Dividend Distribution Tax: A Rejoinder to 339 ITR (J) 52

Abstract

In his paper titled ‘Dividend Distribution Tax – Some Nuances’ published in 339 ITR (J) 52 the learned author has dwelled upon certain aspects of tax on distributed profits under Section 115O of the Income Tax Act, 1961 (‘1961 Act’). In 339 ITR (J) 52 the author referred contrary decisions of the Mumbai Bench [85 TTJ 821] and Ahmedabad Bench [278 ITR (AT) 1] and opined that the tax should not be reckoned as the liability of the shareholder. However in view of this author, the determination of the nature and attributes of the tax levied under Section 115O is far more complex and requires appreciation of a number of allied concepts, which form the subject-matter of the present paper.

This paper deals with tracing the law prior to Finance Act, 2003; examining the legal position after Finance Act, 2003; examining the nature of tax under Section 115O of the Act - whether it is a 'tax on income' or 'corporation tax'; position under the Direct Taxes Code Bill, 2010 and the apparent conclusion thereon.

An attempt has been made to examine the legal and constitutional position of 'corporation tax' in India and contrast the findings returned with the tax levied under Section 115O on the dividend distribution tax. Upon the analysis the legal position settled in India, in terms of the constitutional provisions and the judicial decisions, it is found the tax under Section 115O on distributed dividends is apparently neither a tax on income nor corporation tax and thus is a new genre of tax as far as the provisions of the Constitution are concerned, being of the nomenclature ‘tax on distributed profits of domestic companies’.

Keywords: dividend distribution tax, tax on distributed profits, corporation tax, income tax, India

JEL Classification: E62, H25, K34