TaxTMI 
TaxTMI 
2017 (9) TMI 1300
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....arged under Section 115O can only be on 40 per cent of income which is taxable under Income Tax Act. The Civil Appeal No. 9179 of 2012 has been filed by the writ petitioner who had also challenged the constitutional validity of Section 115O before the Gauhati High Court which writ petition has been dismissed vide judgment and order dated 22.06.2007. The Gauhati High court had also noted the judgment of Calcutta High Court dated 28.07.2006 as referred to above. All the appeals have been heard together and are being decided by this common judgment. 2. The facts giving rise to Civil Appeal No. 9178 of 2012 and 9180 of 2012 needs to be briefly noted. Several writ petitions were filed before the Calcutta High Court questioning the vires of Section 115O of the 1961 Act. The petitioner's case in the writ petition is that the petitioner is a Tea Company which cultivate tea in gardens and processes it in its own factory/plants for marketing the same. The cultivation of tea is an agricultural process although, the processing of tea in the factory is an industrial process. The agricultural income is within the legislative competence of the State and not in the legislative competence of t....
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....nch of the Gauhati High Court vide judgment dated 22.06.2007 against which, the Civil Appeal No. 9179 of 2012 has been filed by the writ petitioner. 6. We have heard, Shri S. Ganesh, learned senior counsel for the appellant in Civil Appeal No. 9179 of 2012. Shri Arijit Prasad, learned counsel has appeared on behalf of the Union of India. We also heard learned counsel appearing for the respondent in Civil Appeal No. 9178 of 2012 and Civil No. 9180 of 2012. The parties shall hereinafter be referred to as described in the respective writ petitions. 7. Learned counsel appearing for the writ petitioners submitted that Section 115O imposes additional tax on the dividend distributed by the Company which distribution arises out of the income received from agriculture, 60 per cent of the income is the agricultural income which is exempt from tax. The Parliament has no legislative competence to tax the agricultural income and Section 115O of the 1961 Act transgresses the legislative field which is assigned to the State Legislature under List II Entry 46 of Seventh Schedule of the Constitution. At the best, the amount of dividend distributed by the Company to the extent of 40 per cent on wh....
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....n the Parliament to enact Section 115O so as to impose additional income tax. The income out of which dividend is declared, distributed or paid is an agricultural income to the extent of 60%, tax on which can only be imposed by State legislature. The Parliament has transgressed its legislative power in enacting Section 115O. 12. Part XI of the Constitution of India Chapter I contains provisions relating to distribution of legislative powers. Article 246 provides for subjectmatter of laws made by the Parliament and by the Legislatures of States. Article 246 of the Constitution of India is as follows: "246. Subjectmatter of laws made by Parliament and by the Legislatures of States.( 1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the "Union List") (2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the "Concurre....
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....iven in 1961, Act of the word 'income' is an inclusive definition. The pivotal question to be answered in these appeals is as to whether the provisions of Section 115O which contains a provision imposing additional tax on the dividends which are declared, distributed or paid by a company are within the fold of legislative field covered by Entry 82 of List I or it relates to legislative field assigned to State legislature under Entry 46 List II that is tax on agricultural income. 19. For answering the above, we need to recapitulate the principles of statutory interpretation of the legislative entries contained in Seventh Schedule of the Constitution. Prior to enforcement of the Constitution, the Government of India Act, 1935 contained the Seventh Schedule containing three legislative lists, namely, List I Federal Legislative List, List II - Provincial Legislative List and List IIIConcurrent Legislative List. 20. In A.L.S.P.P.L. Subrahmanyan Chettiar vs. Muttuswami Goundan, AIR 1941 FC 47, the Federal Court had considered the principles of statutory interpretation of legislative lists contained in the Government of India Act, 1935. Madras Agriculturists Relief Act, 1938 was....
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....al that many, or even most, of the debts with which it deals are in practice evidenced by or based upon such instruments. That is an accidental circumstance which cannot affect the question. Suppose that at some later date moneylenders were to adopt a different method of evidencing the debts of those to whom they lend money; how could the validity or invalidity of the Act vary with moneylenders' practice? I am of opinion therefore that the Act cannot be challenged as invading the forbidden field of List I, for, it was not suggested that it dealt with any item in that List other than No.28." 21. The Privy Council in Prafulla Kumar Mukherjee and others vs. Bank of Commerce, Limited Khulna, Vol.74 194647 Indian Appeals 23, had considered principles of statutory interpretation and the doctrine of pith and substance. The vires of the Bengal Money Lenders Act, 1940 came for consideration. It was held that the provincial legislature was in pith and substance " money lending and money lenders". It held that legislature did not trench the legislative field earmarked for Federal legislation. The Privy Council referring to the observation of Sir Maurice Gwyer, C.J. held following: "(2)....
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....has been laid down that the entries must not be construed in a narrow and pedantic sense and that widest amplitude must be given to the language of these entries. Sometimes the entries in different lists or the same list may be found to overlap or to be in direct conflict with each other. In that event it is the duty of the court to find out its true intent and purpose and to examine the particular legislation in its 'pith and substance' to determine whether it fits in one or other of the lists. [See : Synthetics and Chemicals Ltd. v. State of U.P.; India Cement Ltd. v. State of T.N." 60. This doctrine of 'pith and substance' is applied when the legislative competence of a legislature with regard to a particular enactment is challenged with reference to the entries in the various lists i.e. a law dealing with the subject in one list is also touching on a subject in another list. In such a case, what has to be ascertained is the pith and substance of the enactment. On a scrutiny of the Act in question, if found, that the legislation is in substance one on a matter assigned to the legislature enacting that statute, then that Act as a whole must be held to be valid notwithstanding a....
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.... legislative power in exercise of which it is purported to be made." 24. As noted above Entry 82 of List I embraces entire field of "tax on income". What is excluded is only tax on agricultural income which is contained in Entry 46 of List II. Income as defined in Section 2(24) of the 1961, Act is the inclusive definition including specifically "dividend". Dividend is statutorily regulated and under the article of association of companies are required to be paid as per the Rules of the companies to the shareholders. Section 115O pertains to declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend is thus clearly covered by subject as embraced by Entry 82. The provisions of Section 115O cannot be said to be directly included in the field of tax on agricultural income. Even if for the sake of argument it is considered that the provision trenches the field covered by Entry 46 of List II, the effect is only incidental and the legislation cannot be annulled on the ground of such incidental trenching in the field of the State legislature. Looking to the nature of the provision of Section 115O and its consequences, the pith and su....
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....igh Court was noticed which was to the following effect: "2. The question referred by the Tribunal to the High Court of Judicature at Bombay was stated thus : "Whether 60% of the dividend amounting to Rs. 2,750 received by the assessee from the two Tea companies is agricultural income and as such exempt under section 4(3)(viii) of the Act." Chagla, C.J. and Tendolkar J., who heard the reference, answered the question in the negative by two separate but concurring judgments dated 28, March, 1952." 29. In paragraph 6 of the following was stated by this Court "6. In order, however, that dividend may be held to be agricultural income it will be incumbent upon the appellant to show that, within the terms of the definition, it is rent or revenue derived from land which is used for agricultural purposes. Mr. Kolah, for the appellant, contends that it is revenue derived from land because 60% of the profits of the company out of which dividends are payable are referable to the pursuit of agricultural operations on the part of the company. It is true that the agricultural process renders 60% of the profits exempt from tax in the hands of the company from land which is used for agricu....
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....its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholder. Following was stated in paragraph 3: "3...Dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholder." 31. Learned Single Judge of the Calcutta High Court relying on judgment of this Court in Mrs. Bacha F Guzdar (supra) has dismissed the writ petition. The Division Bench of the Calcutta High Court, however, held that Single Judge's decision relying on Mrs. Bacha F Guzdar (supra) was not correct preposition of law. 32. This Court in Mrs. Bacha F Guzdar (supra) was considering the nature of dividend income in the hands of shareholders. Under the Income tax Act, 1961 earlier the dividend was taxable at the hands of shareholder. By Finance Act, 1997 it was made taxable in the hand of company when additional tax was imposed. 33. This Court, however, while considering the nature of dividend in the above case held that although when the initial source which has pro....