A two judge bench of the Supreme Court, last week, held that levy of dividend distribution tax (DDT) on Companies having agricultural income under section 115O of the Income Tax Act is not ultra vires to the constitution as it was within the legislative competence of the Parliament.
Earlier, both the High Courts of Calcutta and Guahati has upheld the constitutional validity of these provisions. The Calcutta High Court held that the additional tax as levied by section 115O on the dividend declared, distributed or paid additional tax shall be only to the extent of 40% which is taxable income of the Tea Co.
The petitioner’s case in the writ petition is that the petitioner is a Tea Company which cultivate tea in gardens and processes it in its own factory/plants for marketing the same. The cultivation of tea is an agricultural process although, the processing of tea in the factory is an industrial process. The agricultural income is within the legislative competence of the State and not in the legislative competence of the Parliament. The petitioners contended that Section 115O imposes on the dividend distributed by the company. According to them, as per the provision, an additional income tax is levied on the portion of the composite income which represents agricultural income which is also to be made available for the distribution of dividend.
The department justified the levy on ground that it is on the dividend which is decided to be distributed by the Company to its shareholders which is not in the nature of agricultural income. It further contended that the tax is on the amount of dividend distributed by the Company, and not on the agricultural income.
Justices A K Sikri and Justice Ashok Bhushan noted that the term “income” as defined under section 2(24) of the Income Tax Act specifically includes “dividend”. Dividend is statutorily regulated and under the article of association of companies are required to be paid as per the Rules of the Companies to the shareholders.
The bench further noted that the levy under Section 115O which pertains to declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend is clearly within the legislative competence of the Parliament.
“The provisions of Section 115O cannot said to be directly included in the field of tax on agricultural income. Even if for the sake of argument it is considered that the provision trenches the field covered by Entry 46 of List II, the effect is only incidental and the legislation cannot be annulled on the ground of such incidental trenching in the field of State legislature,” the bench said.
Read the full text of the Judgment below.
