Income from "TEA business" whether liable to pay DDT only on 40% of such dividend?

UOI vs. Tata Tea Co. Ltd (Supreme Court)- 20 Sep 2017

Question of law discussed : Whether Income from TEA business which are being taxed @ 40% will be liable to pay dividend distribution tax u/s 115O  only on 40% of such dividend?

Important discussions/ references of the case :

1- 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. Section   115­O   imposes   tax   on   the   dividend distributed   by   the   company   which   is   nothing   but imposing the tax on agricultural income of the writ petitioner.

2- It has been argued by the petitioner learned counsel "The Parliament has no legislative competence to tax the   agricultural   income   and   Section   115­O   of   the 1961 Act transgresses the legislative field which is assigned   to   the   State   Legislature   under   List   II Entry 46 of Seventh Schedule of the Constitution. At the best, the amount of dividend distributed by the Company to the extent of 40 per cent on which income tax   is   charged   can   only   be   subject   to   additional tax.   The   Parliament   cannot   touch   the   agricultural income."

3- Learned court observed and stated "Sub­clause (1) of Article 246 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”.

4- 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. 

5- Learned court further noted that" As   noted   above   Entry   82   of   List   I   embraces entire field of “tax on income”. What is excluded isonly 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 115­ and its consequences, the pith and substance of the legislation is clearly covered by Entry 82 of List I,

6- Reference of a case  in "Nalin Behari Lal Singha where 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.   We,   thus,   find   substances   in   the submission of the learned counsel for the Union of India   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.

Concluding remarks given by learned court - 

The provisions of Section 115­O are well within the competence of Parliament. To put any limitation in the said provision as held by the Calcutta 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...

For reading full text of the judgement please refer the link - http://itatonline.org/archives/uoi-vs-tata-tea-co-ltd-supreme-court-s-115-o-dividend-distribution-tax-entire-law-on-the-constitutional-validity-of-dividend-distribution-tax-ddt-under-article-246-of-the-constitution-read-with-en/tata-tea-ddt-115-o-validity/