Is Dividend Distribution Tax Levy on Distributed Profits or Dividend Income? Supreme Court to Resolve Long-Standing Ambiguity
The Bombay High Court had earlier ruled that DDT was in substance a tax on dividend income despite the statutory liability being imposed upon the distributing company.
The Supreme Court of India is set to examine whether Dividend Distribution Tax (DDT) imposed under Section 115-O of the Income Tax Act, 1961 is in the nature of a tax on distributed profits of the company or a tax on dividend income of shareholders. This particular issue has long been ambiguous and led to divergent judicial decisions over the years.
The present petition filed by the The Joint Commissioner Of Income Tax, Panji & Ors challenges an earlier judgment of the Bombay High Court at Goa in a Tax Appeal filed by respondent herein - M/s. Colorcon Asia Pvt. Ltd.
Colorcon Asia, a Goa-based wholly owned subsidiary of UK company Colorcon Limited (Colorcon UK), distributed dividends to its parent company during THE Assessment Years 2016-17 to 2019-20 and paid Dividend Distribution Tax under Section 115-O of the Income Tax Act, 1961. The cumulative dividend payout exceeded ₹100 Crore.
Colorcon Asia subsequently approached the Board for Advance Rulings - I, New Delhi (BFAR) seeking a declaration that DDT on dividends paid to its UK parent company be restricted to the 10% rate as prescribed under Article 11 of the India-UK Double Taxation Avoidance Agreement (DTAA).
The BFAR, however, rejected the plea holding that DDT was an additional income tax payable by the domestic company on distributed profits and not a tax on dividend income of shareholders, thereby placing the levy outside the scope of the India-UK DTAA.
When Colorcon approached the Bombay High Court, the BFAR ruling was reversed.
The Division Bench of Justice Bharati Dangre and Justice Nivedita P. Mehta held that although the incidence of taxation had shifted from shareholders to the distributing company for “administrative convenience”, the substantive character of the levy continued to remain a tax on dividend income of shareholders.
The High Court noted that dividends remained as income of shareholders and that DDT, being an “additional income tax” as per Section 2(43) read with Section 4 of the Income Tax Act, would necessarily be subject to Section 90 of the Act under which the treaty provisions would override domestic law to the extent that they may be more beneficial to the assessee.
The Bench ultimately concluded that DDT was in substance a tax on dividend income despite the statutory liability being imposed upon the distributing company.
The Revenue has now challenged the Bombay High Court ruling before the Supreme Court. Additional Solicitor General N. Venkataraman appeared for the Income Tax Department, while Senior Advocates Porus Kaka, V. Sridharan and Rajiv Shakdher appeared for Colorcon Asia and several intervenors.
The Supreme Court Bench of Justice Manoj Misra and Justice Manmohan framed three substantial questions of law, which included:
“Whether tax under Section 115-O on any amount declared, distributed or paid by a company by way of dividend chargeable to additional income tax is in the nature of tax on distributed profits or tax on dividend?”
The Apex Court also took note of the Bombay High Court ruling in Foseco India Ltd. Company vs. Assistant Commissioner of Income Tax (2025), where a coordinate bench of the Bombay High Court doubted the correctness of the decision in the earlier Colorcon Asia judgment and referred the issue to a larger bench.
Observing that similar disputes may be pending before several High Courts across the country, the Supreme Court directed circulation of its order to all High Courts and stated that High Courts may consider staying further proceedings involving identical issues.
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