Bombay High Court
Foseco India Ltd Company vs Assistant Commissioner Of Income Tax … on 27 April, 2026
Author: G. S. Kulkarni
Bench: G. S. Kulkarni
31-ITXA-1029-2025.DOC
Vidya Amin
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 1123 OF 2025
Foseco India Ltd. Company ... Appellant
Versus
Assistant Commissioner of Income Tax, Circle1(1), Pune ... Respondents
WITH
INCOME TAX APPEAL NO. 1049 OF 2025
WITH
INCOME TAX APPEAL NO. 1088 OF 2025
WITH
INCOME TAX APPEAL NO. 1055 OF 2025
WITH
INCOME TAX APPEAL NO. 1086 OF 2025
WITH
INCOME TAX APPEAL NO. 1080 OF 2025
WITH
INCOME TAX APPEAL NO. 1029 OF 2025
_________
Mr. Sagar Tilak a/w Sachin Hande, Preshita Adamane and Saachi Bhiwandkar i/b
Sachin Hande for Appellant.
Mr. N. Venkataraman, ASG a/w Sushma Nagaraj, Ms. Amira Razaq, Krithika
Anand, Abhinav Palsikar, Chandrashekara Bharathi and Nakul Madhan i/b
Sushma Nagaraj for Respondent.
Mr. Vinod Tanwani (I.R.S.) (Principal Commissioner of Income Tax, Central - 3,
Mumbai), representative of the Revenue, Present.
__________
CORAM : G. S. KULKARNI &
AARTI SATHE, JJ.
RESERVED ON : 05 MARCH 2026
PRONOUNCED ON : 27 APRIL 2026
Oral Order : (Per G. S. Kulkarni, J.)
1. These are a batch of seven appeals filed under Section 260A of the Income
Tax Act, 1961 (for short “IT Act“), challenging a common order dated 11
November 2024 passed by the Income Tax Appellate Tribunal, Bench at Pune,
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whereby, the appeals filed by the appellant/assessee challenging the orders passed
by the Commissioner of Income Tax (Appeal), Pune (CIT)(A) are dismissed. The
assessment years in question are assessment year 2014-15 to 2020-21.
2. The assessee has raised the following questions of law:
I. Whether Dividend Distribution Tax (‘DDT’) prescribed under
section 115-O of the Income-tax Act, 1961 (‘Act’) is in substance and
effect a tax on dividend income of non-resident shareholders and where
recipient shareholders are residents of United Kingdom the more
beneficial rate of tax of 15% under Article 11 of DTAA between India –
UK is applicable?
II. Whether decision of the Special bench of Tribunal in the case
of Deputy Commissioner of Income Tax Vs. Total Oil India Pvt. Ltd.,
ITA 6997/Mum/2019 lays down the correct law?
III. Without prejudice, whether the Tribunal erred in not
appreciating that since in view of Article 24(1)(b) of the DTAA
between India and UK, levy of DDT was specifically covered within
Article 3(1)(c) of the DTAA between India and UK, therefore, the
lower rate of tax i.e., 15% (inclusive of surcharge and cess) as provided
for under Article 11(2) of the DTAA between India and UK should
apply instead of 16.994% (inclusive of surcharge and cess) as provided
under section 115-O of the Act?
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3. The Tribunal considered the appeal for the Assessment Year 2014-15 as
the lead matter. The question of law as involved as also the facts as involved are
similar except the difference in the amounts of tax. We accordingly refer to the
facts in the lead matter (Income Tax Appeal No.1123 of 2025) which pertain to
the Assessment Year 2014-15.
4. The relevant facts are :
The assessee is a company engaged inter alia in the business of
manufacture, marketing and trading of foundry chemicals and foundry fluxes for
the metallurgical industry, including the steel and foundry industry.
5. On 30 November 2014, the assessee filed its return of income tax for the
assessment year in question (A.Y. 2014-15) disclosing a total income of
Rs.27,17,03,590/- under the normal provision of the Income Tax Act. In such
Assessment Year, the assesssee distributed dividend, amongst its shareholders and
to its foreign shareholders, aggregating to Rs.7,66,30,021/- on which the assessee
paid Dividend Distribution Tax (“DDT”) amounting to Rs.1,30,23,272/-
@16.994%.
6. It is assessee’s case that in terms of Article 11 of the India-UK Double
Taxation Avoidance Agreement (DTAA), dividend becomes taxable @15% in the
hands of the beneficial owner of the dividend i.e. shareholders. According to the
assessee, consequent thereto, dividend of Rs. 7,66,30,021/- being paid to
Vesuvius Holdings Limited (VHL), Foseco Overseas Limited (FOL) and Foseco
UK Limited (FUL) of UK, was taxable at the beneficial rate of 15% as prescribed
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under DTAA, being an amount of Rs.1,14,94,503/-. It is the assessee’s contention
that instead, the assessee paid the DDT at an amount of Rs. 1,30,23,272/-
(@16.994%) which is an amount of tax more than what would be required to be
paid applying the provisions of the DTAA. Accordingly, the assessee contended
that it had become entitled for refund of the DDT paid in excess of the rates
prescribed under the applicable DTAA, which was in the tune of Rs.15,28,769/-
i.e. (1,30,23,272/- less Rs.1,14,94,503/-). Similar are the contentions in the
companion appeals, except the amount being different.
7. In these circumstances, on 12 May 2021, the assessee filed a refund
application under Section 237 of the Income Tax Act, with the respondents
claiming refund of the excess DDT paid over and above rates specified in India –
UK: DTAA.
8. On 19 July 2021, the assessee received a letter under Section 154 from the
respondents, wherein it was stated that an option to modify the DDT payment
was not available in the system. On 17 August 2021, the assessee submitted its
reply to the said letter wherein the assessee stated that technical difficulty ought
not to stand in the way of the assessee being granted and/in denying such refund,
being entitled to the assessee. Hence, the assessee requested the concerned officer
to pass an order under Section 237 of the Income Tax Act.
9. On such backdrop, on 25 November 2022, an order was passed by the
respondent observing that DDT is “an additional income tax” on companies,
imposed under the domestic law and it was the company which was subjected to
tax under Section 115-O of the IT Act, on a transaction arising within the
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territorial jurisdiction of India, hence, the assessee would not be entitled to the
benefit of the reduced rate of tax as per the India – UK DTAA. The relevant
observations as made in the order read thus:
“7. After analyzing the submissions of the assessee, the provisions of the DTAA,
section 90 & Section 115-O of the Income Tax Act, it is construed that DDT is a
tax imposed under the domestic law on a domestic company on a transaction
arising within the territorial jurisdiction of India. It would be appropriate here to
take a note from provision of section 115-O of the Act-
Sub-section (4) of the section 115-O speaks that, “(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 therefore shall be claimed by the company or by any other
person in respect of the amount of tax so paid.”
Sub-section (5) of the section 115-O laid down that, “(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.”
8. The issue of applicability of the tax treaty rate to DDT must be approached
after addressing another critical issue- ‘whether DDT is a tax on the Company or
the shareholder, since the distributable surplus stands reduced to the extent of
DDT’. In this regard, attention is drawn to the decision of the Bombay High
Court in the case of Godrej & Boyce Mfg. Co Ltd. Vs. Dy. CIT [2010] 194
taxman 203/328 ITR 81 which was rendered in the context of section 14A vis-à-
vis Section 115-O of the Act. The Hon’ble Court has observed that-
“The effect of section 115-O is that in addition to the income-tax chargeable
on the total income of a domestic company, additional income-tax is charged
on profits declared, distributed or paid. This tax which is referred to as a tax
on distributed profits is what it means namely, a tax on the profits of the
company. This is not a tax on dividend income. Under section 115-O, the
charge is on a component of the profits of the company; that component
representing profits declared, distributed or paid. The tax under section 115-
O is not a tax which is paid by the company on behalf of the shareholder, nor
does the company act as an agent of the shareholder in paying the tax.
Provisions contained in Chapter XII-D are special provisions relating to tax
on the distribute profits of domestic companies. Even section 115-O in
Chapter XII-D clearly states that the additional income-tax liability there
under is on the amount of profits declared, distributed or paid by a domestic
company as dividend. Thus, the additional income-tax under section 115-O is
a tax on profits and not a tax on dividend.
The general principle of law is that a company is chargeable to taxon its
profits as a distinct taxable entity and has to pay tax In discharge of its own
liability and not on behalf of or as an agent of its shareholder. This position of
the general law is recognized and incorporated in section 115-O and is not
overridden the statutory provision”
9. Thus, the Hon’ble Court had unequivocally held that DDT’is tax on the
company and not on a shareholder. A similar position has been upheld by the
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ITAT Mumbai in the cases of Sunash Investment Co Vs. Asstt. CIT [2007] 14
SOT 80 (Mum.- Trib.), Mohananlal M. Shal Vs. Dy. CIT [2007] 105 ITD 669
(Mum) and Asstt. CIT v. Dakshesh S. Shah [2004] 90 IT 519 (Mum).
10. The issue which now arises and needs deliberation is- ‘whether a lower tax
rate as specified in the treaty can be invoked when the tax is considered to be
paid by the company and not the shareholder’. Article 11 of DTAA relates to tax
on dividend income and not relating to tax on distribution of profit by way of
dividend by a company. Therefore, the DTAA would not apply to such
transactions.
11. On analysis of section 115-O of the Act, it is evident that DDT is an
additional income tax levied on the company distributing dividend and not on
the shareholders who receive the dividend. Referring to the provisions of sub-
section (4) and (5) of section 115-O, DD1 charged under section 115-O is a tax
on distributed profit and is charged on the company distributing the dividend
and has no element of being a withholding tax payable on behalf of any other
entity, shareholders or otherwise. Thus, sub-section (4) clarifies that no further
credit can be claimed by the company or by any other person in respect of the
amount of tax so paid. Further, section 115-O begins with a “non obstante
clause” and therefore, the applicability of other provisions is ruled out.
12. Once the company declaring dividend has paid DDT, subsequently the
dividends received by the shareholders is statutorily exempt from tax in the
hands of the shareholder under sub-section (34) of section 10 of the Act. Thus,
since there is no tax in the hands of shareholders on such dividend, there is no
question of DTAA provisions being applicable since the Income-tax Act
provisions are more favorable.
13. Considering the express provision of Section 115-O, which states that DDT is
an ‘Additional Income-tax’ on companies and can very well argue that it is the
resident company which is subject to tax under section 115-O and not the
shareholder and, hence, the tax treaty benefits should be denied.
14. Thus, the DDT is a tax in the hands of the company declaring dividend and
hence, as per the above discussion, the provisions of DTAA are not applicable to
DDT.
15. Moreover, considering the facts that the assessee company is part of Vesuvius
group which is a multinational group and having all the possible resources to take
a well thought decision on tax rates after considering the provisions of Section
115-O, Section 90 of the Income Tax Act and also the article 11 of India-UK
DTAA which could have been considered before assessee paid the DDT and still
assessee paid the DDT at 20.35% rate. It simply means that the present
application asking to refund the excess amount of DDT paid is an afterthought.
16. In view of the above facts and discussion, the application of assessee asking
for refund out of excess DDT paid is hereby rejected.”
(emphasis supplied)
10. The assessee being aggrieved by the aforesaid orders passed by the
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respondent, rejecting the assessee’s application under Section 237 of the IT Act,
filed an appeal before the Commissioner (Appeals), inter alia contending that the
denial of refund by the respondent in the impugned order dated 25 November
2022 was erroneous and unsustainable, as not only it was the case of refund being
denied on technical issues in the system, but also for the reason that DDT is paid
under Section 115-O of the Income Tax Act, on dividends declared and paid to
the foreign shareholders. Hence such dividend paid to Vesuvius Holdings
Limited (VHL), Foseco Overseas Limited (FOL) and Foseco UK Limited (FUL)
was a tax on shareholders, it is the shareholders who are being taxed, who are the
residents of the UK who stand covered under DTAA. It is contended that the
DDT cannot be at a rate higher that what is provided under Article 11 of the
DTAA. The assessee, hence, contended that in the facts and circumstances of the
case, excess DDT paid during the relevant Assessment Year, be refunded to the
assessee, since as per the provisions of Section 237 of the Income Tax Act read
with Article 265 of the Constitution, only legitimate tax could be retained by the
Revenue. The CIT(A), however was not persuaded to accept the contentions as
urged on behalf of the assessee and by an order dated 28 March 2024, rejected the
appeals filed by the assessee, inter alia on the following reasons :-
“Findings:
2.3 I have carefully considered the facts of the case and submission filed by the
appellant. The issue is regarding claim of refund of excess dividend distribution
tax paid by the appellant u/s 115-O on repatriation of dividend income to its
holding company viz. non-resident, shareholder companies, Vesuvius Holding
Limited (VHL) holding 8.52% shares, Foseco (UK) Limited (FUL) holding
8.46% shares and Foseco Oveiseas Limited (FOL) holding 58% shares. Briefly,
the appellant company distributed dividend of Rs. 7,66,30,021 to VHL, FUL
and FOL during FY 2013-14. The appellant company deducted DDT on this as
per section 115-O of the Act amounting to Rs. 1,30,23,272 (@16.994%). The
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31-ITXA-1029-2025.DOCDDT should have been restricted @10% as per of Article 11 of the India-UK
Double Taxation Avoidance Agreement (‘the DTAA’ or ‘the tax treaty’) read with
section 90(2) of the Act. It is seen that section 90 is under Chapter IX of the
Income Tax Act which is on double taxation relief. This primarily deals with
non-resident assesses and section 90(2) states the principle for granting relief of
tax for non-resident assesses for avoidance of double taxation. It is not furnished
how the dividends have been taxed in both India and UK for the non-resident
parent entity and further in Indo-UK DTAA, the contracting states have not
extended the treaty protections to profits distributed by Indian company by
deeming the DDT paid by the Indian company as tax paid by shareholder and
restricting the DDT rate.
2.4 Further, it is also seen that the Hon’ble Special Bench of the Mumbai ITAT
passed order in case of Total Oil India Pvt Ltd & Oth Vs DCIT, Mumbai & Oth
(ITA No 6997/Mum/2019 dtd. 20.04.2023) wherein the similar issue was
decided. The Hon’ble tribunal has held that DDT is an additional tax levied on
the company and not the shareholder and accordingly, the benefit of the lower
tax rate as per the relevant DTAA for taxation of dividend will not be available in
case of non-resident shareholders, except where specifically agreed upon. The
relevant para of the ITAT order is reproduce as under:
“QUOTE
81. If domestic company has to enter the domain of DTAA, the countries should
have agreed specifically in the DTAA to that effect. In the Treaty between India
and Hungary, the Contracting States have extended the Treaty protection to the
dividend distribution tax. It has been specifically provided in the protocol to the
Indo Hungarian Tax Treaty that, when the company paying the dividends is a
resident of India the tax on distributed profits shall be deemed to be taxed in the
hands of the shareholders and it shall not exceed 10 per cent of the gross amount
of dividend. While making Reference, in the case of Total Oil (supra), the Id.
Division Bench has made the following observations on this aspect:
“(f) Wherever the Contracting States to a tax treaty intended to extend the treaty
protection to the dividend distribution tax, it has been so specifically provided in
the tax treaty itself. For example, in India Hungary Double Taxation Avoidance
Agreement [(2005) 274 ITR (Stet) 74; Indo Hungarian tax treaty, in short], it is
specifically provided, In the protocol to the Indo Hungarian tax treaty it is
specifically stated that “When the company paying the dividends is a resident of
India the tax on distributed profits shall be deemed to be taxed in the hands of
the shareholders and it shall not exceed 10 per cent of the gross amount of
dividend”. That is a provision in the protocol, which is essentially an integral part
of the treaty, and the protocol to a treaty is as binding as the provisions in the
main treaty itself. In the absence of such a provision in other tax treaties, it
cannot be inferred as such because a protocol does not explain, but rather lays
down, a treaty provision. No matter how desirable be such provisions in the other
tax treaties, these provisions cannot be inferred on the basis of a rather
aggressively creative process of interpretation of tax treaties. The tax treaties are
agreements between the treaty partner jurisdictions, an agreements are to be
interpreted as they exist and not on the basis of what ideally these agreements
should have been.
(g) A tax treaty protects taxation of income in the hands of residents of the
treaty partner jurisdictions in the other treaty partner jurisdiction.
Therefore, in order to seek treaty protection of an income in India under
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the Indo French to treaty, the person seeking such treaty protection has to
be a resident of France. The expression `resident’ is defined, under article
4(1) of the Indo French tax treaty, as “any person who, under the laws of
that Contracting State, is liable to tax therein by reason of his domicile,
residence, place of management or any other criterion of a similar nature”.
Obviously, the company incorporated in India, i.e. the assessee before us,
cannot seek treaty protection in India- except for the purpose of, in
deserving cases, where the cases are covered by the nationality non-
discrimination under article 26(1), deductibility non-discrimination under
article 26(4), and ownership no discrimination under article 24(5) as, for
example, article 26(5) specifically extends the scope of tax treaty
protection. to the “enterprises of one of the or partly owned or controlled
Contracting States, the capital of which is wholly as directly or indirectly,
by one or more residents of the other Contracting State The same is the
position with respect of the other non-discrimination provisions. No such
extension of the scope of treaty protection is envisage or demonstrated, in
the present case. When the taxes are paid by the resident of India, in
respect of its own liability in India, such taxation in India, in our
considered view, cannot be protected or influenced by a tax treaty
provision unless a specific provision exists in the related tax treaty enabling
extension the treaty protection.
(h) Taxation is a sovereign power of the State- collection and imposition
taxes are sovereign functions. Double Taxation Avoidance Agreement is in
the nature of self-imposed limitations of a State’s inherent right to tax, and
these DTAAs divide tax sources, taxable objects amongst themselves.
Inherent in the self-imposed restrictions imposed by the DTAA is the fact
that outside the limitations imposed by the DTAA, the State is free to levy
taxes as per it own policy choices. The dividend distribution tax, not being
a tax paid by or on behalf of a resident of treaty partner jurisdiction,
cannot thus be curtailed by tax treaty provision.”
82. We are of the view that the above exposition of law is correct and we agree
with the same. Therefore, the DTAA does not get triggered at all when a
domestic company pays DDT u/s. 115-O of the Act.
CONCLUSION:
83. For the reasons give above, we hold that where dividend is declared,
distributed or paid by a domestic company to a non-resident shareholder(s),
which attracts Additional Income Tax (Tax on Distributed Profits) referred to in
Sec.115-O of the Act, such additional income tax payable by the domestic
company shall be at the rate mentioned in Section 115-O of the Act and not at
the rate of tax applicable to the non-resident shareholder(s) as specified in the
relevant DTAA with reference to such dividend income. Nevertheless, we are
conscious of the sovereign’s prerogative to extend the treaty protection to
domestic companies paying dividend distribution tax through the mechanism of
DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend
the treaty protection to the domestic company paying dividend distribution tax,
only then, the domestic company can claim benefit of the DTAA, if any. Thus,
the question before the Special Bench is answered, accordingly.
UNQUOTE”
On the basis of the reasoning given above, it is concluded that where dividend is
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shareholder, which attracts DDT referred to in Section 115-O of the Act, such
DDT payable by the domestic company shall be at the rate mentioned in Section
115-O of the Act and not at the rate of tax applicable to the non-resident
shareholder as specified in the relevant DTAA with reference to such dividend
income. Wherever the Contracting States to a tax treaty intend to extend the
treaty protection to the domestic company paying DDT, only then, the domestic
company can claim benefit of the DTAA, if any.
2.5 In view of the above, I reject the claim of the appellant for refund of excess
DDT. Accordingly, these grounds of appeal are dismissed.
3. With the result, appeal is dismissed.”
(emphasis supplied)
11. Being aggrieved by the aforesaid appellate orders passed by the CIT(A),
being a common order passed on the appeals for the Assessment Years 2014-15 to
2020-21 dismissing the assessee’s appeals, the assessee approached the Income
Tax Appellate Tribunal (“Tribunal”). The Tribunal however dismissed the appeals
filed by the assessee. The Tribunal followed the decision of the Special Bench of
the Tribunal in the case of Deputy Commissioner of Income Tax Vs. Total Oil
India Pvt. Ltd., ITA 6997/Mum/2019. The Special bench of the Tribunal had
considered the position in law as laid down on the decision of this Court in
Godrej & Boyce Manufacturing Limited Vs. DCIT. 1, wherein, it was held that the
DDT is not a tax paid on behalf of the shareholder but was an additional tax paid
by the company. It was observed that such decision of this Court was upheld by
the Supreme Court in Godrej & Boyce Manufacturing Limited Vs. DCIT 2. It is
on the aforesaid backdrop, the present appeals are filed by the assessee.
Submissions on behalf of the Assessee/Appellant.
12. Mr. Sagar Tilak, learned counsel for assesssee, at the outset has submitted
1 2010 SCC OnLine Bom 1174
2 2017 (7) SCC 421
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that the present appeals were filed on 3 March 2025, however, in the intervening
period, the questions of law which have arisen in these appeals stand answered by
the decision of the Division Bench of this court at Goa in M/s. Colorcon Asia
Private Limited Vs. Joint Commissioner of Income Tax and Ors. 3 His contention
is that the questions of law in the said case were similar to the questions as raised
in the present appeal, wherein, this Court, decided the issue in favour of the
assessee, while rejecting the Revenue’s case considering all the relevant decisions *.
13. Learned counsel for the appellant/assessee has submitted that the Division
Bench has held that the DDT is a tax on dividend income of the shareholders and
that the DTAA would prevail over the Income Tax Act. It is submitted that the
Division Bench also overruled the decision of the Special Bench of the Tribunal
in Total Oil India Pvt. Ltd. (supra) on which reliance was placed by the Tribunal
in the impugned judgment to reject the assessee’s appeal. It is submitted that the
Division Bench also held that beneficial rate of tax would apply irrespective of
who pays the tax, as Article 11 of the DTAA concerns as to what income is taxed
and not who pays. Thus on the aforesaid primary contentions, the learned counsel
for the assessee submits that the said impugned order passed by the Tribunal
confirming the view taken by the authority below needs to be set aside by
following the decision of the Division Bench in M/s. Colorcon Asia Pvt. Ltd.
(supra).
3 2025 SCC OnLine Bom. 5983
* Union of India Vs. Tata Tea Company Limited
Union of India Vs. Azadi Bachao Andolan and
Engineering Analysis Centre of Excellence Pvt. Ltd Vs. Commissioner of Income Tax and Ors. (2021) 432 ITR 471
SC.
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Submission on behalf of the Revenue/Respondents.
14. On the other hand Mr. N. Venkataraman, learned Additional Solicitor
General has made the following submissions:
(i) The primary issue involved in the present appeals is ‘whether the DDT
under Section 115-O of the IT Act is a tax on the Indian company being on its
profits or whether it is a tax on the dividend paid to the shareholder. He submits
that if it is a tax on the profits of the company, the assessee is not entitled to any
refund of the DDT paid.
(ii) It is submitted that Section 115-O which deals with DDT is an “additional
income tax” on the profits of a domestic company, and more specifically on the
part of the profit which is declared, distributed or paid by way of Dividend. It is
hence, not a tax on the dividend distributed to the shareholders. It is submitted
that Section 115-O(1) of the IT Act explicitly states ” notwithstanding anything
contained in any other provision of this Act,” creating an independent charge on
the distributed amount in addition to regular income tax on the company’s “total
income”. This overriding clause ensures it supersedes Section 4 of the IT Act,
which broadly charges income without specifying DDT.
(iii) It is next submitted that the Division Bench of this Court in Godrej and
Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income Tax and Anr.4
(Paragraphs 42 to 55), has held that, the DDT under Section 115-O of the IT Act
is an additional tax on the profits of the company, which is distributed as
4 (2010 SCC Online Bom 1174)
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31-ITXA-1029-2025.DOCdividend, whereas tax in the hands of the shareholder is taxed on dividend
income. This Court also held that the effect of Section 115-O of the IT Act is in
addition to the income tax chargeable on the total income of a domestic company
i.e., such additional income tax is charged on the profits declared distributed
and/or paid. This tax which is referred to as tax on distributed profits means that
it is a tax on the profits of company, and not a tax on the dividend income under
Section 115-O of the IT Act. It is on the component of the profits of the company,
the component representing the profits declared, distributed/paid. It is also not a
tax which is paid by the company on behalf of the shareholder nor does the
company act as an agent of the shareholder in paying the tax. It is submitted that
the decision of the Supreme Court in the appeal from the said decision of this
Court in Godrej & Boyce Mfg Co. Ltd. v Deputy Commissioner of Income Tax
and Anr.5 did not, in any manner, dilute or overrule the decision of this Court.
(iv) It is submitted that further, the issue in the present appeals also stands
covered by the decision of the Division Bench of this Court in Small Industries
Development Board of India vs Central Board of Direct Access 6 wherein, this
Court has specifically held that, the tax under Section 115-O of the IT Act is on
the company’s profits and more specifically on the part of the profit which is
declared, distributed or paid by way of dividend. It is contended that this Court
has also held that the tax under Section 115-O of the IT Act, is not on income by
way of dividend in the shareholders hands. Hence, the additional income tax
5 [2017 (7) SCC 421] (See Paras 9,30,31,34)
6 2021 SCC Online Bom 1174
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payable on the profits of a domestic company under Section 115-O of the Act is
not a tax on dividend.
(v) It is next submitted that the legal interpretation as made by the Courts in
the aforesaid decisions and is reinforced by the legislative history of Section 115-O
of the IT Act, as reflected in the various Memoranda of Understanding,
explaining the relevant Finance Bills and the contemporaneous speeches of the
then Finance Ministers, which clearly elucidate the intent and scope of the
provision. It is submitted that the recent decision of the Division Bench of this
Court at Goa, in M/s .Colorcon Asia Pvt. Ltd. v. The Joint Commissioner of
Income Tax and Ors. (supra) has failed to consider the decisions in Godrej &
Boyce Mfg Co. Ltd. (supra) in the perspective as considered by this Court in
Godrej & Boyce Mfg Co., Ltd. (supra) as also Small Industries Development
Board of India vs Central Board of Direct Access (supra) and in fact is contrary to
the decision of the Supreme Court in Godrej & Boyce Mfg Co. Ltd. v. Deputy
Commissioner of Income Tax and Anr. (supra). It is submitted that the reasoning
as rendered by the Division Bench in M/s. Colorcon Asia Pvt. Ltd. (supra) is also
contrary to the object of introduction of amendments to Section 115-O of the IT
Act as demonstrated by such materials namely the Memoranda of Understanding
and the Finance Bills, as the said decision has wrongfully held that under the said
provision, the incidence of tax has been shifted to the company, purely for
‘administrative convenience’ and the tax is in fact, a tax on the shareholders and
the dividend received by them.
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15. There are several other submissions made on behalf of the Revenue, which
in our opinion need not be delved at this stage considering the view we intend to
take, as also to avoid burdening this order.
Reasons and Conclusion
16. We have given our careful consideration to the submissions as urged on
behalf of the parties.
17. At the outset, we may observe that the primary contention as urged on
behalf of the appellant is to the effect that the issue stands squarely covered by the
decision of the Division Bench of this Court at Goa in M/s. Colorcon Asia Pvt.
Ltd. (supra). On the other hand, Mr. Venkataraman, learned Additional Solicitor
General has taken a position that M/s. Colorcon Asia Pvt. Ltd. (supra), for the
reasons as contended, does not reflect the correct position in law.
18. Thus, confronted with such situation, we intend to address the issues in
regard to the approach which would be required to be adopted in the present
proceedings and more particularly, considering the submissions as made by the
learned Additional Solicitor General that this is a fit case which needs to be
referred for a decision of a Larger Bench, as according to him M/s. Colorcon Asia
Pvt. Ltd. (supra) has not been correctly decided. The following discussion would
aid our conclusion.
19. We note our prima facie views on the issues. At the outset, we may note
the provisions of Section 115-O of the Income Tax Act which reads thus:-
“Tax on distributed profits of domestic companies.
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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,
2003 [but 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,-
[(i) the amount of dividend, if any, received by the domestic company
during the financial year, if such dividend is received from its subsi-diary
and,-
(a) where such subsidiary is a domestic company, the subsidiary has paid
the tax which is payable under this section on such dividend
(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, il 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 sub-
sidiary of another company, if such other company, holds more than half in
nominal value of the equity share capital of the company.]
[(IB) 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 sul
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
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(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) 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 Government body);
(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,
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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 283 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.]”
(emphasis supplied)
20. Section 115-O as noted by us falls in Chapter XII-D which provides for
“Special provisions relating to tax on distributed profits of domestic companies”.
It was inserted by the Finance Act, 1997 with effect from 01 June 1997. On a
plain reading of Section 115-O, it is quite clear that the same begins with a non-
obstante clause which confers an overriding effect of the said provision in regard
to any other provisions of the Income Tax Act. Further it clearly provides that
subject to the said provisions, “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 date provided for in the said section however,
before 31 March 2020, whether out of current or accumulated profits shall be
charged “to additional income tax” at the rate of 15%.
21. Thus on a plain reading of the provision, it is abundantly clear that the
provision provides for a dividend distribution tax payable by a domestic company
under a domestic law. In this context, sub-section (4) of Section 115 is significant
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which provides that 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 dividend and no further credit therefore shall be claimed by the
company or by any other person in respect of the amount of tax so paid. Also
sub-section (5) is pertinent in the present context, which provides that no
deduction under any provision of the Income Tax 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. Thus, on a plain applicability of the
provision, it is clear that dividend distribution tax (“DDT”) is a tax on the
company and not on a shareholder. It is also not a tax which is paid by the
company on behalf of the shareholders, nor does the company acts as an agent of
the shareholder in paying the tax as provided for in these special provisions as
contained in Chapter XII-D, which provides for tax on distributed profits of
domestic companies.
22. There appears to be nothing in the provision to indicate that the operation
of Section 115-O in any manner is either related and/or is controlled by the
DTAA. Also the provisions of Section 115-O, when it concerns the rate of tax, we
do not find in such provision, that the legislature intended to include the
operation of the DTAA, and more particularly as contained in Article 11 of the
DTAA in question, which relates to tax on dividend income and not relating to
tax on distribution of profits by way of dividend by a company. Thus, insofar as
the charging of such tax under Section 115-O is concerned, the DTAA appears to
have no application. It is also required to be borne in mind that once the
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company declaring dividend has paid the DDT, the dividend received by the
shareholder is statutorily exempt from tax in the hands of the shareholders under
sub-section (34) of Section 10 of the Income Tax Act. Thus, when Section 115-O
imposes such tax payable by the company as an additional tax, it is not a tax or the
amounts being received by the shareholders on such dividend, hence, there is no
question of the DTAA provisions being applicable in the operation of Section
115-O. Thus, any other reading of Section 115-O that what it strictly provides,
would amount to reading something in the said provision which the legislature
has expressly either not provided, or the same has been kept away. On such
preliminary note, we discuss how the Courts have dealt with the said provision in
the context of the contentions as urged on behalf of the parties and noted by us
hereinabove.
23. In Godrej and Boyce Mfg. Co. Ltd. vs. Deputy Commissioner of Income-
tax & Anr.7, the Division Bench of this Court was confronted with an issue,
revolving on the computation of the total income of the assessee-Godrej and
Boyce Mfg. Co. Ltd. The issue before the Court was for Assessment year 2002-
03, the assessee claimed a dividend of Rs. 34.34 crores being exempt from the
total taxable income. In such context examining the effect of Section 115-O of the
Act, the Division Bench held that :- The dividend income and income from
mutual funds cannot be regarded as exempt income. That tax on dividends
declared, distributed or paid by the Company is imposed under Section 115-O
and similar is the position of mutual funds under Section 115-R. Hence, when
Section 10(33) provides that such income shall not be included as income of the
7 (2010) 328 ITR 81
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shareholder/Unit holder, it does not mean that this is exempt income or income
which is not charged to tax; The Court observed that , applying Heydon’s rule of
interpreting statutes and considering the object of inserting Section 14A, the
phrase “does not form part of the total income” should be read as equivalent to
exempt income; It was held that Dividend from shares or income from units of
mutual funds are not exempt income as they are charged to tax under Sections
115- O and 115R on the declaration of the dividend by a Company or, as the case
may be, the distribution of income by a mutual fund. Tax is charged on such
independent streams of income under Sections 115-O and 115R and is collected
from the payers. This method of collection had been adopted by the Legislature in
the interest of efficiency and to avoid paper work. The exemption from tax under
Section 10(33) in the hands of shareholders/unit holders was enacted to obviate a
double taxation of the same stream of income, once in the hands of the payer and
thereafter in the hands of the recipient. Section 10(33) was enacted because tax on
dividend has already been collected from the dividend paying Company. There
is a specific charge independent of the Company’s liability to pay tax under
Section 4. The relevant observations as made by the Court are required to be
noted, which reads thus:
“35. The submission which has been urged on behalf of the assessee is that
Section 14A has no application either to dividend income or to income from
mutual funds. The submission proceeds on the basis that the words “in
relation to income which does not form part of the total income under this
Act” can have no application to dividend income from shares or to income
from mutual funds for the reason that such income is not exempt from
income tax, but is subject to tax under Section 115-O and Section 115R.
36. Now, Sub-section (1) of Section 115-O prior to its substitution by the
Finance Act of 2003 with effect from 1 April 2003, provided as follows :
“(1) Notwithstanding anything contained in any other provision of
this Act and subject to the provisions of this section, in addition to the
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paid by such company by way of dividends (whether interim or
otherwise) on or after the 1st day of June, 1997 but on or before the
31st day of March, 2002, whether out of current or accumulated
profits shall be charged to additional income tax (hereinafter referred
to as tax on distributed profits) at the rate of ten per cent.”
37. Sub-section (1) of Section 115-O begins with a non obstante
provision and stipulates that any amount declared, distributed or paid by a
company by way of dividends shall be charged to additional income tax:
‘Additional’ because this is in addition to income tax chargeable in respect
of the total income of the domestic company. The total income of a domestic
company is chargeable to income tax under the Act. In addition, any amount
declared, distributed or paid by such company by way of dividends is
subjected to additional income tax at the stipulated rate. The charge under
sub section (1) of Section 115-O is on a component of the profits of the
domestic company representing an amount declared, distributed or paid by
way of dividend.
39. The plain meaning of Section 14A is that no deduction can be
allowed in respect of expenditure incurred by an assessee in relation to
income which does not form part of the total income under the Act. Section
10 provides for incomes which shall not be included in computing the total
income of a previous year of any person. Prior to the amendment brought
about by the Finance Act of 2003 with effect from 1 April 2003, income by
way of dividends referred to in Section 115-O and income received in
respect of the units of a mutual fund did not form part of the total income by
virtue of the provisions of clause 33 of Section 10. (Clause 33 of Section 10
was omitted by the Finance Act of 2003. Clauses 34 and 35 which were
inserted by the same Finance Act, now provide that income by way of
dividends referred to in Section 115-O and income received in respect of the
units of a mutual fund specified in clause 23(b) shall not be included in
computing the total income of any person for the previous year). Plainly
dividend income and income from mutual funds are incomes which by
virtue of the provisions of Section 10, do not form part of the total income
under the Act. Expenditure incurred in relation to the earning of such
income has to be disallowed under Section 14A.
40. The submission which has been urged on behalf of the assessee is that
the expression “income which does not form part of the total income” under
the Act should be interpreted to mean income which is exempt from tax, On
this hypothesis, it has been urged that Section 14A will not apply to
dividend income because the Revenue has already received its share of tax.
41. The submission cannot be accepted. The expression “income which
does not form part of the total income” under the Act must receive its plain
and grammatical construction. Such income is income which is not
includible in computing the total income of the assessee under the
provisions of the Act for a previous year. Now it is trite law that under the
Act, “it is income that is taxed but it is not taxed in vacuo. It is taxed in the
hands of a per son. (CIT v. Indian Bank Ltd. (1965) 56 ITR 77; AIR 1965
SC 1473 at paragraph 19 page 1476). Section 2(45) defines the expression
“total income” to mean the total amount of income referred to in Section 5,
computed in the manner laid down in the Act. Section 4 charges the total
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person who is the recipient. This is defined to include all income, from
whatsoever sources derived, which is received or deemed to be received or
which accrues or is deemed to have accrued in India or which accrues or
arises outside India during the previous year. Section 10 defines those
categories of income which shall not be included in computing the total
income of the previous year of any person. Income tax is a tax on income in
the hands of the assessee. Hence, when Section 14A disallows expenditure
incurred by the assessee in relation to income which does not form part of
the total income, it would include categories of income such as dividend
from shares and income from mutual fund which under Section 10 are not to
be included in the total income. Since dividend income and income from
mutual funds are not included in the total income of the assessee, no
deduction of expenditure is permissible under Section 14A(1). Sub-section
(5) of Section 115-O stipulates that no deduction under any other provisions
of the Act shall be allowed to the Company or to a shareholder in respect of
the amount which has been charged to tax under sub-section (1) or the tax
thereon.
42. The tax which is paid by the Company on profits declared,
distributed or paid by way of dividend is not a tax which is paid on behalf of
the shareholder. The company is liable to pay income tax in respect of its
total income. In addition to the income tax chargeable in respect of its total
income, a domestic Company is charged with the payment of additional
income tax, called a tax on distributed profits on any amount declared,
distributed or paid by the Company by way of dividend. The charge under
sub-section (1) of Section 115-O is on the profits of the Company; more
specifically on that part of the profits which is declared, distributed or paid
by way of dividend. The charge under sub-section (1) of Section 115-O is
not on income by way of dividend in the hands of the shareholder.
The additional income-tax payable on profits of a domestic company under
Section 115-O is not a tax on dividend.
43. Section 115-O provides that a domestic company which declares,
distributes or pays dividend out of current or accumulated profits, shall,
apart from paying tax on its total income, pay additional income-tax on the
amount of profits declared, distributed or paid as dividend or after 1 April
2003.
44. To illustrate, if Rs.1,000/- is the total income of a domestic company
and out of the total income of Rs.1,000/-, Rs. 300/- is declared, distributed
or paid as dividend, then that domestic company is liable to pay income tax
on the total income of Rs.1,000/- at the rate specified under the relevant
Finance Act and is further liable to pay additional income-tax at the rate
prescribed under Section 115-O on the amount of profits declared,
distributed or paid as dividend.
45. Section 115-O has been enacted with a view to exempt dividend
income. Prior to the insertion of Section 115-O, domestic companies were
liable to pay tax on the total income (including profits distributed as
dividends) and shareholders were liable to pay tax on dividend income
received. Domestic companies distributing profits as dividends were liable to
deduct tax at source and shareholders receiving the dividend were entitled to
take credit of such tax deducted at source. As this method was found to be
cumbersome, Parliament chose to exempt dividend income in the hands of
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the shareholder and chose to levy additional income-tax on the amount of
profits declared, distributed or paid as dividend by the domestic companies.
Thus, by inserting Section 115-O, additional income-tax is levied on the
amount of profits declared, distributed or paid as dividend and by inserting
Section 10(33) it is made clear that the dividends referred to in Section 115-
O would be exempt from tax.
46. In Purushottamdas Thakurdas vs. C.I.T. (1963) 48 ITR (SC) 206 the
Supreme Court construed the provisions of Section 16(2) and Section 49B
of the Indian Income Tax Act, 1922. Sub-section (2) of Section 16 provided
that any dividend shall be deemed to be income of the year in which it is
paid regardless of the question as to when the profits out of which the
dividend is paid were earned. By a deeming fiction introduced by Section
49B, when a dividend was paid to a shareholder by a Company which was
assessed to tax, the income tax in respect of such dividend was deemed to
have been paid by the shareholder himself. The Supreme Court observed
that the position as a matter of general law was as follows:
“In general law, the Company is chargeable to tax on its profits as a
distinct taxable entity and it paid tax in discharge of its own liabilities
and not on behalf of or as an agent for its shareholders”
……..
48. Significantly, in the Income Tax Act, 1961, Parliament has not made
such a deeming provision as was enacted in Section 49B of the act of 1922.
On the contrary, sub-section (4) of Section 115-O has the effect of providing
that the shareholder cannot claim any credit for the amount paid by the
Company under Section 115-O(1). There is, therefore, merit in the
submission of the Additional Solicitor General that dividend received by the
shareholder is not tax paid. Similarly, as noted earlier, under sub-section (5),
a shareholder is not entitled to claim any deduction in respect of the amount
which has been charged to tax under sub-section (1) of Section 115-O or the
tax thereon. Hence, viewed from the perspective of Section 115-O as well as
Section 14A, it is evident that the tax on distributed profits is a charge on the
Company. The Company is chargeable to tax on its profits as a distinct
taxable entity. It does not do so on behalf of the shareholder. The Company
does not act as an agent of the shareholder in paying the tax under Section
115-O. In the hands of the recipient shareholder dividend does not form part
of the total income. On the contrary, Section 10(33) clearly evinces
parliamentary intent that incomes from dividend (and from mutual VBC 44
ITXA626.10 funds) are not includible in the total income.
51. We have also been fortified in the conclusion which we have drawn, by
the judgment of the Supreme Court in Walfort (supra). The Supreme Court
has in the following observation expressly held that since dividend income
does not form part of the total income, the expenditure that is incurred in
the earning of such income cannot be allowed even though it is of a nature
specified in Sections 15 to 59.
55. In order to conclude the discussion on this aspect of the case, we
would proceed to recapitulate our conclusions:
(i) …….
(x) The effect of Section 115-O is that in addition to the income tax
chargeable on the total income of a domestic Company, additional
income tax is charged on profits declared, distributed or paid. This
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tax which is referred to as a tax on distributed profits is what it means,
namely, a tax on the profits of the Company. This is not a tax on
dividend income. Under Section 115-O, the charge is on a
component of the profits of the Company; that component
representing profits declared, distributed or paid. The tax under
Section 115-O is not a tax which is paid by the Company on behalf of
the shareholder, nor does the Company act as an agent of the
shareholder in paying the tax. This legal position is fortified by the
circumstance that the shareholder is not entitled to any deduction in
respect of the amount which has been charged to tax under sub-
section (1) or the tax thereon;
(xi) Additional income-tax liability on the profits declared,
distributed or paid as dividend by a domestic company, cannot be
considered as tax on dividend, because,
(a) Provisions contained in Chapter XII-D are special provisions
relating to tax on the distributed profits of domestic companies.
Even Section 115-O in Chapter XII-D clearly states that the
additional income-tax liability thereunder is on the amount of
profits declared, distributed or paid by a domestic company as
dividend. Thus, the additional income tax under Section 115-O is
a tax on profits and not a tax on dividend.
(b) Distribution of profits as dividend being appropriation of
profits, the company distributing profits as dividend is liable to
pay tax on the total income inclusive of the amount of profits
distributed as dividend. By inserting Section 115-O, the legislature
has imposed additional income-tax on the amount of profits
distributed as dividend. Thus, tax as well as additional income-tax
are taxes levied on the profits of a domestic company. From the
fact that the additional income-tax is levied only on profits
declared, distributed, or paid as dividend, it cannot be said that
the additional income-tax is not a tax on the profits of the
domestic company but a tax on dividend.
(c) Where profits of a Company are distributed as dividend,
those profits are taxed in the hands of the Company and dividends
are taxed in the hands of the shareholders because the character of
the income in the hands of a Company and in the hands of a
shareholder is totally different. Profits in the hands of a company
would be business income, whereas, the said amounts when
distributed as dividend, would constitute dividend income in the
hands of the shareholders. In such a case, the liability on the
Company is on profits of business income, where as the tax
liability on the shareholder would be on the dividend income.
The legislature has chosen to exempt tax o n dividend income and
has chosen to impose additional tax on profits distributed as
dividend. Therefore, the tax as well as additional tax are taxes
levied on a domestic company on its profits and it cannot be said
that the regular / normal tax is levied on profits and the additional
tax is levied on the dividend. When Section 115-O specifically
states that the additional tax is on the profits distributed as
dividend, there is no reason to hold that the additional income-tax
is a tax on dividend.
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(d) Income-tax is charged on the income earned by an assessee.
When profits are distributed as dividend, there is no income
earned by a domestic company and consequently, there is no
question of taxing the amount distributed as dividend. However,
the legislature has chosen to impose additional tax in addition to
the regular tax, payable on the profits of a domestic Company.
Thus, the regular tax as well as the additional tax are taxes on the
profits of the domestic companies.
(e) Incomes enumerated in Section 10 are not includible in the
total income, because the legislature exempts such income from
tax. Dividends referred to in Section 115-O are covered under
Section 10(33) and hence exempt from tax. As noted earlier, the
additional tax under Section 115-O is a tax on the profits
distributed as dividend and not a tax on dividend. In the absence
of Section 10(33), tax would have been payable on the dividends
referred in Section 115-O. Therefore, it is clearly evident from
Section 10(33) that dividends referred to in Section 115-O are
exempt from tax.
(f) It is contended that dividends taxed in the hands of a
domestic company under Section 115-O if held taxable again in
the hands of a shareholder, would amount to double taxation.
There is no merit in this contention because, additional tax is a tax
on the profits of the Company which is distributed as dividend,
whereas, tax in the hands of a shareholder is a tax on dividend
income.
(g) This is also supported by Circular No.763 dated 18 February
1998 issued to explain the provisions of Section 115-O and
Section 10(33) inserted by Finance Act 1997. The Circular, clearly
and unequivocally states that Section 10(33) and Section 115-O
are intended to exempt dividend income and levy a new tax on
distributed profits on domestic companies. Thus, what is collected
under Section 115-O is the additional tax on profits distributed as
dividend and not a tax on dividends, because dividends received
are exempt under Section 10(33).
(emphasis supplied)
24. It was thus clearly held by the Division Bench that effect of Section 115-O
is that in addition to the income-tax chargeable on the total income of domestic
company, an additional income-tax is charged on profits declared, distributed or
paid. It was held that such tax which is referred to as a tax on distributed profits
would mean that it is a tax on the profits of the company. This is not a tax on
dividend income. It was held that under Section 115-O, the charge is on a
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component of the profits of the Company.
25. The decision of the Division Bench in Godrej and Boyce Mfg. Co. Ltd.
was assailed before the Supreme Court in Godrej & Boyce Mfg. Co. Ltd. vs.
Deputy Commissioner of Income-tax and Anr.(supra). The Supreme Court
noted the issue which had arisen for determination when it observed in paragraph
2 of its judgment that the appeal relates to the admissibility or otherwise of
deduction of expenditure incurred in earning dividend income which is not
includible in the total income of the assessee by virtue of the provisions of Section
10(33) of the Income Tax Act, 1961as in force during the relevant Assessment
Year 2002-2003. Paragraph 2 reads thus:
2. The issue in the present appeal relates to the admissibility or otherwise of
deduction of expenditure incurred in earning dividend income which is not
includible in the total income of the Assessee by virtue of the provisions of
Section 10(33) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”)
as in force during the relevant Assessment Year i.e. 2002-2003.”
26. In paragraph 8 of the decision, the Supreme Court noted that the High
Court had inter alia held that Section 14A of the Act * was required to be
construed on a plain grammatical construction thereof and the said provision is
attracted in respect of dividend income referred to in Section 115-O as such
income is not includible in the total income of the shareholder. In so observing,
the Supreme Court noted that the High Court had also held that the tax paid
under section 115-O of the Act was an additional tax on that component of the
profits of the dividend distributing company which is distributed by way of
dividends and that the same is not a tax on dividend income of the assessee. The
* Section 14A [Expenditure incurred in relation to income not includible in total income.
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Supreme Court in the context of the questions as raised by the assessee also
framed two questions to be decided as referred to in paragraph 9 of its judgment.
Paragraphs 8 and 9 are required to be noted, which reads thus:
8. The High Court by the impugned judgment dated 12th August, 2010,
inter alia, held that Section 14A of the Act has to be construed on a plain
grammatical construction thereof and the said provision is attracted in
respect of dividend income referred to in Section 115-O as such income is
not includible in the total income of the shareholder. Sub-sections (2) and
(3) of Section 14A of the Act and rule 8D of the Income-tax Rules, 1962
(hereinafter referred to as “the Rules”) would, however, not apply to the AY
2002-03 as the said provisions do not have retrospective effect.
Notwithstanding the above the High Court upheld the remand as made by
the Tribunal to the AO though for a slightly different reason as will be
noticed hereinafter. We may also notice that the High Court in its
impugned judgment also held that the tax paid under section 115-O of the
Act is an additional tax on that component of the profits of the dividend
distributing company which is distributed by way of dividends and that the
same is not a tax on dividend income of the assessee.
9. Aggrieved, the instant appeal has been filed raising two questions in the
main which have been summarized by the appellant, and we may say
accurately, as follows :
“(a)Irrespective of the factual position and findings in the case of the
Appellant, whether the phrase “income which does not form part of
total income under this Act” appearing in Section 14A includes within
its scope dividend income on shares in respect of which tax is payable
under Section 115-O of the Act and income on units of mutual funds
on which tax is payable under Section 115-R.
(b) Whatever be the view on the legal aspects, whether on the facts and
in the circumstances of the Appellant’s case and bearing in mind the
unanimous findings of the lower authorities over a considerable period
of time (which were accepted by the Revenue) there could at all be any
question of the provisions of Section 14A in the appellant’s case.”
27. The Supreme Court dealing with the provisions of Section 115-O did not
disturb as to what was held by the Division Bench of this Court in Godrej &
Boyce Mfg. Co. Ltd. (supra) as clearly seen from the observations of the Supreme
Court in paragraph 9, 30, 31 and 34, which read thus:
“9. Aggrieved, the instant appeal has been filed raising two questions in the
main which have been summarised by the appellant, and we may say
accurately, as follows:
“(a) Irrespective of the factual position and findings in the case of the appellant,
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31-ITXA-1029-2025.DOCwhether the phrase “income which does not form part of total income under
this Act” appearing in Section 14-A includes within its scope dividend income
on shares in respect of which tax is payable under Section 115-O of the Act and
income on units of mutual funds on which tax is payable under Section 115-R.
(b) Whatever be the view on the legal aspects, whether on the facts and in the
circumstances of the appellant’s case and bearing in mind the unanimous
findings of the lower authorities over a considerable period of time (which were
accepted by the Revenue) there could at all be any question of the provisions of
Section 14-A in the appellant’s case.”
…..
…..
30. While it is correct that Section 10(33) exempts only dividend income
under Section 115-O of the Act and there are other species of dividend income
on which tax is levied under the Act, we do not see how the said position in law
would assist the assessee in understanding the provisions of Section 14A in the
manner indicated. What is required to be construed is the provisions of Section
10(33) read in the light of Section 115-O of the Act. So far as the species of
dividend income on which tax is payable under Section 115-O of the Act is
concerned, the earning of the said dividend is tax free in the hands of the
assessee and not includible in the total income of the said assessee. If that is so,
we do not see how the operation of Section 14A of the Act to such dividend
income can be foreclosed. The fact that Section 10(33) and Section 115-O of
the Act were brought in together; deleted and reintroduced later in a composite
manner, also, does not assist the assessee. Rather, the aforesaid facts would
countenance a situation that so long as the dividend income is taxable in the
hands of the dividend paying company, the same is not includible in the total
income of the recipient assessee. At such point of time when the said position
was reversed (by the Finance Act of 2002; reintroduced again by the Finance
Act, 2003), it was the assessee who was liable to pay tax on such dividend
income. In such a situation the assessee was entitled under Section 57 of the
Act to claim the benefit of exemption of expenditure incurred to earn such
income. Once Section 10(33) and 115-O was reintroduced the position was
reversed. The above, actually fortifies the situation that Section 14A of the Act
would operate to disallow deduction of all expenditure incurred in earning the
dividend income under Section 115-O which is not includible in the total
income of the assessee.
31. So far as the provisions of Section 115-O of the Act are concerned, even
if it is assumed that the additional income tax under the aforesaid provision is
on the dividend and not on the distributed profits of the dividend paying
company, no material difference to the applicability of Section 14A would arise.
Sub-sections (4) and (5) of Section 115-O of the Act makes it very clear that
the further benefit of such payments cannot be claimed either by the dividend
paying company or by the recipient assessee. The provisions of Sections 194,
195, 196C and 199 of the Act, quoted above, would further fortify the fact that
the dividend income under Section 115-O of the Act is a special category of
income which has been treated differently by the Act making the same non-
includible in the total income of the recipient assessee as tax thereon had
already been paid by the dividend distributing company. The other species of
dividend income which attracts levy of income tax at the hands of the recipient
assessee has been treated differently and made liable to tax under the aforesaid
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provisions of the Act. In fact, if the argument is that tax paid by the dividend
paying company under Section 115-O is to be understood to be on behalf of
the recipient assessee, the provisions of Section 57 should enable the assessee to
claim deduction of expenditure incurred to earn the income on which such tax
is paid. Such a position in law would be wholly incongruous in view of Section
10(33) of the Act.
34. For the aforesaid reasons, the first question formulated in the appeal
has to be answered against the appellant assessee by holding that Section 14-A
of the Act would apply to dividend income on which tax is payable under
Section 115-O of the Act.”
28. On such backdrop, we consider the contention as urged on behalf of the
appellant/assessee that the issue, the assessee is canvassing that the DDT is a tax
paid by the Company in the hands of the shareholders, and hence, the liability of
the assessee under the DTAA would be to pay tax not at the rate as prescribed
under Section 115-O but a lower rate of (10%) tax under Article 11 of the DTAA
is no more res integra in view of the judgment of co-ordinate Bench of this Court
in Colorcon Asia Pvt. Ltd. (supra). In Colorcon Asia Pvt. Ltd. (supra), the
Division Bench was concerned with the assessee’s case that during the AY 2016-
17 to 2018-19 Colorcon had paid dividend to its parent company – Colorcon
Limited, United Kingdom, as also had paid the Dividend Distribution Tax
(DDT) thereon at the rate specified under Section 115-O of the Act. Also an
interim dividend was paid for AY 2019-20.
29. Colorcon Asia Pvt. Ltd./ appellant having paid the cumulative dividend,
pay out in excess of Rs.100 crores, filed an application under Section 245Q of the
IT Act on 20 May, 2019 seeking an advance ruling on the questions before Board
for Advance Rulings (BFAR), which were to the following effect:
(i) Whether Colorcon Asia Private Limited would be entitled to restrict
the tax rate on dividends distributed or distributable by it to Colorcon
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31-ITXA-1029-2025.DOCLimited, United Kingdom UK), at 10 per cent under Article 11
(Dividends) of the India-UK Tax Treaty (“Tax Treaty”).
(ii) If the answer to question no.(1) is in the affirmative, whether in the
facts and circumstances of the case and in law, the tax rate of 10 per cent
under the Tax Treaty needs to be further grossed-up.
30. The BFAR after hearing the parties, rendered its ruling dated 27 June,
2024 (as impugned) when it answered the questions to the following effect:
(i) The Dividend Distribution Tax (DDT) paid by the Colorcon Asia
Pvt. Ltd./appellant to its shareholder was squarely outside the scope of
DTAA between India and the United Kingdom as held by the Special
bench of the Tribunal in Total Oil Pvt. Ltd. without dealing with the
detailed distinctions filed by the appellant.
(ii) DDT does not fall within “Taxes covered” under Article 2 of India –
UK DTAA.
(iii) Colorcon’s contention to restrict the tax rate of DDT to the extent
of withholding tax rate on dividend income under Article 11 of the India-
UK DTAA has no merit.
31. In considering the challenge to the aforesaid ruling of BFAR relying on the
India-UK DTAA, Colorcon asserted that under the statutory scheme contained in
the IT Act, which defines “Tax to be income tax chargeable ” to include the
dividend income, the term “dividend” was defined under Section 2(22) to include
any distribution by a company of accumulated profits to its shareholders under
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the provisions of Section 115-O (introduced by the Finance Act, 1997), the
incidence of collection of tax on dividend from shareholders was shifted to
dividend declaring company. It is in such context, the provisions of India-UK
DTAA were considered and more particularly Articles 1, 2 and 11. Article 11
which deals with “Dividends”, is to the following effect :-
“ARTICLE 11
DIVIDENDS
1. Dividends paid by a company which is a resident of a Contracting State
to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident and according to the
laws of that State, but if the beneficial owner of the dividends is a resident of
the other Contracting State, the tax so charged shall not exceed.
(a) 15 per cent of the gross amount of the dividends where those dividends are
paid out of income (including gains) derived directly or indirectly from
immovable property within the meaning of Article 6 by an investment vehicle
which distributes most of this income annually and whose income from such
immovable property is exempted from tax;
(b) 10 per cent of the gross amount of the dividends, in all other cases. The
competent authorities of the Contracting States shall by mutual agreement
settle the mode of application of these limitations. The provisions of this
paragraph shall not affect the taxation of the company in respect of the profits
out of which the dividends are paid.
3. The term “dividends” as used in this Article means income from shares,
or other rights, not being debt-claims, participating in profits, as well as any
other item which is subjected to the same taxation treatment as income from
shares by the laws of the State of which the company making the distribution
is a resident.
4. The provisions of paragraphs 1 and 2 of this Article shall not apply if the
beneficial owner of the dividends, being a resident of a Contracting State,
carries on business in the other Contracting State of which the company
paying the dividends is a resident, through a permanent establishment situated
therein, or performs in that other State independent personal services from a
fixed base situated therein, and the holding in respect of which the dividends
are paid is effectively connected with such permanent establishment. In such
case the provisions of Article 7 (Business profits) or Article 15 (Independent
personal services), as may be the case, shall apply.
5. Where a company which is a resident of a Contracting State derives
profits or income from the other Contracting State, that other State may not
impose any tax on the dividends paid by the company, except insofar as such
dividends are paid to a resident of that other State or insofar as the holding in
respect of which the dividends are paid is effectively connected with a
permanent establishment situated in that other State, nor subject the
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company’s undistributed profits to a tax on undistributed profits, even if the
dividends paid or the undistributed profits consist wholly or partly of profits or
income arising in that other State.
6. No relief shall be available under this Article if it was the main purpose
or one of the main purposes of any person concerned with the creation or
assignment of the shares or other rights in respect of which the dividend is
paid to take advantage of this Article by means of that creation or
assignment.]”
(emphasis supplied)
32. The assertion of Colorcon Asia Pvt. Ltd. (supra) was by juxtaposing the
effect of Section 90 of the Income Tax Act read with the consequence of
Article 11 qua the applicability of Section 115-O, as included in Chapter XII-D in
form of “Special Provisions relating to Tax on Distributed Profits of Domestic
Companies”, in the light of the definition of term ‘Dividend’ under Section 2(22)
of the Income Tax Act, and by taking into consideration the legislative history
surrounding the insertion and repeal of Section 115-O, read alongwith the
memorandum, offering the justification for such amendment. On such backdrop,
the assessee contended that the DDT is nothing but tax on dividend, which is
income of the shareholder, the incidence of which was shifted to the Company,
and that there was no change in its substantive concept or definition, but all the
while shifting has occurred for ‘Administrative convenience’. Colorcon further
asserted that in the light of the domestic law provision, DDT is levied on the
dividend distributed by the Company, which is income of the “shareholders”
being an ‘Additional tax’ covered by the definition of ‘tax’ as defined in Section
2(43) of the Act, falling within the ambit of charging Section 4 of the Act, being
covered by provisions of the Income Tax Act, including Section 90 empowering
the Central Government to enter into any ‘Double Tax Avoidance Agreement’
with another country. On such premise, Colorcon asserted that the impugned
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ruling passed by BFAR against Colorcon was on an erroneous premise as
Colorcon being a resident of India cannot seek relief under India -UK DTAA,
which according to Colorcon, was contrary to the reading of Article 1 of the
DTAA, which provided that the convention shall apply to persons who are
resident of one or both of the contracting States, hence under Article 4, Colorcon
was entitled to seek relief under the DTAA, whereby the payment was made to
the resident of another contracting State. Thus, the ultimate contention referring
to the relevant Articles of the India-UK DTAA, Colorcon, urged that if the
payment made by the Colorcon Asia Pvt. Ltd. to Colorcon UK is in the nature of
dividend as falling under the definition of ‘dividend’ provided under Section
2(22) of the IT Act and under Article 11(3) of the DTAA, and as a concept, since
dividend has remained unchanged under the IT Act of 1961 or under the DTAA,
but there is merely the change in the incidence of tax under the domestic law for
administrative convenience, the benefit under the DTAA cannot be denied to
Colorcon/appellant, hence, the situation would be governed under Article 11 of
the DTAA.
33. The department resisted the aforesaid contention of Colorcon and
supported the impugned ruling of the BFAR inter alia contending that Colorcon
had paid dividend to Colorcon UK as also paid Dividend Distribution Tax
(DDT) at the rate specified under Section 115-O of the IT Act for FYs in
question. It was contended that in the context of DTAA in question, the dividend
distribution tax was explicitly excluded from the scope of taxes covered under the
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agreement. It was contended that since DDT is not classified under the heading
“Tax”, and hence the 10% withholding tax rates stipulated under Article 11(2)
would not apply and the dividend would be governed by Indian Tax Laws. In
supporting such contention, reliance was placed in the case of Total Oil India
Private Ltd. (supra), in which after the analysis of the relevant statutory
provisions, and treaties, the Special Bench of the Tribunal had reached to a
conclusion that the tax paid under Section 115-O is an “additional tax” on the
Domestic Company and it is not a tax in respect of non-residence income in
India. It was categorically contended that on reading of Section 115-O of the
Income Tax Act, it was evident that the incidence as well as charge in respect of
DDT is only on the domestic company that declares, distributes or has paid the
dividend. It was contended that the tax under section 115-O is an additional
income tax, on the domestic company and by no stretch of imagination, DDT
could be construed to mean as a tax on non resident dividend income, which is
collected by domestic company. Revenue also placed reliance on the decision of
this Court in Godrej & Boyce Mfg. Co. Ltd. (supra) as also the decision of the
Supreme Court arising from such decision in Godrej & Boyce Mfg. Co. Ltd.
(supra). The Division Bench analyzing the provisions of Section 115-O and its
antecedents held that Dividend Distribution Tax (DDT) is not the tax on income
of the dividend declaring company, however, ultimately it was a tax on the
dividend income of the shareholders. The relevant observations in that regard are
found in paragraph 26, which read thus:
“26. The aforesaid amendment to Section 115-O make it clear that DDT
is not the tax on income of the dividend declaring company, but it isPage 35 of 42
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31-ITXA-1029-2025.DOCultimately a tax on the dividend income of shareholders. The provision of
Section 115-O, though prescribe the tax on distributed profits of
domestic companies to be in addition to the income tax chargeable in
respect of the total income of a domestic company for any assessment
year, declared or distributed by way of dividends, with effect from
01/04/2003, was charged to additional income tax. Sub-Section (2) made
it evidently clear that though a domestic company had not paid any
income tax on its income in accordance with the Act , the tax on
distributive profits shall be payable by such company and it shall be paid
to the credit of the Central Government within 14 days from the
declaration of dividend or its distribution or payment whichever is the
earliest.
Sub-Section (1)(b) of Section 115-O, is the provision for grossing up
of the dividend income of the shareholder for the purpose of computing
DDT, but it always remain a tax on dividend, which can be declared out
of companies reserves and it is not an additional income tax on profits of
the company as even if the company is subject to loss during the financial
year and do not pay income tax, but upon declaration of the dividend it is
still required to pay DDT under sub-section (2), which make it clear that
it is not a tax on profits of the company, but is tax on dividend.
From the above alchemy of Section 115-O, shifting the incidence of
DDT, in light of the definition of the term ‘Dividend’ under the Income
Tax Act with the legislative history referred to above, the provision in
form of Section 115-O, being amended on more than one occasion, we
safely lead to an inference that DDT is a tax on dividend , which is
income of the shareholder, but its incidence has been shifted to the
company purely for administrative convenience though there is no
change in the substantive Rule or concept of ‘Dividend’. Since under the
Income Tax Act, DDT is levied on Dividend distributed company, which
amounts to income in the hands of shareholder and being “additional
tax” it covered within the definition of Tax as defined in Section 2 (43) of
the Act and since it is covered by Charging Section 4, it must be
necessarily subservient to the provisions of the Act which include Section
90.”
34. The Division bench referring to Godrej & Boyce Mfg. Co. Ltd. (supra)
held that the reliance on such decision would not govern the question that arises
for consideration, as the Division Bench opined that it was undisputed position
that DDT is tax on dividend income having been declared, distributed and paid
to Colorcon UK, the same would stand covered under the definition of dividend
under Article 11(2) India-UK DTAA. It was hence held that the decision in
Godrej & Boyce Mfg. Co. Ltd. (supra) was of no succor to the Revenue. It was
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also held that the decision in DCIT Vs. Total Oil India Pvt. Ltd. (supra), which
followed the law laid down by the Supreme Court in Godrej & Boyce Mfg. Co.
Ltd. (supra) while deciding the nature of DDT under Section 115-O of the IT
Act, was held to be dealing with a different situation on different issue of
disallowance of expenses under Section 14-A. It was observed that in contrast,
the decision in Union of India Vs. Tata Tea Company Ltd. 8 in the context of tax
on the dividend income was completely ignored by the authority. The Division
Bench in conclusion held that from a combined reading of Section 115-O and
10(34), on the backdrop of the legislative history of the provisions, it was evident
that DDT was a tax on the dividend income of the shareholder, though the
incidence of tax has shifted from the shareholder to the company paying the
dividend. It was held that any other interpretation of the provisions will render
the section 115-O of the IT Act unconstitutional, as it will fall foul of Entry 82,
since what is sought to be taxed by the department is not ‘income’ of the
company. Also in conclusion, it was held that decision in Godrej & Boyce Mfg.
Co. Ltd. (supra) was rendered on a different issue as to whether expenses
incurred in relation to earning an exempt income by way of dividend was to be
disallowed under Section 14-A of the IT Act.
35. On the aforesaid conspectus, the question which has arisen for
consideration in the present proceedings is whether the DDT payable by the
appellant under the provisions of Section 115-O would be required to be held,
merely on the legislative history of the provisions of Section 115-O read with
8 (2017)398 ITR 260(SC)
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Section 10(34), to be a tax on the dividend income of the shareholder and not an
additional tax by the company declaring the dividend. This more particularly on a
plain purport of the said provision under Section 115-O begins with a non-
obstante clause “Notwithstanding anything contained in any other provisions of
this Act and subject to the provisions of this section”, stipulates that ” 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 dividend (whether interim or otherwise), whether out of
current or accumulated profits shall be charged to additional income-tax (referred
to as tax on distributed profits) in the manner a provided in the said provision and
more particularly Section 115-O(3), providing for “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 declaration of any dividend, distribution of any dividend, payment of any
dividend, whichever is earliest. Further, in our opinion the Division Bench of this
Court in Godrej & Boyce Mfg. Co. Ltd. (supra), has categorically held that
payment of tax by domestic company under Section 115-O(1) was an additional
income-tax on profits declared, distributed or paid being, is a charge on a
component of the profits of the company. Thus, it is the company which is
chargeable to tax, on its profits as a distinct taxable entity and it pays tax in
discharge of its own liability and not on behalf of or as an agent for its
shareholders. It was also categorically held that in the hands of the shareholder as
the recipient of dividend, income by way of dividend does not form part of the
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total income by virtue of the provisions of Section 10(33). This is the clear view
of the Division Bench as seen from the conclusions/operative part of the decision
of the Division Bench in Godrej & Boyce Mfg. Co. Ltd. (supra). Such view of the
Division Bench was accepted and/or not disturbed by the Supreme Court, as the
Supreme Court considering the provisions of Section 115-O and other relevant
provisions, categorically held that sub-sections (4) and (5) of Section 115-O of the
IT Act made it very clear that the benefit of such payments cannot be claimed
either by the dividend paying company or by the recipient assessee except when
115-O was not to be applied. The Supreme Court also held that tax paid by the
dividend paying company under Section 115-O is to be understood not to be on
behalf of the recipient assessee, the provisions of Section 57 would enable the
assessee to claim deduction of expenditure incurred to earn the income on which
such tax is paid, and that such a position in law would be wholly incongruous in
view of Section 10(33) of the Act.
36. It thus appears to us that the Division Bench in Colorcon Asia Pvt. Ltd.
(supra) has made observations which in our respectful view appear to be contrary
to the view taken by the Division Bench of this Court in Godrej & Boyce Mfg.
Co. Ltd. (supra) as also confirmed by the Supreme Court. In fact the arguments
of Mr. Venkataraman, learned Additional Solicitor General is that the decision in
Colorcon Asia Pvt. Ltd. (supra) in such view of the matter is per incuriam, i.e., the
same being contrary to the provisions of Section 115-O of the IT Act, which
stands interpreted by the Supreme Court in Godrej & Boyce Pvt. Ltd. (supra).
37. Further, Mr. Venkataraman also drawing our attention to the decision of
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the Division Bench of this Court in Small Industries Development Bank of India
vs. Central Board of Direct Taxes and Anr.9 has submitted that the view taken by
the Division Bench in M/s. Colorcon Asia Pvt. Ltd. (supra) is also contrary to this
decision of the Division Bench. Even in such case, the Division Bench of this
Court has held that the tax under sub-section (1) of Section 115-O of the IT Act
is on the company’s profits and more specifically on that part of the profits which
is declared, distributed or paid by way of dividend. It was held that such charge is
not on income by way of dividend in the shareholder’s hands and hence the
additional income-tax payable on profits of a domestic company under Section
115-O of the Act is not a tax on dividend. It was also held that thus the amount
distributed or paid by way of dividend falls in the category of income, profits or
gains derived. The following observations as made by the Division Bench are
required to be noted, which read thus:
“14. Dividend is defined in Section 2(22) of the IT Act to, inter alia, include
any distribution by a company of accumulated profits, which entails releasing
any assets by the company to its shareholders. In terms of Explanation 2 to
Section 2(22) of the said Act, the expression accumulated profits includes all
company profits up to the date of distribution or payment thereof. It appears
that the transfer of profits of Petitioner to IDBI in terms of Section 29(2) of
SIDBI Act entails payment by Petitioner to IDBI. This payment or
distribution of Petitioner’s liquid assets constitutes dividend distributed by
Petitioner out of its accumulated profits as envisaged under Section 2(22)(a)
of the IT Act. It needs to be noted that the charge under sub-section (1) of
Section 115-O of the said Act is on the rsk 11 / 12 202-WP-1994-03-F-1.doc
company’s profits, more specifically on that part of the profits which is
declared, distributed or paid by way of dividend. The charge under sub-
section (1) of Section 115-O of the said Act is not on income by way of
dividend in the shareholder’s hands. Therefore, the additional income-tax
payable on profits of a domestic company under Section 115-O of the said
Act is not a tax on dividend. In our considered opinion, the amount
distributed or paid by way of dividend falls in the category of income, profit
or gains derived.”
9 2021 SCC OnLine Bom 14048
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38. Thus, another Division Bench has given similar meaning and
interpretation to Section 115-O, which has been completely overlooked by the
Division Bench in deciding M/s. Colorcon Asia Pvt. Ltd. (supra) is Mr.
Venkataraman’s submission. We find much substance in the contentions as urged
by Mr. Venkataraman.
39. In the aforesaid circumstances, we are of the clear view that there is a
cleavage of opinion considering the view taken by the Division Bench in the case
of M/s. Colorcon Asia Pvt. Ltd. (supra) and the view taken by the Division Bench
in Godrej & Boyce Pvt. Ltd. (supra) (as confirmed by the Supreme Court), as also
similar view taken by another Division Bench in Small Industries Development
Bank of India (supra).
40. In our respectful opinion, in these circumstances, the following questions
of law are required to be answered by the Larger Bench:
(i) Whether the decision of the Division Bench in M/s.
Colorcon Asia Pvt. Ltd. vs. The Joint Commissioner of Income
Tax, Panji Goa and Ors. (Tax Appeal No. 5/2024 decided on 28
November, 2025) lays down the correct position in law when it
holds that, Dividend Distribution Tax (DDT) is a tax paid by the
Company, on dividend income of the shareholder, entitling the
shareholder of the benefit of the provisions of Double Taxation
Avoidance Agreement (DTAA) between India and UK?
(ii) Considering the decision of the Supreme Court in Godrej
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& Boyce Pvt. Ltd. (supra), whether the decision of the Division
Bench in M/s. Colorcon Asia Pvt. Ltd. (supra) is per incuriam ?
41. Registry to place the proceedings before the Hon’ble the Chief Justice for
constitution of a Larger Bench to answer the aforesaid questions.
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