While refusing to put an end on the issue of entitlement of taxpayer to Double Taxation Avoidance Agreement (DTAA) benefit against Dividend Distribution Tax (DDT) under Section 115-O of the Income Tax Act, the Bombay High Court has said that in view of the apparent conflict between the decision in Colorcon Asia Private Limited Vs. Joint Commissioner of Income Tax [2025 SCC OnLine Bom. 59] and the earlier binding view in Godrej and Boyce Mfg. Co. Ltd. vs. Deputy Commissioner of Income Tax [(2010) SCC Online Bom 1174], the questions whether DDT is a tax on dividend income of the shareholder, require consideration by a Larger Bench. Accordingly, the Registry was directed to place the proceedings before the Chief Justice for constitution of a Larger Bench.
The Division Bench comprising Justice G. S. Kulkarni and Justice Aarti Sathe observed that on a plain reading of Section 115-O, that it begins with a non obstante clause and provides that, in addition to income-tax chargeable on the total income of a domestic company, any amount declared, distributed or paid by way of dividend is chargeable to additional income-tax. The Bench noted that sub-sections (4) and (5) are significant, because they provide that the tax paid by the company is final payment of tax on the amount distributed as dividend and that no credit or deduction can be claimed by the company or any other person.
The Bench prima facie held that DDT under Section 115-O is a tax on the company and not on the shareholder, and that the company does not pay such tax on behalf of the shareholder nor act as an agent of the shareholder. It further observed that Article 11 of the DTAA concerns tax on dividend income and not tax on distribution of profits by way of dividend by a company; hence, insofar as the charging of tax under Section 115-O is concerned, the DTAA appeared to have no application.
The Bench extensively referred to Godrej & Boyce, where the Bombay High Court had held that the charge under Section 115-O is on the profits of the company, more specifically on that part of the profits which is declared, distributed or paid by way of dividend, and that such tax is not a tax on dividend income in the hands of the shareholder. The Bench noted that this view had not been disturbed by the Supreme Court, which had also observed that sub-sections (4) and (5) of Section 115-O make it clear that the tax paid by the dividend distributing company cannot be treated as payment on behalf of the recipient assessee.
The Bench then examined the contrary Division Bench ruling in Colorcon Asia Pvt Ltd., where it had been held that DDT is ultimately a tax on dividend income of shareholders and that the incidence of tax had merely shifted to the company for administrative convenience. The Bench found that those observations appeared contrary to the earlier Division Bench decision in Godrej & Boyce, as affirmed by the Supreme Court, and also contrary to the view in Small Industries Development Board of India vs Central Board of Direct Access [2021 SCC Online Bom 1174], which had similarly held that Section 115-O imposes tax on the company’s profits and not on dividend income in shareholders’ hands.
Briefly, the appellant had filed seven appeals against a common order of the Income Tax Appellate Tribunal, Pune, for assessment years 2014-15 to 2020-21, arising from rejection of its claim for refund of alleged excess Dividend Distribution Tax (DDT).
For AY 2014-15, the appellant filed its return declaring total income of Rs. 27.17 crores. During the year, it distributed dividends aggregating to Rs. 7.66 crores to, inter alia, its UK shareholders and paid DDT of Rs. 1.30 crores at 16.994%. The appellant contended that under Article 11 of the India-UK DTAA, the dividend was taxable at the beneficial rate of 15%, and therefore excess DDT of Rs. 15.28 lakhs had been paid.
The appellant accordingly filed a refund application under Section 237 on 12 May 2021. The department responded that modification of DDT payment was not available in the system, but ultimately, by order dated 25 November 2022, rejected the claim on the ground that DDT under Section 115-O is an additional income-tax on the domestic company and not a tax on the shareholder, and therefore treaty benefit under the India-UK DTAA was unavailable.
The CIT(A) also upheld the rejection, reiterating that DDT payable under Section 115-O is to be charged at the statutory rate under the Act and not at the DTAA rate applicable to non-resident shareholders unless the treaty specifically extends such benefit.
Appearances:
Advocates Sagar Tilak, Sachin Hande, Preshita Adamane and Saachi Bhiwandkar, for the Appellant
ASG N. Venkataraman, along with advocates Sushma Nagaraj, Amira Razaq, Krithika Anand, Abhinav Palsikar, Chandrashekara Bharathi and Nakul Madhan, for the Respondent
