Law:

Section:

Section 115-O of the Income-tax Act, 1961, read with rule 8 of the Income-tax Rules, 1962 - Tax on distributed profits of domestic companies - Whether imposition of additional income tax is permitted by Constitution and Union is within its power to impose such additional tax on assessee - Held, yes - Whether, therefore, section 115-O providing for imposition of additional income-tax on distributed profits of companies is constitutionally valid - Held, yes FACTS The assessee, tea companies used to cultivate tea plants, pick green tea leaves and thereafter process them in their factory for marketing the same. Cultivation of tea was considered to be an agricultural process whereas processing of the tea in the factory was industrial process. By the Finance Bill, 1997-98, the Union proposed an additional income tax on the distributed profit in the corporate sector in case any company declared dividend and thereby distributed profits amongst the shareholders. The amendment to that effect was made in section 115-O. The assessees filed writ petitions challenging the introduction of section 115-O on the ground that it was ultra vires the Constitution. The Single Judge dismissed the petitions. On appeal: HELD 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. 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. On 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 it 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, there was no illegality in introduction of the section on this score. The assessees also could not show as to how the provisions of the Constitution on this…

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