Delhi High Court upholds Provisions relating to Tax on Dividend above 10 lakhs [Read Judgment]

A two-judge bench of the Delhi High Court has upheld the constitutional validity of the provisions of Section 115BBDA of the Income Tax Act, 1961. Under the said provision, the dividend received from domestic companies in excess of Rs10 lakh attracts tax at the rate of 10%.

The assessee, an individual approached the High Court challenging the provisions of Sections 10(34) and 115BBDA of the Income Tax Act. The petitioner contended that these provisions are arbitrary, ultra vires and violative of Article 14 of the Constitution. Another petition was also filed for staying operation of the aforesaid provisions generally and in particular in relation to the Assessment Year 2017-2018.

The petitioner challenged the provisions of 115BBDA of the Act on two grounds. Firstly, it does not have any base and the provision makes hostile discrimination between a resident assessee and a non-resident assessee, as the provision only applies to a resident assessee. It is also pointed out that the provision excludes from its ambit any domestic company. Prior to 14.09.2018, the provision was not applicable to the association of persons.

The bench comprising Justices Sanjiv Khanna and Anup Jairam Bhambhani observed that the contention that the provision lacks ‘base’ is founded on a misrepresentation and misreading of clause (a) of the sub-section (1) of Section 115 BBDA of the Act.

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The bench pointed out that there is no merit in the said contention as, according to the bench, clause (a) of sub-section (1) of Section 115BBDA of the Act is clear and categoric. It stipulates that where a specified assessee, who is a resident of India, has income in aggregate exceeding Rs. 10 lacs by way of dividends declared, distributed or paid by a domestic company or companies, then he/she would be liable to pay tax @ of 10% on such dividend income i.e. dividend income exceeding Rs.10 Lacs.

The bench pointed out that as per the section, the dividend income up to Rs. 10 lacs is not to be charged to tax @ 10 % under Section 115 BBDA of the Act. Dividend income of less than Rs.10 lacs continues to remain exempt under Section 10(34) of the Act.

“In taxation matters, the Government has the right to identify the persons who have to be taxed. The legislature and executive enjoy greater latitude in the field of tax and economic legislation because of the complexities involved as compared to laws touching civil rights such as freedom of speech, religion etc. Taxation invariably is a matter of policy and the court is not to examine and comment on the wisdom of such decisions. Further, there is a presumption in favor of the constitutional validity of law made by the Parliament or State Legislature,” the bench said.

“Similarly, the argument that non-residents have been left-out is an argument of under-classification. Non-residents who invest in India contribute and help in the growth of industrialization, job creation, and economic progress. Non-residents have options to invest in different countries. Consequently, the Legislature/Executive as a matter of policy decides how and in what manner non-residents should be taxed. Non-residents can be treated differently for the reason that they are residents of foreign states and not residents of India. Taxation at source principle may not be applied to non-residents. Non-residents are liable to pay tax in the country of their residence. Taxation regime applicable to non-residents need not identical to that applicable to residents,” the bench added.