JUDGMENT Ashim Kumar Banerjee, J.
Facts and controversy:
1. Altogether four writ petitions were filed calling in question the provision of Section 115-O of the Income-tax Act, 1961 (hereinafter referred to as "the said Act of 1961"). The writ petitions were dismissed by the learned single judge by judgment and order dated September 20, 2001, reported in Jayshree Tea and Industries Ltd. v. Union of India [2002] 253 ITR 608 (Cal). Hence, these appeals. Since these appeals involve identical questions of facts and law these are disposed of by this common judgment.
2. The appellants in the four appeals are four different tea companies who cultivate tea plants, pick green tea leaves and thereafter process them in their factory for marketing the same. Cultivation of tea is considered to be an agricultural process whereas processing of tea in the factory is an industrial process. Agricultural income is within the domain of the State and not the Union. Hence, the Union is not empowered to levy tax on agricultural income which is within the domain of the State. In the case of tea companies 60 per cent, of the income is considered to be agricultural income and exempt from payment of income-tax. As such the tea companies are required to pay income-tax on 40 per cent, of their net income.
3. By the Finance Bill 1997-98, the Union proposed an additional income-tax on the distributed profits in the corporate sector in case any company decides to declare dividend and thereby distributes profits amongst the shareholders. By the said Bill levy of tax on dividend in the hands of the shareholders was withdrawn.
4. Paragraphs 100-101 of the speech of the hon'ble Finance minister on the floor as reported in [1997] 224 ITR (St.) 9, page 23 is quoted below:
100. Another area of vigorous debate over many years relates to the issue of tax on dividends. I wish to end this debate. Hence, I propose to abolish tax on dividends in the hands of the shareholder.
101. Some companies distribute exorbitant dividends. Ideally, they should retain the bulk of their profits and plough them into fresh investments. I intend to reward companies who invest in future growth. Hence, I propose to levy a tax on distributed profits at the moderate rate of 10 per cent, on the amount so distributed. This tax shall be an incidence on the company and shall not be passed on to the shareholder.
5. Prior to the said amendment there had been a grievance of the taxpayers with regard to double taxation as the corporate sector were to pay tax on the net income and as and when such income was distributed amongst the shareholders, the shareholders were also to pay tax on the said amount. By the above amendment the shareholders were relieved of payment of tax. However, the company was imposed an additional tax in case they decide to declare dividend and thereby distribute profit amongst the shareholders. Section 115-O is quoted below:
115-O. (1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of June, 1997, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of ten per cent.
(2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on distributed profits under Sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the tax on distributed profits to the credit of the Central Government within fourteen days from the date of:
(a) declaration of any dividend ; or
(b) distribution of any dividend ; or
(c) payment of any dividend, whichever is earliest.
(4) The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under Sub-section (1) or the tax thereon.
6. The writ petitioners challenged the introduction of Section 115-O on the ground that it was ultra vires the Constitution. Such submission of the writ petitioners were negated by the learned single judge by the judgment and order dated September 20, 2001 (see ).
Judgment and order impugned:
7. On a perusal of the judgment of the learned single judge it appears to us that the learned single judge rejected the contentions of the appellants to the extent that imposition of additional income-tax on the dividend was not ultra vires unless it was found that such tax was a tax upon agricultural income in disguise. The learned judge held that income on dividend declared by a tea company and income of a tea company could not be equated. His Lordship relied upon the case of Mrs. Bacha F. Guzdar v. CIT . His Lordship dismissed the writ petition mainly relying on the principle laid down in the Bacha case . His Lordship also negated the submission of the writ petitioners that levy of such additional income-tax had, in fact, frustrated the object of the Legislature to exempt the shareholders from tax on dividend.
Contentions of the appellants:
8. Mr. Debiprasad Pal, learned Counsel appearing for the appellants, contended as follows:
9. Additional tax was in addition to the tax. Once the company was assessed income-tax on its income the additional income-tax could be imposed on the amount for which original tax was imposed. However, in this case such additional income-tax was only upon a portion of income which was to be distributed amongst the shareholders as and by way of dividend. Hence, it was a tax on dividend which was exempt by the said Act.
10. Once the additional tax was levied at a flat rate of 10 per cent, that was to be applied on the income of the company which was contrary to Rule 8 of the Income-tax Rules, 1962, whereby 60 per cent, of the income was exempt from tax as and by way of agricultural income.
11. The rate of tax could only be levied on a total income and it should have a relation with the income of the assessee. Hence, the additional tax imposed only on the amount which was being distributed as profit through dividend to the shareholders was illegal and ultra vires the Constitution.
12. Even in the case of distribution of profits when the profits were distributed amongst the shareholders this would include 60 per cent, agricultural income which was not taxable. Since such income could not be segregated the imposition of additional tax was beyond the legislative competence of Parliament under entry 82 of List I of the Seventh Schedule of the Constitution.
13. If a company declared profit in a particular year taking into account the accumulated profits carried forward from the previous assessment years such distribution would come within the purview of additional tax and thereby the assessee would have to pay tax not only for that financial year but also for the preceding years which was not permissible.
14. The amended section was arbitrary, irrational particularly where it directed the company to pay tax within 14 days from the date of distribution or declaration of dividend which was impossible.
Cases cited:
15. In support of his contentions Dr. Pal cited the following decisions:
(i) Mrs. Bacha F. Guzdar v. CIT :
(ii) Khatau Makanji Spinning and Weaving Co. Ltd. v. CIT :
(iii) CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. :
(iv) Karimtharuvi Tea Estates Ltd. v. State of Kerala :
(v) Empire Jute Co. Ltd. v. CIT ; and
(vi) Tata Tea Ltd. v. State of West Bengal . Contention of the Revenue:
16. Mr. Tapas Hazra, learned Counsel appearing for the respondents, contended that imposition of additional income-tax was permitted by the Constitution. The Union was within its power to impose such additional tax on the assessee. The income from dividend could not have any nexus with agricultural income or industrial income. Hence, the learned judge was right in dismissing the writ petition relying on Mrs. Bacha F. Guzdar v. CIT .
Law as decided in precedents:
17. On a plain reading of the decisions cited before us our understanding of the law is as follows:
18. Agricultural income was not within the purview of legislative competence of Parliament.
19. In the case of tea companies to avoid complication in accounting procedure Rule 8 of the Income-tax Rules provided for a taxing formula suggesting exemption of 60 per cent, of the net income as agricultural income and the rest 40 per cent, as industrial income on which tax is to be levied.
20. Income of a tea company and income of a shareholder of a tea company could not be equated as a same class. A shareholder of a tea company gets a return of his cash investment in the company not in the field where tea is grown. Hence, no part of such income would be termed as agricultural income.
21. Under Section 3 of the Income-tax Act, income-tax was defined as a tax on the income of the previous year and it could not take into account any income for the earlier years to be tagged with it.
22. The State has no power to impose tax on any tea company as agricultural income beyond 60 per cent, of the total income.
Our view on the issue:
23. Section 115-O provides additional tax on the company and not on the shareholder. It contemplates a situation when there is any declaration of dividend out of current or accumulated profit by the company. If we read this provision coupled with the speech made by the hon'ble Finance Minister on the floor quoted (supra) we would find that the intention of the Government was to levy additional tax upon the company if they decide not to plough back the profit and thereby distribute the same amongst the shareholders. On the other hand, the Government as and by way of policy allowed the company some concession on tax who ploughs back the profit of the company as its additional resource. Hence, any company, if it decides to distribute profit, would have to pay additional tax on that. On the other hand, if a company decides to use that amount for development of the company they would not be liable to pay any additional tax under Section 115-O. Hence, we do not find any illegality in introduction of the section on this score. The appellants also could not show us as to how the provisions of the Constitution on this score were violated. Hence such plea of the appellants being not tenable is rejected.
24. Now comes the question of tea company. The activities of the tea company are different from other commercial sectors. Although all these tea companies are corporate entities their activities have a distinctive feature. It has a lot of agricultural activities starting from plantation to picking green tea leaves. The Constitution makers provided that agricultural income would come within the domain of the State. Hence, the Income-tax Act, 1961, being the Central law was not competent to take the agricultural income within its fold as it was beyond the legislative competence of Parliament. Hence, if this additional tax is found to have been put on any agricultural income it is liable to be struck down.
25. In this back drop, let us examine Section 115-O. As we have observed earlier, additional tax per se was not violative of the provisions of the Constitution. It is for the Union to impose income-tax upon the assessee. Similarly it has power to impose additional tax too. On a grammatical construction of this section it would appear that the tax was levied on the company and not on the shareholder. Hence, his Lordship's decision relying on Mrs. Bacha F. Guzdar case [1955] 27 ITR 1 (SC) was not the correct proposition of law. Under Rule 8 of the Income-tax Rules the net income of the tea companies for the purpose of the Income-tax Act is 40 per cent, of the total income meaning thereby "X" company having various industrial and commercial activities except tea growing and manufacturing would have to pay tax at the prescribed rate on the total net income whereas "Y" company being a tea company despite having other activities, would pay tax on 40 per cent, of the total net income.
26. A tea company is liable to pay tax at the prescribed rate on 40 per cent, total net income. If there is any additional tax they would pay in the same manner and in the same proportion. For that we do not see any reason to hold the said provision as irrational or unconstitutional. Hence, such plea being not tenable is rejected.
27. Dr. Pal contended that when a tea company decided to declare a dividend that profit would not only include profit for the particular financial year but also the accumulated profit for the earlier years which were not available for tax. Such submission in our view is totally illogical. When a company earns a profit for a particular year and does not declare a dividend such profit is automatically ploughed back to the company's growth and in the next year the profit earned by the company is a profit for that particular year for tax purpose. Hence, the contention of Dr. Pal on that score is rejected. Reference may be had from the observation of the apex court in the case of CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. .
28. The appellant tried to contend that since the additional tax was only on part of the income which relates to declaration of dividend there could not be any mechanism provided for segregation of such income, as such distribution of profit would also include agricultural income. We are unable to appreciate such contention of the appellants. If a tea company has a net income of Rs. 100, Rs. 40 would be liable to income-tax at the prescribed rate and the assessee would be assessed accordingly. By virtue of Section 115-O if the company declares Rs. 50 for distribution amongst the shareholders it would have a proportionate liability. It is true that in case the company decides to distribute a part of the income it would be impossible to find out whether that part of the income included the whole of the agricultural income or a part of it. This exercise now, in our view, is not at all relevant in view of the provision of Rule 8 of the Income-tax Rules. In such event the company would be charged on Rs. 40 for income-tax and on Rs. 50 for additional income-tax on proportionate basis.
29. We are, however, in agreement with Dr. Pal on a limited issue. We are of the view that Rs. 50 as a whole could not be taxed at the prescribed rate of additional tax. Such additional tax would be levied on Rs. 20 being 40 per cent, of Rs. 50. Hence, at the end of the day the company would have to pay income-tax at the prescribed rate on Rs. 40 as well as additional income-tax at the prescribed rate on Rs. 20.
Result:
30. The judgment and order of the learned single judge is set aside.
31. We hold that the provision of Section 115-O is constitutional and we have given the proper interpretation of the subject section as observed hereinbefore.
32. The appeals are disposed of accordingly without any order as to costs.
33. Urgent xerox certified copy would be given to the parties, if applied for.
Tapan Mukherjee, J.
34. I agree.