Deemed dividends not exempted u/s 10(34) in the hand of the payee-High Court

Deemed dividends not exempted u/s 10(34) in the hand of the payee since there is no payment of additional tax under Section 115(O)-High Court

ABCAUS Case Law Citation:
ABCAUS 2263 (2018) (03) HC

The appellant assessee had challeneged the order of the ITAT holding that assessee was liable to pay tax on the advance amount received which was held to be deemed dividend u/s 2(22)(e).

The appellant assessee was a major shareholder in a private limited company and was also a major participant in a Trust. The Trust availed finance from the private limited company. The same is deemed to be dividend under Section 2(22)(e) of the Income Tax Act, 1961 (the Act) and the said amount were taxed in the hands of the assessee.

The question raised before the Hon’ble High Court was as to whether the assessee would be liable to tax for the said advance amounts at his hands.

The Hon’ble High Court observed that definitely, the assessee  had a beneficial interest in the Trust which established the College and which used the advance paid to the assessee. There was also no dispute that the assessee was a major shareholder in the Private Limited Company which made the advance. Thus All the ingredients available in Section 2(22)(e) of the Act were attracted.

The assessee contended that the deemed dividend could not be taxed at the hands of the receiver. The dividend income having been exempted under Section 10(34); even if the amounts advanced were deemed to be dividend, the provision of exemption had to be given effect. At best, the dividend could be taxed as profits of the Company, which had already been done since the advanced amounts were from the accumulated profits. An additional tax under Section 115(O) can be levied on the payee Company and no tax can be levied on the receiver.

The Revenue, on the other hand, relied on Section 115(O) and contended that only those amounts, which are levied with additional income tax under Section 115(O) would be excluded under Section 10(34). It was pointed out that the explanation available in Chapter XXII(d) provides that the expression “dividends” not include sub-clause (e) of section 22.

The Hon’ble High Court observed that the exemption available from total income, as per Section 10(34), is on ‘any income by way of dividends referred to in Section 115(O)’. Section 115(O) specifically speaks of an additional income tax being levied on the amounts disbursed as dividend by a Company. What is exempted from being included in the total income is that amount disbursed by a Company as dividend, which has been taxed under Section 115(O).

The Hon’ble High Court observed that the explanation puts it beyond any pale of doubt and excludes sub-Clause (e) of Section 2(22) from the expression of dividend for the purposes of Chapter XII-D [containing Section 115(O) to 115(Q)]. Prior to sub-section (34) of Section 10 dividend was taxable as income in the hands of the recipient. Only in the context of non additional tax being levied on the Company, declaring and paying dividend, that exemption was granted to the recipient-shareholder.

The Hon’ble High Court opined that in the instant case, deemed dividends were not exempted since there was no payment of additional tax under Section 115(O). The revenue was right in contending that the exclusion under Section 10(34) would be applicable only for the amounts, which had suffered tax under Section 115(O).

The question of law was answered in favour of the Revenue and against the assessee.