By TIOL News Service

NEW DELHI, SEPT 23, 2017: THE issue before the Apex Court is - Whether Entry 82 of the Seventh Schedule of the Constitution - 'taxes on income' - also includes tax on dividend declared by tea cultivating company. And the verdict favours the Revenue.

Facts of the case

The Assessee is a Tea Company which cultivates tea in gardens and processes it in its own factory/plants for marketing the same. The contention of the Assessee was that the cultivation of tea was an agricultural process although, the processing of tea in the factory was an industrial process. The agricultural income was within the legislative competence of the State and not in the legislative competence of the Parliament. Section 115O imposed tax on the dividend distributed by the Assessee which was nothing but imposing tax on agricultural income. The Assessee filed a Writ Petition where the vires of Section 1150 was challenged contending that the Parliament had no competence to levy income tax on agricultural income. The writ petition was dismissed by the Single Judge against which a petition was filed before the Division Bench. The Writ Court upheld the constitutionality of Section 115O, but a rider was put that additional income tax to be charged under Section 115O could only be on 40 per cent of income. This prompted the Revenue to move the Apex Court.

After hearing the parties, the Apex Court held that,

++ subclause (1) of Article 246 of the Constitution of India begins with non-obstante clause that is “Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule”. The State as per clause (3) of Article 246 “Subject to clauses (1) and (2) of Article 246 has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule”;

++ the definition of agricultural income was contained in Income tax Act, 1922. In the Income tax Act, 1961 agricultural income has now been defined in Section 2(1A). The words agricultural income as used in the legislative entries, thus, has to be given the meaning as contained in Income tax Act, 1961. The entries in the Seventh Schedule are not powers but fields of legislature. The words in the respective entries have to be given the widest scope of their meaning, each general word should extend to ancillary or subsidiary matter which can be comprehended in it. As per Entry 82, Union/Parliament, thus, has full power to legislate in the field of “taxes on income”. The subject excluded from its field are agricultural income;

++ the definition given in 1961, Act of the word 'income' is an inclusive definition. The pivotal question to be answered in these appeals is as to whether the provisions of Section 115O which contains a provision imposing additional tax on the dividends which are declared, distributed or paid by a company are within the fold of legislative field covered by Entry 82 of List I or it relates to legislative field assigned to State legislature under Entry 46 List II that is tax on agricultural income. For answering the above, one need to recapitulate the principles of statutory interpretation of the legislative entries contained in Seventh Schedule of the Constitution. Prior to enforcement of the Constitution, the Government of India Act, 1935 contained the Seventh Schedule containing three legislative lists, namely, List I - Federal Legislative List, List II – Provincial Legislative List and List III - Concurrent Legislative List;

++ entry 82 of List I embraces entire field of “tax on income”. What is excluded is only tax on agricultural income which is contained in Entry 46 of List II. Income as defined in Section 2(24) of the 1961, Act is the inclusive definition including specifically “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. Section 115O pertains to declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend is thus clearly covered by subject as embraced by Entry 82. The provisions of Section 115O cannot be 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 the State legislature. Looking to the nature of the provision of Section 115O and its consequences, the pith and substance of the legislation is clearly covered by Entry 82 of List I;

++ under the Income tax Act, 1961 earlier the dividend was taxable at the hands of shareholder. By Finance Act, 1997 it was made taxable in the hand of company when additional tax was imposed. While considering the nature of dividend in the case of Mrs. Bacha F. Guzdar, Bombay vs. Commissioner of Income Tax, Bombay, it was held that although when the initial source which has produced the revenue is land used for agricultural purposes but to give to the words 'revenue derived from land', apart from its direct association or relation with the land, an unrestricted meaning shall be unwarranted. Again in Commissioner of Income Tax, Calcutta vs. Nalin Behari Lal Singha, etc. an observation was made that shares of its profits declared as distributable among the shareholders is not impressed with the character of the profit from which it reaches the hands of the shareholder. Thus, there is substance in the submission of the Revenue that when the dividend is declared to be distributed and paid to company's shareholder it is not impressed with character of source of its income;

++ the provisions of Section 115O are well within the competence of Parliament. To put any limitation in the said provision as held by the High Court that additional tax can be levied only on the 40% of the dividend income shall be altering the provision of Section 115O for which there is no warrant. The High Court having upheld the vires of Section 115O no further order was necessary in that writ petition and hence, the appeal of Revenue is allowed.

(See full text of Judgement 2017-TIOL-357-SC-IT)