By TIOL News Service

ERNAKULAM, APRIL 03, 2018: THE issue before the Bench is - Whether deemed dividend is different from the 'dividends' explained u/s 115(O) and therefore, the assessee cannot take exemption provided u/s 10(34), as no additional income tax in paid on such amount. And the HC verdict is YES.

Facts of the case

The Assessee, an individual, was a major shareholder of one PVS Hospitals Pvt Ltd. He was also a major participant in a Trust, which was setting up a Nursing institution, called 'PVS Nursing College'. For the purpose of setting up the College, the Trust availed finance from PVS Hospitals Private Limited, to the extent of Rs.39,14,983/- in the FY 2004-2005. However, the AO treated such amount as deemed dividend u/s 2(22)(e) of the Act and accordingly, taxed the same in the hands of the Assessee, who definitely had a beneficial interest in the Trust. On Assessee's appeal, both the lower authorities upheld the decision of the AO.

On hearing the parties, the High Court held that,

++ 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 dividend by a Company. What is exempted from being included in the total income is that amount disbursed by a Company as 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 [containing Section 115(O) to 115(Q)]. Prior to sub-section (34) of Section 10 dividend was taxable as income in the hands of the recipient. Only in the context of non additional tax being levied on the Company, declaring and paying dividend, that exemption was granted to the recipient-shareholder. 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). The question of law hence has to be answered in favour of the Revenue and against the assessee.

(See 2018-TIOL-578-HC-KERALA-IT)