At, High Court of Kerala
By, THE HONOURABLE MR. JUSTICE K. VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON
For the Petitioner: P. Raghunath, Premjit Nagendran, Advocates. For the Respondent: P.K.R. Menon, Senior Counsel, Jose Joseph, SC.
K. Vinod Chandran, J.
1. The appellant is before us; with a question of law as re-framed by this Court vide order dated 29.10.2014, as against the order of the Tribunal, which is as herein below:-
'Whether the authorities below did not commit an error of law while holding that the above 'dividends' are different from the 'dividends' referred to in Section 115(O) and that the provisions of Section 115(O) are not applicable to such 'deemed dividends'?'
2. The brief facts to be noticed are that the appellant was a major shareholder of one PVS Hospitals Private Limited. The appellant was also a major participant in a Trust, which was setting up a Nursing institution, called 'PVS Nursing College'. For the purpose of setting up the College, the Trust availed finance from PVS Hospitals Private Limited, to the extent of Rs.39,14,983/- in the financial year 2004-2005. The same is deemed to be dividend under Section 2(22)(e) of the Income Tax Act, 1961 [for brevity, 'IT Act']. The said amounts were taxed in the hands of the assessee, who definitely had a beneficial interest in the Trust which established the College and which used the advance paid to the assessee. There is also no dispute that the assessee is a major shareholder in the Private Limited Company which made the advance. All the ingredients available in Section 2(22)(e) of the Act are attracted. The question raised is as to whether the assessee would be liable to tax for the said advance amounts at his hands.
3. The learned Counsel appearing for the assessee would take us through the provision under Section 2(22)(e) of the Income Tax Act, 1961 [for brevity, the Act] as also the provision under Section 10(34); the latter exempting dividends referred to in Section 150(O). There is no dispute that the money advanced by the Hospital to the assessee for the trust would fall under the definition of deemed dividend as available in Section 2(22)(e). The contention is that the dividend income having been exempted under Section 10(34); even if the amounts advanced are deemed to be dividend, the provision of exemption has to be given full play. The compelling argument is that at the hands of the receiver the dividend cannot be taxed. The dividend can be taxed as profits of the Company, which has already been done since the advanced amounts are 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.
4. The learned Standing Counsel appearing for the Revenue takes us through Section 115(O) to contend that only those amounts, which are levied with additional income tax under Section 115(O) would be excluded under Section 10(34). The explanation available in Chapter XXII(d) also is pointed out, which is extracted hereunder:-
'Explanation-For the purposes of this Chapter, the expression 'dividends' shall have the same meaning as is given to 'dividend' in clause (22) of Section 2 but shall not include sub-clause (e) thereof.'
5. 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 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 nonadditional tax being levied on the Company, declaring and paying dividend, that exemption was granted t
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o the recipient-shareholder. Deemed dividends are not exempted since there is no payment of additional tax under Section 115(O). The revenue is right in contending that the exclusion under Section 10(34) would be applicable only for the amounts, which has suffered tax under Section 115(O). The question of law hence has to be answered in favour of the Revenue and against the assessee. The appeal is rejected. No costs.