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.
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