Deemed Dividend is different from ‘Dividends’: Kerala HC denies Exemption as No Additional Income Tax was paid [Read Judgment]

A division bench of the Kerala High Court in T.J. Jaikish vs. The Commissioner of Income Tax held that Deemed Dividend is different from ‘dividends’ under section 115(O) of the Income Tax Act, 1961.

The appellant was a major shareholder of PVS Hospitals Ltd and was also a major participant in a Trust which was establishing a nursing institution. The trust sought funds from the PVS Hospital Ltd for setting up the institution. The same was deemed to be the dividend under Section 2(22)(e) of the Income Tax Act, 1961. The said advanced amounts were taxed in the hands of the assessee.

The issue before the court was whether the assessee would be liable to tax for the said advance amounts at his hands. The Counsel for the appellant contended that the dividend incomes, even though the amounts advanced were deemed to be the dividend, are exempted by virtue of Section 10(34) of the Income Tax Act, 1961. He also argued that a dividend can only be taxed as the profits of the company and it cannot be taxed at the hands of the receiver. Further, he submitted that an additional tax under section 115(O) of the Act, only the dividend payee company could be taxed and the same could not be taxed at the hands of the receiver.\

The Counsel for the Respondent submitted that only those amounts, which are levied with additional income tax under Section 115(O), would be excluded under Section 10(34).

While dismissing the bench comprising of Justice K. Vinod Chandran and Justice Ashok Menon observed” Exemption available from total income, as per Section 10(34), is on ‘any income by way of dividends referred to in Section 115(O)’. Section 115(O) specifically speaks of an additional income tax being levied on the amounts disbursed as the dividend by a Company. What is exempted from being included in the total income is that amount disbursed by a Company as the dividend, which has been taxed under Section 115(O). The explanation puts it beyond any pale of doubt and excludes sub-Clause (e) of Section 2(22) from the expression of dividend for the purposes of Chapter XII-D…..Deemed dividends are not exempted since there is no payment of additional tax under Section 115(O). The revenue is right in contending that the exclusion under Section 10(34) would be applicable only for the amounts, which has suffered tax under Section 115(O)…”