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Facts
The assessee company declared Nil income and claimed dividend income of Rs. 40,30,507/- as exempt. The CPC, however, treated this dividend as taxable and included it for book profit calculation under Section 115JB, leading to a demand. The CIT(A) confirmed the CPC's order.
Held
The Tribunal held that Section 10(34) of the Income Tax Act exempts dividend income referred to in Section 115-O from tax in the hands of the shareholder. The non-payment of tax by the dividend-paying company under Section 115-O does not disentitle the shareholder to the exemption under Section 10(34).
Key Issues
Whether dividend income, declared exempt under Section 10(34), can be taxed in the hands of the recipient if the dividend-paying company has not paid the distribution tax under Section 115-O, and whether such dividend can be included for book profit calculation under Section 115JB.
Sections Cited
10(34), 115JB, 115-O, 143(1), 154, 250, 2(22)(d)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “H(SMC
Before: SHRI ANIKESH BANERJEE & SHRI GAGAN GOYAL
PER GAGAN GOYAL, A.M: This appeal by assessee is directed against the order of National Faceless Appeal Centre (for short “NFAC”) Delhi dated 11.06.2024 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2020-21. The assessee has raised the following grounds of appeal:-
The Ld. CIT (A) has erred in law and in facts in confirming the addition made by the CPC.
Bigflex Enterprises Pvt. Ltd., 2. The Ld. CIT (A) has erred in law and in facts in passing order without providing effective opportunity of hearing leading to violation of principles of natural justice. 3 The Ld. CIT(A) has erred in law and in facts in confirming the action of the CPC in not allowing dividend of Rs. 40,30,507/- as exempt income u/s. 10 (34) of the Act.
The Ld. CIT (A) has erred in law and in facts, in not allowing dividend income to be deducted while calculating book profit u/s. 115JB of the Act. 5 The appellant craves leave to amend, alter or delete all or any of the forgoing grounds of appeal.
2. The brief facts of the case are that the assessee company filed its return of income at Rs. NIL vide dated: 08.02.2021. The return of the assessee company was processed u/s. 143(1) of the Act vide intimation dated: 12.10.2021. Vide this intimation the CPC, Bengaluru considered dividend of Rs. 40,30,507/- as taxable instead of giving exemption as claimed by the assessee u/s. 10(34) of the Act and considered the same for the purposes of section 115JB of the Act also while calculating the book profit and created demand of Rs. 7,65,760/-. The assessee being disagreed with this intimation filed an application u/s. 154 of the Act before the CPC, Bengaluru. This application of the assessee was also rejected by the CPC, Bengaluru vide order dated: 07.02.2022. The Assessee being aggrieved with the same preferred an appeal before the Ld. CIT(A), who in turn confirmed the order of the CPC, Bengaluru passed u/s. 154 r.w.s. 143(1) of the Act. The assessee being further aggrieved preferred the present appeal before us.
We have gone through the order of the CPC; Bengaluru passed u/s. 154 r.w.s. 143(1) of the Act and order of the Ld. CIT (A) passed u/s. 250 of the Act. It is observed that the assessee company received a dividend of Rs. 40,30,507/- (As the same is not shown as receivable in Balance Sheet of the assessee under schedule 5,6 and 7 of the Balance-Sheet), against this assessee claimed expenses Bigflex Enterprises Pvt. Ltd., of Rs. 41,284/- and net figure of Rs. 39,89,223/- has been declared in its return of income and claimed exempt u/s. 10(34) of the Act and the same has not been treated as exempt u/s. 10(34) of the Act by the CPC, Bengaluru while processing its return u/s. 143(1) of the Act. For better understanding of the issue under consideration, we are reproducing herein below the provisions of section 10(34), 115O and 115BBDA of the Act as under:
10(34) any income by way of dividends referred to in section 115-O:
Provided that nothing in this clause shall apply to any income by way of dividend chargeable to tax in accordance with the provisions of section 115BBDA:
Provided further that nothing contained in this clause shall apply to any income by way of dividend received on or after the 1st day of April, 2020 other than the dividend on which tax under section 115-O and section 115BBDA, wherever applicable, has been paid; Section - 115BBDA, Income-tax Act, 1961 - FA, 2023 Tax on certain dividends received from domestic companies. 115BBDA. (1) Notwithstanding anything contained in this Act, where the total income of a specified assessee, resident in India, includes any income in aggregate exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company or companies [on or before the 31st day of March, 2020], the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent; and (b) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends.
Bigflex Enterprises Pvt. Ltd., (2) No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in clause (a) of sub-section (1). [Explanation. —For the purposes of this section, —
(a) "dividend" shall have the meaning assigned to it in clause (22) of section 2 but shall not include sub-clause (e) thereof;
(b) "Specified assessee" means a person other than, —
(i) a domestic company; or (ii) a fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub- clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or (iii) a trust or institution registered under section 12A or section 12AA or section 12AB].
Section - 115-O, Income-tax Act, 1961 - FA, 2023 CHAPTER XII-D SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES Tax on distributed profits of domestic companies. 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 April, 2003but on or before the 31st day of March, 2020, 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 fifteen per cent: Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this sub-section shall have effect as if for the words "fifteen per cent", the words "thirty per cent" had been substituted.] (1A) The amount referred to in sub-section (1) shall be reduced by, — Bigflex Enterprises Pvt. Ltd., (i) the amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and, —
(a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or (b) where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend:
Provided that the same amount of dividend shall not be taken into account for reduction more than once;]
(ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10.
Explanation. —For the purposes of this sub-section, a company shall be a subsidiary of another company, if such other company, holds more than half in nominal value of the equity share capital of the company.] (1B) For the purposes of determining the tax on distributed profits payable in accordance with this section, any amount by way of dividends referred to in sub-section (1) as reduced by the amount referred to in sub-section (1A) [hereafter referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits:] Provided that this sub-section shall not apply in respect of dividend referred to in sub-clause (e) of clause (22) of section 2.] (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 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) Notwithstanding anything contained in this section, no tax on distributed profits shall be chargeable in respect of the total income of an undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone for any assessment year on any amount declared, distributed or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2005 out of its current income either in the hands of the Developer or enterprise or the person receiving such dividend : Provided that the provisions of this sub-section shall cease to have effect from the 1st day of June, 2011.] (7) No tax on distributed profits shall be chargeable under this section in respect of any amount declared, distributed or paid by the specified domestic company by way of dividends (whether interim or otherwise) to a business trust out of its current income on or after the specified date: Provided that nothing contained in this sub-section shall apply in respect of any amount declared, distributed or paid, at any time, by the specified domestic company by way of dividends (whether interim or otherwise) out of its accumulated profits and current profits up to the specified date. Explanation. —For the purposes of this sub-section, —
(a) "Specified domestic company" means a domestic company in which a business trust has become the holder of whole of the nominal value of equity share capital of the company (excluding the equity share capital required to be held mandatorily by any other person in accordance with any law for the time being in force or any directions of Government or any regulatory authority, or equity share capital held by any Government or (b) "Specified date" means the date of acquisition by the business trust of such holding as is referred to in clause (a).] (8) Notwithstanding anything contained in this section, no tax on distributed profits shall be chargeable in respect of the total income of a company, being a unit of an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2017, out of its current incomeor income accumulated as a unit of International Financial Services Centre after the 1st day of April, 2017], either in the hands of the company or the person receiving such dividend. Explanation. —For the purposes of this sub-section, — (a) "International Financial Services Centre" shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);
(b) "unit" means a unit established in an International Financial Services Centre, on or after the 1st day of April, 2016;
(c) "Convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999) and the rules made thereunder.]
In view of the provisions of section 10(34) and 115-O of the Act, there is no ambiguity in position of law that changed scenario is applicable w.e.f. Financial Year 2020-21, whereas the case under consideration pertains to Financial Year 2019-20.Although there is an ambiguity in the language of section 115BBDA of the Act reproduced as under:
“(1) Notwithstanding anything contained in this Act, where the total income of a specified assessee, resident in India, includes any income in aggregate exceeding ten lakh rupees, by way Bigflex Enterprises Pvt. Ltd., of dividends declared, distributed or paid by a domestic company or companies [on or before the 31st day of March, 2020], the income-tax payable shall be the aggregate of— (a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent; and (b) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends.”
Clearly sections 10(34) and 115-O of the Act are in favour of the assessee, but to mitigate a possible exigency of revenue loss section 115BBDA of the Act was also there, i.e. in case by any reason the company has not paid taxes (The company declaring/distributing/paying dividend) u/s. 115-O of the Act, same can be taxed in the hands of the recipient shareholder by applying the provisions of section 115BBDA of the Act. But this situation can only be applied for F.Y. 2020-21 and not for F.Y. 2019-20.
Moreover, the Hon’ble Jurisdictional High Court dealt with a similar situation in the case of [2018] 100 taxmann.com 284 (Bom.) PCIT vs. Smt. Kayan Jamshid Pandole, wherein the Hon’ble Court held as under:
“9. Section 10(34) in turn exempts from payment of tax, any income by way of dividend referred to Section 115-O. As per Sub-section (1) of Section 115-O notwithstanding anything contained in the provisions of Act and subject to the provisions of the said section in addition to the income tax chargeable in respect of the total income of the domestic company, any amount declared, distributed or paid by such company by way of dividend on or after 1st April, 2003 would be chargeable to additional income tax referred to as tax on distributed profits.
The question would be whether the deemed dividend under Section 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.
Bigflex Enterprises Pvt. Ltd., Before we refer to the explanation, we may note 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 sub-clause (e) thereof.
The plain effect of the explanation, therefore, would be that even the deemed dividend under Section 2(22)(d) of the Act would be covered for the purpose of Chapter XIID. In turn, therefore, such deemed dividend would be one which is referred to Section 115-O of the Act. Inescapable conclusion, therefore, would be that such dividend also would be exempt from tax in the hands of the receiver in terms of Section 10(34) of the Act.
The contention of the counsel for the Revenue that the company having not paid such dividend distribution tax, exemption under Section 10(34) should be deprived to the assessee needs to be noted only for rejection. If a certain income is exempt at the hands of receiptant 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. In the result, the tax appeal is dismissed.
The purpose of section 115-O was to tax the dividend at the time of declaration / distribution and, therefore, such dividend is not taxed in the hands of the shareholder. This is clear from the provisions of section 10(33) (1) which was applicable on 1st April, 2003 and later on in section 10(34) with effect from 1st April, 2004. This section exempts dividend which has been referred in section 115-O i.e., it is treated as exempt in the hands of the recipients. The revenue's contention that sub-section (5) of section 115-O, bars the deduction under any other provisions of the Act by this overriding clause, is not correct. In view of the above, Ground Nos. 1 to 3 are allowed in favour of the assessee.
Bigflex Enterprises Pvt. Ltd., 7. Ground No. 4 is consequential in nature, once it is hold that dividend received by the assessee is exempt u/s. 10(34) of the Act, same can’t be the part of book profit under MAT for the purposes of section 115JB of the Act. Hence, this ground of appeal is also allowed in favour of the assessee.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 19th day of August, 2024.
Sd/- Sd/- (ANIKESH BANERJEE) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, दिन ांक/Dated: 19/08/2024 Dhananjay, Sr. PS