BY TIOL News Service

MUMBAI, NOV 30, 2018: THE issue before the high court in this case was whether deemed dividend u/s 2(22)(d), which is referred to u/s 115O, is exempted from taxation in the hands of the receiver u/s 10(34) of the Act. YES is the verdict. Moreover, the bench also clarified that where law exempts certain income from taxation in the recipient's hands, can such exemption be withdrawn for assessee's failure to pay tax, more so without there being any provision to such effect.

Facts of the case

The assessee, an individual, held shares in a company in accordance with a scheme formulated by the latter. Later, the company purchased shares held by the assessee & several other shareholders of the same group. The assessee reflected such proceeds as capital gains in its returns for the relevant AY. On assessment, the AO opined that such income was deemed dividend u/s 2(22)(d). On subsequent appeal, the Tribunal concurred with the AO's findings but also delved into whether the dividend would be exempt from u/s 10(34). The Tribunal referred to the provisions of Section 10(34) & Section 115O and held such dividend to be tax-free in the hands of the receiver. Hence the Revenue's appeal.

On appeal, the High Court held that,

++ the question would be whether the deemed dividend u/s 2(22)(d) would fall within the purview of Sub-Section 1 of Section 115-O of the Act. However, the legislature has advisedly cleared this position by providing an explanation to Section 115-Q of the Act. Before referring to the explanation, it is noted that Section 115-Q provides that if any Principal Officer of domestic company and a company does not pay tax on distributed profits in accordance with the provisions of Section 115-O then he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of the Act for collection and recovery of the income tax shall apply. This provision thus makes a specific reference to unpaid distribution tax by a company. An explanation to Section 115-Q which existed at the relevant time but which was omitted by the Finance Act, 2018 and provided that for the purposes of the said Chapter (Chapter XIID) which contains Section 115-O and 115-Q, the expression "dividend" shall have the same meaning as it given to dividend under Sub-Section (22) of Section 2, but shall not include subclause (e) thereof;

++ hence the plain effect of the provisions is that even the deemed dividend u/s 2(22)(d) of the Act is covered from the purpose of Chapter XIID. Therefore, such deemed dividend would be one which is referred to Section 115-O of the Act. Thus, such dividend also would be exempt from tax in the hands of the receiver in terms of Section 10(34) of the Act. If a certain income is exempt at the hands of recipient by virtue of statutory provision, unless a provision is made in the statute itself, such exemption cannot be withdrawn only because the payer has not paid tax. The statute has made specific provision for recovery or unpaid tax from the company.

(See 2018-TIOL-2492-HC-MUM-IT)