AI Drafter 
TaxTMI 
TaxTMI 
2026 (4) TMI 1795
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....ssed by the Income Tax Appellate Tribunal, Bench at Pune, whereby, the appeals filed by the appellant/assessee challenging the orders passed by the Commissioner of Income Tax (Appeal), Pune (CIT)(A) are dismissed. The assessment years in question are assessment year 2014-15 to 2020-21. 2. The assessee has raised the following questions of law: I. Whether Dividend Distribution Tax ('DDT') prescribed under section 115-O of the Income-tax Act, 1961 ('Act') is in substance and effect a tax on dividend income of non-resident shareholders and where recipient shareholders are residents of United Kingdom the more beneficial rate of tax of 15% under Article 11 of DTAA between India - UK is applicable? II. Whether decision of the Special bench of Tribunal in the case of Deputy Commissioner of Income Tax Vs. Total Oil India Pvt. Ltd., ITA 6997/Mum/2019 lays down the correct law? III. Without prejudice, whether the Tribunal erred in not appreciating that since in view of Article 24(1)(b) of the DTAA between India and UK, levy of DDT was specifically covered within Article 3(1)(c) of the DTAA between India and UK, therefore, the lower rate of tax i.e., 15% (inclusi....
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....d a refund application under Section 237 of the Income Tax Act, with the respondents claiming refund of the excess DDT paid over and above rates specified in India - UK: DTAA. 8. On 19 July 2021, the assessee received a letter under Section 154 from the respondents, wherein it was stated that an option to modify the DDT payment was not available in the system. On 17 August 2021, the assessee submitted its reply to the said letter wherein the assessee stated that technical difficulty ought not to stand in the way of the assessee being granted and/in denying such refund, being entitled to the assessee. Hence, the assessee requested the concerned officer to pass an order under Section 237 of the Income Tax Act. 9. On such backdrop, on 25 November 2022, an order was passed by the respondent observing that DDT is "an additional income tax" on companies, imposed under the domestic law and it was the company which was subjected to tax under Section 115-O of the IT Act, on a transaction arising within the territorial jurisdiction of India, hence, the assessee would not be entitled to the benefit of the reduced rate of tax as per the India - UK DTAA. The relevant observations as made ....
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....domestic companies. Even section 115-O in Chapter XII-D clearly states that the additional income-tax liability there under is on the amount of profits declared, distributed or paid by a domestic company as dividend. Thus, the additional income-tax under section 115-O is a tax on profits and not a tax on dividend. The general principle of law is that a company is chargeable to tax on its profits as a distinct taxable entity and has to pay tax In discharge of its own liability and not on behalf of or as an agent of its shareholder. This position of the general law is recognized and incorporated in section 115-O and is not overridden the statutory provision" 9. Thus, the Hon'ble Court had unequivocally held that DDT'is tax on the company and not on a shareholder. A similar position has been upheld by the ITAT Mumbai in the cases of Sunash Investment Co Vs. Asstt. CIT [2007] 14 SOT 80 (Mum.-Trib.), Mohananlal M. Shal Vs. Dy. CIT [2007] 105 ITD 669 (Mum) and Asstt. CIT v. Dakshesh S. Shah [2004] 90 IT 519 (Mum). 10. The issue which now arises and needs deliberation is- 'whether a lower tax rate as specified in the treaty can be invoked when the tax is....
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.... simply means that the present application asking to refund the excess amount of DDT paid is an afterthought. 16. In view of the above facts and discussion, the application of assessee asking for refund out of excess DDT paid is hereby rejected." (emphasis supplied) 10. The assessee being aggrieved by the aforesaid orders passed by the respondent, rejecting the assessee's application under Section 237 of the IT Act, filed an appeal before the Commissioner (Appeals), inter alia contending that the denial of refund by the respondent in the impugned order dated 25 November 2022 was erroneous and unsustainable, as not only it was the case of refund being denied on technical issues in the system, but also for the reason that DDT is paid under Section 115-O of the Income Tax Act, on dividends declared and paid to the foreign shareholders. Hence such dividend paid to Vesuvius Holdings Limited (VHL), Foseco Overseas Limited (FOL) and Foseco UK Limited (FUL) was a tax on shareholders, it is the shareholders who are being taxed, who are the residents of the UK who stand covered under DTAA. It is contended that the DDT cannot be at a rate higher that what is provided unde....
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....similar issue was decided. The Hon'ble tribunal has held that DDT is an additional tax levied on the company and not the shareholder and accordingly, the benefit of the lower tax rate as per the relevant DTAA for taxation of dividend will not be available in case of non-resident shareholders, except where specifically agreed upon. The relevant para of the ITAT order is reproduce as under: "QUOTE 81. If domestic company has to enter the domain of DTAA, the countries should have agreed specifically in the DTAA to that effect. In the Treaty between India and Hungary, the Contracting States have extended the Treaty protection to the dividend distribution tax. It has been specifically provided in the protocol to the Indo Hungarian Tax Treaty that, when the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend. While making Reference, in the case of Total Oil (supra), the Id. Division Bench has made the following observations on this aspect: "(f) Wherever the Contracting States to a tax treaty intended....
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....rprises of one of the or partly owned or controlled Contracting States, the capital of which is wholly as directly or indirectly, by one or more residents of the other Contracting State The same is the position with respect of the other non-discrimination provisions. No such extension of the scope of treaty protection is envisage or demonstrated, in the present case. When the taxes are paid by the resident of India, in respect of its own liability in India, such taxation in India, in our considered view, cannot be protected or influenced by a tax treaty provision unless a specific provision exists in the related tax treaty enabling extension the treaty protection. (h) Taxation is a sovereign power of the State-collection and imposition taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State's inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside the limitations imposed by the DTAA, the State is free to levy taxes as per it own policy choices. The dividend distribution tax, not ....
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....eals for the Assessment Years 2014-15 to 2020-21 dismissing the assessee's appeals, the assessee approached the Income Tax Appellate Tribunal ("Tribunal"). The Tribunal however dismissed the appeals filed by the assessee. The Tribunal followed the decision of the Special Bench of the Tribunal in the case of Deputy Commissioner of Income Tax Vs. Total Oil India Pvt. Ltd., ITA 6997/Mum/2019. The Special bench of the Tribunal had considered the position in law as laid down on the decision of this Court in Godrej & Boyce Manufacturing Limited Vs. DCIT. 2010 SCC OnLine Bom 1174, wherein, it was held that the DDT is not a tax paid on behalf of the shareholder but was an additional tax paid by the company. It was observed that such decision of this Court was upheld by the Supreme Court in Godrej & Boyce Manufacturing Limited Vs. DCIT 2017 (7) SCC 421. It is on the aforesaid backdrop, the present appeals are filed by the assessee. Submissions on behalf of the Assessee/Appellant. 12. Mr. Sagar Tilak, learned counsel for assesssee, at the outset has submitted that the present appeals were filed on 3 March 2025, however, in the intervening period, the questions of law which have arisen ....
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....hence, not a tax on the dividend distributed to the shareholders. It is submitted that Section 115-O(1) of the IT Act explicitly states "notwithstanding anything contained in any other provision of this Act," creating an independent charge on the distributed amount in addition to regular income tax on the company's "total income". This overriding clause ensures it supersedes Section 4 of the IT Act, which broadly charges income without specifying DDT. (iii) It is next submitted that the Division Bench of this Court in Godrej and Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income Tax and Anr. (2010 SCC Online Bom 1174) (Paragraphs 42 to 55), has held that, the DDT under Section 115-O of the IT Act is an additional tax on the profits of the company, which is distributed as dividend, whereas tax in the hands of the shareholder is taxed on dividend income. This Court also held that the effect of Section 115-O of the IT Act is in addition to the income tax chargeable on the total income of a domestic company i.e., such additional income tax is charged on the profits declared distributed and/or paid. This tax which is referred to as tax on distributed profits means that it is a tax ....
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....Tax and Anr. (supra). It is submitted that the reasoning as rendered by the Division Bench in M/s. Colorcon Asia Pvt. Ltd. (supra) is also contrary to the object of introduction of amendments to Section 115-O of the IT Act as demonstrated by such materials namely the Memoranda of Understanding and the Finance Bills, as the said decision has wrongfully held that under the said provision, the incidence of tax has been shifted to the company, purely for 'administrative convenience' and the tax is in fact, a tax on the shareholders and the dividend received by them. 15. There are several other submissions made on behalf of the Revenue, which in our opinion need not be delved at this stage considering the view we intend to take, as also to avoid burdening this order. Reasons and Conclusion 16. We have given our careful consideration to the submissions as urged on behalf of the parties. 17. At the outset, we may observe that the primary contention as urged on behalf of the appellant is to the effect that the issue stands squarely covered by the decision of the Division Bench of this Court at Goa in M/s. Colorcon Asia Pvt. Ltd. (supra). On the other hand, Mr. Venkatara....
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....i) the amount of dividend, il any, paid to any person for, or on behalf of the New Pension System Trust referred to in clause (44) of section 10. Explanation- For the purposes of this sub-section, a company shall be a subsidiary of another company, if such other company, holds more than half in nominal value of the equity share capital of the company.] [1B) For the purposes of determining the tax on distributed profits payable in accordance with this section, any amount by way of dividends referred to in sub-section (1) as reduced by the amount referred to in sub-section (1A) [hereafter referred to as net distributed profits), shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits:] [Provided that this sub-section shall not apply in respect of dividend referred to in sub-clause (e) of clause (22) of section 2.] (2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on distributed profits under sub-section (1) shall be payable ....
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....the holder of whole of the nominal value of equity share capital of the company (excluding the equity share capital required to be held mandatorily by any other person in accordance with any law for the time being in force or any directions of Government or any regulatory authority, or equity share capital held by any Government or Government body); (b) "specified date" means the date of acquisition by the business trust of such holding as is referred to in clause (a).] "[(8) Notwithstanding anything contained in this section, no tax on distributed profits shall be chargeable in respect of the total income of a company, being a unit of an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2017, out of its current income "[or income accumulated as a unit of International Financial Services Centre after the 1st day of April, 2017], either in the hands of the company or the person receiving such dividend. Explanation.-For the purposes of this sub....
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....thereon. Thus, on a plain applicability of the provision, it is clear that dividend distribution tax ("DDT") is a tax on the company and not on a shareholder. It is also not a tax which is paid by the company on behalf of the shareholders, nor does the company acts as an agent of the shareholder in paying the tax as provided for in these special provisions as contained in Chapter XII-D, which provides for tax on distributed profits of domestic companies. 22. There appears to be nothing in the provision to indicate that the operation of Section 115-O in any manner is either related and/or is controlled by the DTAA. Also the provisions of Section 115-O, when it concerns the rate of tax, we do not find in such provision, that the legislature intended to include the operation of the DTAA, and more particularly as contained in Article 11 of the DTAA in question, which relates to tax on dividend income and not relating to tax on distribution of profits by way of dividend by a company. Thus, insofar as the charging of such tax under Section 115-O is concerned, the DTAA appears to have no application. It is also required to be borne in mind that once the company declaring dividend has p....
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....-O and 115R and is collected from the payers. This method of collection had been adopted by the Legislature in the interest of efficiency and to avoid paper work. The exemption from tax under Section 10(33) in the hands of shareholders/unit holders was enacted to obviate a double taxation of the same stream of income, once in the hands of the payer and thereafter in the hands of the recipient. Section 10(33) was enacted because tax on dividend has already been collected from the dividend paying Company. There is a specific charge independent of the Company's liability to pay tax under Section 4. The relevant observations as made by the Court are required to be noted, which reads thus: "35. The submission which has been urged on behalf of the assessee is that Section 14A has no application either to dividend income or to income from mutual funds. The submission proceeds on the basis that the words "in relation to income which does not form part of the total income under this Act" can have no application to dividend income from shares or to income from mutual funds for the reason that such income is not exempt from income tax, but is subject to tax under Section 115-O an....
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....d income received in respect of the units of a mutual fund specified in clause 23(b) shall not be included in computing the total income of any person for the previous year). Plainly dividend income and income from mutual funds are incomes which by virtue of the provisions of Section 10, do not form part of the total income under the Act. Expenditure incurred in relation to the earning of such income has to be disallowed under Section 14A. 40. The submission which has been urged on behalf of the assessee is that the expression "income which does not form part of the total income" under the Act should be interpreted to mean income which is exempt from tax, On this hypothesis, it has been urged that Section 14A will not apply to dividend income because the Revenue has already received its share of tax. 41. The submission cannot be accepted. The expression "income which does not form part of the total income" under the Act must receive its plain and grammatical construction. Such income is income which is not includible in computing the total income of the assessee under the provisions of the Act for a previous year. Now it is trite law that under the Act, "it is inc....
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.... sub-section (1) of Section 115-O is not on income by way of dividend in the hands of the shareholder. The additional income-tax payable on profits of a domestic company under Section 115-O is not a tax on dividend. 43. Section 115-O provides that a domestic company which declares, distributes or pays dividend out of current or accumulated profits, shall, apart from paying tax on its total income, pay additional income-tax on the amount of profits declared, distributed or paid as dividend or after 1 April 2003. 44. To illustrate, if Rs. 1,000/- is the total income of a domestic company and out of the total income of Rs. 1,000/- Rs. 300/- is declared, distributed or paid as dividend, then that domestic company is liable to pay income tax on the total income of Rs. 1,000/- at the rate specified under the relevant Finance Act and is further liable to pay additional income-tax at the rate prescribed under Section 115-O on the amount of profits declared, distributed or paid as dividend. 45. Section 115-O has been enacted with a view to exempt dividend income. Prior to the insertion of Section 115-O, domestic companies were liable to pay tax on the total income....
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....x under sub-section (1) of Section 115-O or the tax thereon. Hence, viewed from the perspective of Section 115-O as well as Section 14A, it is evident that the tax on distributed profits is a charge on the Company. The Company is chargeable to tax on its profits as a distinct taxable entity. It does not do so on behalf of the shareholder. The Company does not act as an agent of the shareholder in paying the tax under Section 115-O. In the hands of the recipient shareholder dividend does not form part of the total income. On the contrary, Section 10(33) clearly evinces parliamentary intent that incomes from dividend (and from mutual funds) are not includible in the total income. 51. We have also been fortified in the conclusion which we have drawn, by the judgment of the Supreme Court in Walfort (supra). The Supreme Court has in the following observation expressly held that since dividend income does not form part of the total income, the expenditure that is incurred in the earning of such income cannot be allowed even though it is of a nature specified in Sections 15 to 59. 55. In order to conclude the discussion on this aspect of the case, we would proceed to rec....
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.... hands of the shareholders because the character of the income in the hands of a Company and in the hands of a shareholder is totally different. Profits in the hands of a company would be business income, whereas, the said amounts when distributed as dividend, would constitute dividend income in the hands of the shareholders. In such a case, the liability on the Company is on profits of business income, where as the tax liability on the shareholder would be on the dividend income. The legislature has chosen to exempt tax o n dividend income and has chosen to impose additional tax on profits distributed as dividend. Therefore, the tax as well as additional tax are taxes levied on a domestic company on its profits and it cannot be said that the regular / normal tax is levied on profits and the additional tax is levied on the dividend. When Section 115-O specifically states that the additional tax is on the profits distributed as dividend, there is no reason to hold that the additional income-tax is a tax on dividend. (d) Income-tax is charged on the income earned by an assessee. When profits are distributed as dividend, there is no income earned by a domestic company and con....
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....of the Company. 25. The decision of the Division Bench in Godrej and Boyce Mfg. Co. Ltd. was assailed before the Supreme Court in Godrej & Boyce Mfg. Co. Ltd. vs. Deputy Commissioner of Income-tax and Anr.(supra). The Supreme Court noted the issue which had arisen for determination when it observed in paragraph 2 of its judgment that the appeal relates to the admissibility or otherwise of deduction of expenditure incurred in earning dividend income which is not includible in the total income of the assessee by virtue of the provisions of Section 10(33) of the Income Tax Act, 1961as in force during the relevant Assessment Year 2002-2003. Paragraph 2 reads thus: 2. The issue in the present appeal relates to the admissibility or otherwise of deduction of expenditure incurred in earning dividend income which is not includible in the total income of the Assessee by virtue of the provisions of Section 10(33) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") as in force during the relevant Assessment Year i.e. 2002-2003." 26. In paragraph 8 of the decision, the Supreme Court noted that the High Court had inter alia held that Section 14A of the Act [Section ....
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....x is payable under Section 115-O of the Act and income on units of mutual funds on which tax is payable under Section 115-R. (b) Whatever be the view on the legal aspects, whether on the facts and in the circumstances of the Appellant's case and bearing in mind the unanimous findings of the lower authorities over a considerable period of time (which were accepted by the Revenue) there could at all be any question of the provisions of Section 14A in the appellant's case." 27. The Supreme Court dealing with the provisions of Section 115-O did not disturb as to what was held by the Division Bench of this Court in Godrej & Boyce Mfg. Co. Ltd. (supra) as clearly seen from the observations of the Supreme Court in paragraph 9, 30, 31 and 34, which read thus: "9. Aggrieved, the instant appeal has been filed raising two questions in the main which have been summarised by the appellant, and we may say accurately, as follows: "(a) Irrespective of the factual position and findings in the case of the appellant, whether the phrase "income which does not form part of total income under this Act" appearing in Section 14-A includes within its scope dividend inc....
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.... not includible in the total income of the assessee. 31. So far as the provisions of Section 115-O of the Act are concerned, even if it is assumed that the additional income tax under the aforesaid provision is on the dividend and not on the distributed profits of the dividend paying company, no material difference to the applicability of Section 14A would arise. Sub-sections (4) and (5) of Section 115-O of the Act makes it very clear that the further benefit of such payments cannot be claimed either by the dividend paying company or by the recipient assessee. The provisions of Sections 194, 195, 196C and 199 of the Act, quoted above, would further fortify the fact that the dividend income under Section 115-O of the Act is a special category of income which has been treated differently by the Act making the same non-includible in the total income of the recipient assessee as tax thereon had already been paid by the dividend distributing company. The other species of dividend income which attracts levy of income tax at the hands of the recipient assessee has been treated differently and made liable to tax under the aforesaid provisions of the Act. In fact, if the argument i....
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....as impugned) when it answered the questions to the following effect: (i) The Dividend Distribution Tax (DDT) paid by the Colorcon Asia Pvt. Ltd./appellant to its shareholder was squarely outside the scope of DTAA between India and the United Kingdom as held by the Special bench of the Tribunal in Total Oil Pvt. Ltd. without dealing with the detailed distinctions filed by the appellant. (ii) DDT does not fall within "Taxes covered" under Article 2 of India - UK DTAA. (iii) Colorcon's contention to restrict the tax rate of DDT to the extent of withholding tax rate on dividend income under Article 11 of the India-UK DTAA has no merit. 31. In considering the challenge to the aforesaid ruling of BFAR relying on the India-UK DTAA, Colorcon asserted that under the statutory scheme contained in the IT Act, which defines "Tax to be income tax chargeable " to include the dividend income, the term "dividend" was defined under Section 2(22) to include any distribution by a company of accumulated profits to its shareholders under the provisions of Section 115-O (introduced by the Finance Act, 1997), the incidence of collection of tax on dividend from shareholders w....
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.... personal services), as may be the case, shall apply. 5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment situated in that other State, nor subject the company's undistributed profits to a tax on undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that other State. 6. No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.]" (emphasis supplied) 32. The assertion of Colorcon Asia Pvt. Ltd. (supra) was by juxtaposing the effect of Section 90 of the Income Tax Act read with the cons....
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....er the DTAA cannot be denied to Colorcon/appellant, hence, the situation would be governed under Article 11 of the DTAA. 33. The department resisted the aforesaid contention of Colorcon and supported the impugned ruling of the BFAR inter alia contending that Colorcon had paid dividend to Colorcon UK as also paid Dividend Distribution Tax (DDT) at the rate specified under Section 115-O of the IT Act for FYs in question. It was contended that in the context of DTAA in question, the dividend distribution tax was explicitly excluded from the scope of taxes covered under the agreement. It was contended that since DDT is not classified under the heading "Tax", and hence the 10% withholding tax rates stipulated under Article 11(2) would not apply and the dividend would be governed by Indian Tax Laws. In supporting such contention, reliance was placed in the case of Total Oil India Private Ltd. (supra), in which after the analysis of the relevant statutory provisions, and treaties, the Special Bench of the Tribunal had reached to a conclusion that the tax paid under Section 115-O is an "additional tax" on the Domestic Company and it is not a tax in respect of non-residence income in Ind....
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....vidend it is still required to pay DDT under sub-section (2), which make it clear that it is not a tax on profits of the company, but is tax on dividend. From the above alchemy of Section 115-O, shifting the incidence of DDT, in light of the definition of the term 'Dividend' under the Income Tax Act with the legislative history referred to above, the provision in form of Section 115-O, being amended on more than one occasion, we safely lead to an inference that DDT is a tax on dividend, which is income of the shareholder, but its incidence has been shifted to the company purely for administrative convenience though there is no change in the substantive Rule or concept of 'Dividend'. Since under the Income Tax Act, DDT is levied on Dividend distributed company, which amounts to income in the hands of shareholder and being "additional tax" it covered within the definition of Tax as defined in Section 2 (43) of the Act and since it is covered by Charging Section 4, it must be necessarily subservient to the provisions of the Act which include Section 90." 34. The Division bench referring to Godrej & Boyce Mfg. Co. Ltd. (supra) held that the reliance on such decision would n....
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....ng contained in any other provisions of this Act and subject to the provisions of this section", stipulates that "in addition to the income-tax chargeable" in respect of the total income of a domestic company, for any assessment year, "any amount declared, distributed or paid" by such company by way of dividend (whether interim or otherwise), whether out of current or accumulated profits shall be charged to additional income-tax (referred to as tax on distributed profits) in the manner a provided in the said provision and more particularly Section 115-O(3), providing for "The principal officer of the domestic company and the company" shall be liable to pay the tax on distributed profits, to the credit of the Central Government within fourteen days from the date of declaration of any dividend, distribution of any dividend, payment of any dividend, whichever is earliest. Further, in our opinion the Division Bench of this Court in Godrej & Boyce Mfg. Co. Ltd. (supra), has categorically held that payment of tax by domestic company under Section 115-O(1) was an additional income-tax on profits declared, distributed or paid being, is a charge on a component of the profits of the company.....
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....trary to this decision of the Division Bench. Even in such case, the Division Bench of this Court has held that the tax under sub-section (1) of Section 115-O of the IT Act is on the company's profits and more specifically on that part of the profits which is declared, distributed or paid by way of dividend. It was held that such charge is not on income by way of dividend in the shareholder's hands and hence the additional income-tax payable on profits of a domestic company under Section 115-O of the Act is not a tax on dividend. It was also held that thus the amount distributed or paid by way of dividend falls in the category of income, profits or gains derived. The following observations as made by the Division Bench are required to be noted, which read thus: "14. Dividend is defined in Section 2(22) of the IT Act to, inter alia, include any distribution by a company of accumulated profits, which entails releasing any assets by the company to its shareholders. In terms of Explanation 2 to Section 2(22) of the said Act, the expression accumulated profits includes all company profits up to the date of distribution or payment thereof. It appears that the transfer of profits....