Dividend income of assessee-trust not taxable u/ss 10(34) proviso and 115BBDA; addition deleted on appeal

ITAT Delhi allowed the assessee-trust's appeal and deleted the addition made on account of dividend income. It held that the amendment to section 10(34) read with section 115BBDA, introduced by Finance Act 2016, applies only to specified assessees, namely individual, HUF and firm, and not to trusts. Consequently, the dividend income received by the assessee-trust for the relevant assessment year could not be taxed under section 115BBDA, and the proviso to section 10(34) was inapplicable. The CIT(A)'s order treating the dividend as taxable was set aside.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether dividend income received in the relevant year by a trust registered under section 12A is exempt under section 10(34) or taxable in view of the first proviso to section 10(34) inserted by the Finance Act, 2016.

1.2 If the dividend income is taxable, whether section 115BBDA, inserted by the Finance Act, 2016 with effect from 1 April 2017, applies to such dividend income in the hands of a trust.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of the first proviso to section 10(34) to dividend income of the relevant assessment year

Legal framework

2.1 The first proviso to section 10(34), inserted by clause 7(iv) of the Finance Act, 2016 with effect from 1 April 2017, provides that nothing in clause (34) applies to any income by way of dividend chargeable to tax in accordance with section 115BBDA.

2.2 Clause 50 of the Finance Bill, 2016 inserted section 115BBDA "with effect from the 1st day of April, 2017". Notes on Clauses and the Memorandum explaining the Finance Bill, 2016 state that the amendments to section 10(34) and insertion of section 115BBDA "will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years."

Interpretation and reasoning

2.3 The Tribunal noted that the legislative material (Finance Bill clauses, Notes on Clauses and Memorandum) clearly specifies that the amendment to section 10(34) and the insertion of section 115BBDA apply from assessment year 2017-18 onwards.

2.4 Accordingly, for the assessment year under consideration (2017-18), the first proviso to section 10(34) is operative; however, its scope is confined to dividend income "chargeable to tax in accordance with the provisions of section 115BBDA".

Conclusions

2.5 The amendment to section 10(34) by insertion of the first proviso is applicable from assessment year 2017-18, but it operates only in cases where dividend is chargeable under section 115BBDA.

Issue 2: Applicability of section 115BBDA to a trust and consequent taxability of dividend income

Legal framework

2.6 Section 115BBDA(1), as inserted, applies where the total income of an assessee, "being an individual, Hindu undivided family or a firm, resident in India," includes dividend income exceeding ten lakh rupees. Such dividend is taxable at 10% on gross basis, with no deduction for expenditure or loss under section 115BBDA(2). "Dividends" is defined by reference to section 2(22) (excluding sub-clause (e)).

Interpretation and reasoning

2.7 The Tribunal observed that the category of assessees covered by section 115BBDA is expressly restricted to "an individual, Hindu undivided family or a firm, resident in India." A trust is not included within this specified class of assessees.

2.8 Since the operation of the first proviso to section 10(34) is linked to dividend income "chargeable to tax in accordance with the provisions of section 115BBDA," and section 115BBDA itself does not apply to a trust, the condition for triggering the proviso is not satisfied in the case of the assessee trust.

2.9 Consequently, the Tribunal held that, in the case of a trust, the first proviso to section 10(34) inserted by the Finance Act, 2016 cannot be invoked by importing section 115BBDA, as the charging provision (section 115BBDA) is inapplicable to such an assessee.

Conclusions

2.10 Section 115BBDA applies only to individuals, HUFs and firms resident in India and does not apply to a trust.

2.11 As section 115BBDA is inapplicable to a trust, the first proviso to section 10(34) does not operate to withdraw the exemption in respect of the trust's dividend income.

2.12 The dividend income received by the assessee trust in the relevant assessment year remains exempt under section 10(34); the action of treating the dividend as taxable and applying section 115BBDA was contrary to section 10(34) read with section 115BBDA.

2.13 The addition made on account of dividend income was deleted and the grounds of appeal on this issue were allowed.

---