UNION OF INDIA V. TATA TEA (SUPREME COURT): Dividend Distribution Tax u/s 115-O of Income tax Act, 1961 is levied in respect of the dividend declared out of agricultural income


Issue:
Can dividend distribution tax under Section 115-O of Income tax Act, 1961 be levied in respect of the dividend declared out of agricultural income?


Facts of the case:

1. The petitioner is a tea company engaged in cultivating and processing tea in its factory for marketing.

2. The cultivation of tea is an agricultural process while the processing of tea in the factory is an industrial process.

3. The petitioners contend that when the company distributes dividend, it is taxed under Section 115-O. The tax on dividend declared by it in this case is nothing but a tax on agricultural income. The legislative competence for taxing agricultural income lies with the State Government and not the Central Government.

Supreme Court’s Decision:

1. When dividend is declared to be distributed and paid to a company’s shareholders it is not impressed with character of the source of its income.

2. Dividend is derived from the investment made in the company’s shares and the foundation rests on the contractual relations between the company and the shareholder.

3. Dividend is not ‘revenue derived from land’ and hence cannot be termed as agricultural income in the hands of a shareholder.

4. Hence, despite the petitioner’s company being involved in agricultural activities, in the shareholder’s hands, the income is only dividend and not agricultural income.

When dividend is declared to be distributed and paid to a company’s shareholders, it is not impressed with character of the source of its income. Section 115-O is within the competence of the Union Parliament and therefore dividend distribution tax can be levied in respect of the entire dividend declared and distributed by a tea company.

Post a Comment

0 Comments