to invest in different countries. Consequently, the Legislature/Executive as a matter of policy decide how and in what manner non-residents should be taxed. Non-residents can be treated differently for the reason that they are residents of foreign states and not residents of India. Taxation at source principle may not be applied to non-residents. Non-residents are liable to pay tax in the country of their residence. Taxation regime applicable to non-residents need not identical to that applicable to residents. Issues:1. Challenge to the constitutional validity of the proviso to Section 10(34) of the Income Tax Act, 1961.2. Interpretation of Section 115BBDA of the Income Tax Act.3. Allegation of hostile discrimination between resident and non-resident assessees.4. Exclusion of companies from the purview of Section 115BBDA.5. Argument of under-classification regarding non-resident assessees.Issue 1: Challenge to Constitutional Validity of Proviso to Section 10(34):The petitioner challenged the constitutional validity of the proviso to Section 10(34) of the Income Tax Act, arguing that it was arbitrary, ultra vires, and violated Article 14 of the Constitution of India. The proviso gives precedence to Section 115BBDA over Section 10(34), impacting the taxation of dividend income.Issue 2: Interpretation of Section 115BBDA:Section 115BBDA imposes a tax on specified resident assessees with dividend income exceeding ten lakh rupees. The section outlines the calculation of income tax payable on such dividends, emphasizing that the tax rate of 10% applies only to dividend income exceeding the threshold amount. The court clarified the provisions and explained the impact of the amendment on the scope of specified assessees under the section.Issue 3: Allegation of Hostile Discrimination:The petitioner alleged hostile discrimination between resident and non-resident assessees, contending that the provision only applied to residents. However, the court held that differential treatment based on residency status is permissible in tax legislation and does not violate Article 14 of the Constitution.Issue 4: Exclusion of Companies from Section 115BBDA:The court justified the exclusion of companies from the purview of Section 115BBDA by highlighting the existing dividend tax obligations of companies. Including companies under this section would have resulted in a cascading tax effect when dividends are paid to shareholders, justifying their exclusion.Issue 5: Argument of Under-Classification for Non-Resident Assessees:The argument of under-classification regarding non-resident assessees was addressed by the court, emphasizing the policy discretion of the Legislature and Executive in determining the taxation of non-residents. The court explained the rationale behind treating non-residents differently for tax purposes, considering their contribution to economic growth and the principles of taxation applicable to non-residents.In conclusion, the court dismissed the writ petition, finding no merit in the challenges raised regarding the constitutional validity and application of the relevant provisions of the Income Tax Act. The judgment provided a detailed analysis of the legal issues raised, clarifying the interpretation and application of the contested sections within the framework of tax legislation and constitutional principles.