Versus And: Efore Shim Umar Anerjee AND Apan Ukherjee

SCC Online Web Edition, Copyright © 2020
Page 1 Tuesday, June 30, 2020

Printed For: Amartya Vikram Singh, Rajiv Gandhi National University of Law
SCC Online Web Edition: http://www.scconline.com
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2006 SCC OnLine Cal 404 : (2006) 4 CHN 45 : (2006) 285 ITR 506 : (2006) 205
CTR 370
Reversed in Union of India v. Tata Tea Co. Ltd., (2017) 10 SCC 764
BEFORE ASHIM KUMAR BANERJEE AND TAPAN MUKHERJEE, JJ.
APO No. 25 of 2002; W.P. No. 1707 of 2000

Jayshree Tea & Industries Ltd. & Anr.
Versus
Union of India & Ors.
and
APO No. 64 of 2002; W.P. No. 794 of 2001
Tata Tea Company Limited & Anr.
Versus
and
APO No. 62 of 2002; W.P. No. 1699 of 2000
Bishnauth Tea Company Limited & Anr.
Versus
and
APO No. 61 of 2002; W.P. No. 1700 of 2000
AFT Industries Limited & Anr.
Versus
APO No. 25 of 2002; W.P. No. 1707 of 2000, APO No. 64 of 2002; W.P. No. 794 of
2001, APO No. 62 of 2002; W.P. No. 1699 of 2000 and APO No. 61 of 2002; W.P.
No. 1700 of 2000
Decided on July 28, 2006
Facts and Controversy:
1. Altogether four writ petitions were filed calling in question the provision of
section 115-O of the Income-tax Act, 1961 (hereinafter referred to as “the said Act of
1961”). The writ petitions were dismissed by the learned Single Judge by judgment
and order dated September 20, 2001 reported in 253, Income Tax Reports, Page 608
(Jayshree Tea and Industries Ltd. v. Union of India). Hence, these appeals. Since these
appeals involve identical question of facts and law these are disposed of by this
common judgment.
Page: 48
2. The appellants in four appeals are four different tea companies who cultivate tea
plants, pick up green tea leaves and thereafter process it in their factory for marketing
the same. Cultivation of tea is considered to be an agricultural process whereas
processing of tea, in the factory is an industrial process. Agricultural income is within
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the domain of the State and not the Union. Hence, Union is not empowered to levy tax
on agricultural income which is within the domain of the State. In case of tea
companies 60% of the income are considered to be an agricultural income and exempt
from payment of income-tax. As such, the tea companies are required to pay income
tax on 40% of their net income.
3. By the Finance Bill, 1997-1998 Union proposed an additional income tax on the
distributed profits in corporate sector in case any company decides to declare dividend
and thereby distributes profits amongst the shareholders. By the said Bill levy of tax
on dividend in the hand of the shareholders was withdrawn.
4. Paragraph 100-101 of the Speech of the Hon'ble Finance Minister on the floor as
reported in 224 Income Tax Reporter (Statute), page 23 is quoted below:
“100. Another area of vigorous debate over many years relates to the issue of tax
on dividends. I wish to end this debate. Hence, I propose to abolish tax on
dividends in the hands of the shareholder.
101. Some companies distribute exorbitant dividends. Ideally, they should retain
the bulk of their profits and plough them into fresh investments. I intend to reward
companies who invest in future growth. Hence, I propose to levy a tax on
distributed profits at the moderate rate of 10 per cent on the amount so distributed.
This tax shall be an incidence on the company and shall not be passed on to the
shareholder.”
5. Prior to the said amendment there had been a grievance of the tax payers with
regard to double taxation as the corporate sectors were to pay tax on the net income
and as and when such income was distributed amongst the shareholders, the
shareholders were also to pay tax on the said amount. By the above amendment the
shareholders were relieved of payment of tax. However, the company was imposed an
additional tax in case they decide to declare dividend and thereby distribute profit
amongst the shareholders. Section 115-O is quoted below:
“115-O. (1) Notwithstanding anything contained in any other provision of this Act
and subject to the provisions of this section, in addition to the income-tax
chargeable in respect of the total income of a domestic company for any
assessment year, any amount declared, distributed or paid by such company by
way of dividends (whether interim or otherwise) on or after the 1st day of June,
1997, whether out of current or accumulated profits shall be charged to additional
income-tax (hereinafter referred to as tax on distributed profits) at the rate of ten
per cent.
(2) Notwithstanding that no income-tax is payable by a domestic company on its
total income computed in accordance with the provisions of this Act, the tax on
distributed profits under sub-section (1) shall be payable by such company.
Page: 49
(3) The principal officer of the domestic company and the company shall be liable to
pay the tax on distributed profits to the credit of the Central Government within
fourteen days from the date of—
(a) declaration of any dividend; or

(b) distribution of any dividend; or
(c) payment of any dividend,
whichever is earliest.
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(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.
(5) No deduction under any other provision of this Act shall be allowed to the
company or a shareholder in respect of the amount which has been charged to tax
under sub-section (1) or the tax thereon.”
6. The writ petitioners challenged the introduction of section 115-O on the ground
that it ultra vires the Constitution. Such submission of the writ petitioners were
negated by the learned Single Judge by the judgment and order dated September 20,
2001.
Judgment and Order Impugned:
7. On perusal of the judgment of the learned Single Judge it appears to us that the
learned Single Judge rejected the contentions of the appellants to the extent that
imposition of additional income-tax on the dividend was not ultra vires unless it was
found that such tax was a tax upon agricultural income in disguise. The learned Judge
held that income on dividend declared by a tea company and income of a tea company
could not be equated. His Lordship relied upon the case of Bacha F. Guzdar, Bombay v.
Commissioner of Income Tax, Bombay, reported in 27, Income Tax Reporter, Page 1.
His Lordship dismissed the writ petition mainly relying on the principle laid down in
Bacha case (supra). His Lordship also negated the submission of the writ petitioners
that levy of such additional income-tax had, in fact, frustrated the object of the
legislature to exempt the shareholders from tax on dividend.
Contentions of the Appellants:
8. Mr. Debi Prasad Pal, learned Counsel appearing for the appellants contended as
follows:
(i) Additional tax was in addition to the tax. Once the company was assessed
income-tax on its income the additional income-tax could be imposed on the
amount for which original tax was imposed. However, in this case such additional
income-tax was only upon a portion of income which was to be distributed
amongst the shareholders as and by way of dividend. Hence, it was a tax on
dividend which was exempt by the said Act.
(ii) Once the additional tax was levied on a flat rate of 10% that was to be applied
on the income of the company which was contrary to Rule 8 of the Income-tax
Rules, 1962 whereby 60% of the income was exempt from tax as and by way of
agricultural income.
Page: 50
(iii) The rate of tax could only be levied on a total income and it should have a relation
with the income of the assessee. Hence, the additional tax imposed only on the
amount which was being distributed as profit through dividend to the shareholders
was illegal and ultra vires the Constitution.
(iv) Even in case of distribution of profit when profits were distributed amongst the
shareholders this would include 60% agricultural income which was not taxable.
Since such income could not be segregated the imposition of additional tax was
beyond the legislative competence of the Parliament under Entry 82 of List 1 of
the 7th Schedule to the Constitution.
(v) If a company declared profit in a particular year taking into account the
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accumulated profits carried forward from the previous assessment years such
distribution would come within the purview of additional tax and thereby the
assessee would have to pay tax not only for that financial year but also for the
preceding years which was not permissible.
(vi) The amended section was arbitrary, irrational particularly where it directed the
company to pay tax within 14 days from the date of distribution or declaration of
dividend which was impossible.
Cases Cited:
9. In support of his contentions, Dr. Pal cited the following decisions:
(i) 27, Income Tax Reports, Page 1 (Bacha F. Guzdar, Bombay v. Commissioner of
Income Tax, Bombay)
(ii) 30, Income Tax Reports, Page 841 (Khatau Makanji Spinning & Weaving Co.
Ltd. v. Commissioner of Income Tax, Bombay)
(iii) 40, Income Tax Reports, Page 189 (Commissioner of Income Tax, Bombay City
I v. Khatau Makanji Spinning & Weaving Co. Ltd.)
(iv) 48, Income Tax Reports, Page 83 (Karimtharuvi Tea Estates Ltd. v. State of
Kerala)
(v) 124, Income Tax Reports, Page 1 (Empire Jute Co. Ltd. v. Commissioner of
Income Tax)
(vi) 173, Income Tax Reports, Page 18 (Tata Tea Limited v. State of West Bengal)
Contention of the Revenue:
10. Mr. Tapas Hazra, learned Counsel appearing for the respondents contended that
imposition of additional income-tax was permitted by the Constitution. Union was
within its power to impose such additional tax on the assessee. The income from
dividend could not have any nexus with agricultural income or industrial income.
Hence, the learned Judge was right in dismissing the writ petition relying on the Mrs.
Bacha F. Guzdar, Bombay case (supra).
Law as decided in Precedents:
11. On a plain reading of the decisions cited before us our understanding of the law
is as follows:
Page: 51
(i) Agricultural income was not within the purview of legislative competence of the
Parliament.
(ii) In case of tea companies to avoid complication in accounting procedure Rule 8

of the Income-tax Rules provided for a taxing formula suggesting exemption of
60% of the net income as agricultural income and the rest 40% as industrial
income on which tax is to be levied.
(iii) Income of a tea company and income of a shareholder of a tea company could
not be equated as a same class. A shareholder of a tea company gets return of
its cash investment on the company not on the field where tea is grown. Hence,
no part of such income would be termed as agricultural income.
(iv) Under section 3 of the Income-tax Act, income-tax was defined as a tax on the
income of the previous year and it could not take into account any income for the
earlier years to be tagged with it.
(v) The State has no power to impose tax on any tea company as agricultural
income beyond 60% of the total income.
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Our View on the Issue:

12. Section 115-O provides additional tax on the company and not on the
shareholder. It contemplates a situation when there is any declaration of dividend out
of current or accumulated profit by the company. If we read this provision coupled
with the Speech made by the Hon'ble Finance Minister on the floor quoted (supra) we
would find that the intention of the Government was to levy additional tax upon the
company if they decide not to plough back the profit and thereby distribute the same
amongst the shareholders. One the other hand the Government as and by way of
policy allowed the company some concession on tax who ploughs back the profit of the
company as its additional resource. Hence, any company, if decides to distribute
profit, would have to pay additional tax on that. On the other hand if a company
decides to use that amount for development of the company they would not be liable
to pay any additional tax under section 115-O. Hence, we do not find any illegality in
introduction of the section on this score. The appellants also could not show us as to
how the provisions of the Constitution on this score were violated. Hence, such plea of
the appellants being not tenable is rejected.
13. Now comes the question of tea company. The activities of the tea company are
different from other commercial sectors. Although all these tea companies are
corporate entities their activities have a distinctive feature. It has lot of agricultural
activities starting from plantation to picking up green tea leaves. Constitution makers
provided that agricultural income would come within the domain of the State. Hence,
the Income-tax Act, 1961 being the Central law was not competent to take the
agricultural income within its fold as it was beyond the legislative competence of the
Parliament. Hence, if this additional tax is found to have been put on any agricultural
income it is liable to be struck down.
14. In this backdrop, let us examine section 115-O. As we have observed earlier,
additional tax per se was not violative of the provisions of the
Page: 52
Constitution. It is for the Union to impose income tax upon the assessee. Similarly, it
has power to impose additional tax too. On a grammatical construction of this section
it would appear that the tax was levied on the company and not on the shareholder.
Hence, His Lordship's decision relying on the Mrs. Bacha F. Guzdar, Bombay case
(supra) was not the correct proposition of law. Under Rule 8 of the Income-tax Rules
the net income of the tea companies for the purpose of Income-tax Act is 40% of the
total income meaning thereby ‘X’ company having various industrial and commercial
activities except tea growing and manufacturing would have to pay tax at the
prescribed rate on the total net income whereas ‘Y’ company being a tea company
despite having other activities, would pay tax on 40% of the total net income.
15. A tea company is liable to pay tax at the prescribed rate on 40% total net
income. If there is any additional tax they would pay in the same manner and in the
same proportion. For that we do not see any reason to hold the said provision as
irrational or unconstitutional. Hence, such plea being not tenable is rejected.
16. Dr. Pal contended that when a tea company decided to declare dividend that
profit would not only include profit for the particular financial year but also the
accumulated profit for the earlier years which were not available for tax. Such
submission in our view is totally illogical. When a company earns profit for a particular
year and does not declare dividend such profit is automatically ploughed back to the
company's growth and in the next year the profit earned by the company is a profit for
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that particular year for tax purpose. Hence, the contention of Dr. Pal on that score is
rejected. Reference may be had from the observation of the Apex Court in the case of
Commissioner of Income Tax, Bombay (supra) reported in 40 Income Tax Reporter,
Page 189.
17. The appellant tried to contend that since the additional tax was only on the part
of the income which relate to declaration of dividend there could not be any
mechanism provided for segregation of such income, as such distribution of profit
would also include agricultural income. We are unable to appreciate such contention of
the appellants. If a tea company has a net income Rs. 100/-, Rs. 40/- would be liable
to income-tax at the prescribed rate and the assessee would be assessed accordingly.
By virtue of section 115-O if the company declares Rs. 50/- for distribution amongst
the shareholders it would have a proportionate liability. It is true that in case the
company decides to distribute a part of the income it would be impossible to find out
whether that part of the income included the whole of the agricultural income or a part
of it. This exercise now, in our view, is not at all relevant in view of the provision of
Rule 8 of the Income-tax Rules. In such event the company would be charged on Rs.
40/- for income-tax and on Rs. 50/- for additional income-tax on proportionate basis.
18. We are, however, in agreement with Dr. Pal on a limited issue. We are of the
view that Rs. 50/- as a whole could not be taxed at the prescribed rate of additional
tax. Such additional tax would be levied on Rs. 20/- being
Page: 53
40% of Rs. 50/-. Hence, at the end of the day the company would have to pay income
-tax at the prescribed rate on Rs. 40/- as well as additional income-tax at the
prescribed rate on Rs. 20/-.
Result:
19. The judgment and order of the learned Single Judge is set aside.
20. We hold that the provision of section 115-O is Constitutional and we have given
the proper interpretation of the subject section as observed hereinbefore.
21. The appeals are disposed of accordingly without any order as to costs.
22. Urgent xerox certified copy would be given to the parties, if applied for.
Tapan Mukherjee, J.: I agree.
Appeals disposed of.
S.K.P.
———
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Versus And: Efore Shim Umar Anerjee AND Apan Ukherjee

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SCC Online Web Edition, Copyright © 2020

Page 1 Tuesday, June 30, 2020

APO No. 25 of 2002; W.P. No. 1707 of 2000

(a) declaration of any dividend; or

(ii) In case of tea companies to avoid complication in accounting procedure Rule 8

Our View on the Issue:

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