Case: Union of India &amp; Others Vs. M/s. Tata Tea Co. Ltd. &amp; Others

referred to the High Court was noticed which was to the following effect:2. The question referred by the Tribunal to the High Court of Judicature at Bombay was stated thus : Whether 60% of the dividend amounting to Rs. 2,750 - received by the assessee from the two Tea companies is agricultural income and as such exempt under section 4(3)(viii) of the Act. Chagla, C.J. and Tendolkar J., who heard the reference, answered the question in the negative by two separate but concurring judgments dated 28, March, 1952. 29. In paragraph 6 of the following was stated by this Court6. In order, however, that dividend may be held to be agricultural income it will be incumbent upon the appellant to show that, within the terms of the definition, it is rent or revenue derived from land which is used for agricultural purposes. Mr. Kolah, for the appellant, contends that it is revenue derived from land because 60% of the profits of the company out of which dividends are payable are referable to the pursuit of agricultural operations on the part of the company. It is true that the agricultural process renders 60% of the profits exempt from tax in the hands of the company from land which is used for agricultural purposes but can it be said that when such company decides to distribute its profits to the shareholders and declares the dividends to be allocated to them, such dividends in the hands of the shareholders also partake of the character of revenue derived from land which is used for agricultural purposes ? Such a position if accepted would extend the scope of the vital words revenue derived from land beyond its legitimate limits. Agricultural income as defined in the Act is obviously intended to refer to the revenue received by direct association with the land which is used for agricultural purposes and not by indirectly extending it to cases where that revenue or part thereof changes hands either by way of distribution of dividends or otherwise. In fact and truth dividends is derived from the investment made in the shares of the company and the foundation of it rests on the contractual relations between the company and the shareholder. Dividend is not derived by a shareholder by his direct relationship with the land. There can be no doubt that the initial source which has produced the revenue is land used for agricultural purposes but to give to the words revenue derived from land the unrestricted meaning apart from its direct association or relation with the land, would be quite unwarranted. For example, the proposition that a creditor advancing money on interest to an agriculturist and receiving interest out of the produce of the lands in the hands of the agriculturist can claim exemption of tax upon the ground that it is agricultural income within the meaning of section 4, sub-section (3) (viii), is hardly statable. The policy of the Act as gathered from the various sub-clauses of section 2(1) appears to be to exempt agricultural income from the purview of Income-tax Act. The object appears to be not to subject to tax either the actual tiller of the soil or any other person getting land cultivated by others for deriving benefit therefrom, but to say that the benefit intended to be conferred upon this class of persons should extend to those into whosoever hands that revenue falls, however remote the receiver of such revenue may be, is hardly warranted. 30. In The Commissioner of Income-Tax, Calcutta v. Nalin Behari Lal Singha, etc., 1969 (2) SCC 310 , this Court held that dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholder. Following was stated in paragraph 3:3...Dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholder. 31. Learned Single Judge of the Calcutta High Court relying on judgment of this Court in Mrs. Bacha F. Guzdar (supra) has dismissed the writ petition. The Division Bench of the Calcutta High Court, however, held that Single Judges decision relying on Mrs. Bacha F Guzdar (supra) was not correct preposition of law. 32. This Court in Mrs. Bacha F. Guzdar (supra) was considering the nature of dividend income in the hands of shareholders. Under the Income-tax Act, 1961 earlier the dividend was taxable at the hands of shareholder. By Finance Act, 1997 it was made taxable in the hand of company when additional tax was imposed. 33. This Court, however, while considering the nature of dividend in the above case held that although when the initial source which has produced the revenue is land used for agricultural purposes but to give to the words revenue derived from land, apart from its direct association or relation with the land, an unrestricted meaning shall be unwarranted. Again as noted above Nalin Behari Lal Singha (supra) observation was made that shares of its profits declared as distributable among the shareholders is not impressed with the character of the profit from which it reaches the hands of the shareholder. We, thus, find substances in the submission of the learned counsel for the Union of India that when the dividend is declared to be distributed and paid to companys shareholder it is not impressed with character of source of its income. 34. The provisions of Section 115-O are well within the competence of Parliament. To put any limitation in the said provision as held by the Calcutta High Court that additional tax can be levied only on the 40% of the dividend income shall be altering the provision of Section 115-O for which there is no warrant. The Calcutta High Court having upheld the vires of Section 115-O no further order was necessary in that writ petition.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]13. Sub-clause (1) of Article 246 begins with non obstante clause that is Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule. The State as per clause (3) of Article 246 Subject to clauses (1) and (2) of Article 246 has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule.17. The definition of agricultural income was contained in Income-tax Act, 1922. In the Income-tax Act, 1961 agricultural income has now been defined in Section 2(1A). The words agricultural income as used in the legislative entries, thus, has to be given the meaning as contained in Income-tax Act, 1961. The entries in the Seventh Schedule are not powers but fields of legislature. The words in the respective entries have to be given the widest scope of their meaning, each general word should extend to ancillary or subsidiary matter which can be comprehended in it. As per Entry 82, Union/Parliament, thus, has full power to legislate in the field of taxes on income. The subject excluded from its field are agricultural income.18. The definition given in 1961, Act of the word income is an inclusive definition.22. This Court has time and again emphasised that in the event of any overlapping is found in two Entries of Seventh Schedule or two legislations, it is the duty of the Court to find out its true intent and purpose and to examine the particular legislation in its pith and substance.24. As noted above Entry 82 of List I embraces entire field of tax on income. What is excluded is only tax on agricultural income which is contained in Entry 46 of List II. Income as defined in Section 2(24) of the 1961, Act is the inclusive definition including specifically dividend. Dividend is statutorily regulated and under the article of association of companies are required to be paid as per the Rules of the companies to the shareholders. Section 115-O pertains to declaration, distribution or payment of dividend by domestic company and imposition of additional tax on dividend is thus clearly covered by subject as embraced by Entry 82. The provisions of Section 115-O cannot be said to be directly included in the field of tax on agricultural income. Even if for the sake of argument it is considered that the provision trenches the field covered by Entry 46 of List II, the effect is only incidental and the legislation cannot be annulled on the ground of such incidental trenching in the field of the State legislature. Looking to the nature of the provision of Section 115-O and its consequences, the pith and substance of the legislation is clearly covered by Entry 82 of List I25. We, thus, repel the argument of the learned counsel for the writ petitioners that provision of Section 115-O is beyond the legislative competence of the Parliament.27. There cannot be any dispute regarding computation of income of Tea Co., manufacture of tea, as provided in Rule 8.28. This Court in Mrs. Bacha F. Guzdar, Bombay v. Commissioner of Income Tax, Bombay,AIR 1955 SC 74  , had occasion to consider the nature of an income in the hands of shareholders of company consequent to payment of dividend amount. The appellant in the above case was paid dividend by two Tea companies of which she was shareholder. The income received by the appellant was held taxable by the Revenue Authority which was also upheld by the High Court. In paragraph 2 of the judgment question referred to the High Court was noticed which was to the following effect:2. The question referred by the Tribunal to the High Court of Judicature at Bombay was stated thus :Whether 60% of the dividend amounting to Rs. 2,750 - received by the assessee from the two Tea companies is agricultural income and as such exempt under section 4(3)(viii) of the ActChagla, C.J. and Tendolkar J., who heard the reference, answered the question in the negative by two separate but concurring judgments dated 28, March, 1952.. In paragraph 6 of the following was stated by this Court6. In order, however, that dividend may be held to be agricultural income it will be incumbent upon the appellant to show that, within the terms of the definition, it is rent or revenue derived from land which is used for agricultural purposes. Mr. Kolah, for the appellant, contends that it is revenue derived from land because 60% of the profits of the company out of which dividends are payable are referable to the pursuit of agricultural operations on the part of the company. It is true that the agricultural process renders 60% of the profits exempt from tax in the hands of the company from land which is used for agricultural purposes but can it be said that when such company decides to distribute its profits to the shareholders and declares the dividends to be allocated to them, such dividends in the hands of the shareholders also partake of the character of revenue derived from land which is used for agricultural purposes ?Such a position if accepted would extend the scope of the vital words revenue derived from land beyond its legitimate limits. Agricultural income as defined in the Act is obviously intended to refer to the revenue received by direct association with the land which is used for agricultural purposes and not by indirectly extending it to cases where that revenue or part thereof changes hands either by way of distribution of dividends or otherwise. In fact and truth dividends is derived from the investment made in the shares of the company and the foundation of it rests on the contractual relations between the company and the shareholder. Dividend is not derived by a shareholder by his direct relationship with the landThere can be no doubt that the initial source which has produced the revenue is land used for agricultural purposes but to give to the words revenue derived from land the unrestricted meaning apart from its direct association or relation with the land, would be quite unwarranted. For example, the proposition that a creditor advancing money on interest to an agriculturist and receiving interest out of the produce of the lands in the hands of the agriculturist can claim exemption of tax upon the ground that it is agricultural income within the meaning of section 4, sub-section (3) (viii), is hardly statableThe policy of the Act as gathered from the various sub-clauses of section 2(1) appears to be to exempt agricultural income from the purview of Income-tax Act. The object appears to be not to subject to tax either the actual tiller of the soil or any other person getting land cultivated by others for deriving benefit therefrom, but to say that the benefit intended to be conferred upon this class of persons should extend to those into whosoever hands that revenue falls, however remote the receiver of such revenue may be, is hardly warranted.. In The Commissioner of Income-Tax, Calcutta v. Nalin Behari Lal Singha, etc., 1969 (2) SCC 310  , this Court held that dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholder. Following was stated in paragraph 3:3...Dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholder.. Learned Single Judge of the Calcutta High Court relying on judgment of this Court in Mrs. Bacha F. Guzdar (supra) has dismissed the writ petition. The Division Bench of the Calcutta High Court, however, held that Single Judges decision relying on Mrs. Bacha F Guzdar (supra) was not correct preposition of law32. This Court in Mrs. Bacha F. Guzdar (supra) was considering the nature of dividend income in the hands of shareholders. Under the Income-tax Act, 1961 earlier the dividend was taxable at the hands of shareholder. By Finance Act, 1997 it was made taxable in the hand of company when additional tax was imposed33. This Court, however, while considering the nature of dividend in the above case held that although when the initial source which has produced the revenue is land used for agricultural purposes but to give to the words revenue derived from land, apart from its direct association or relation with the land, an unrestricted meaning shall be unwarranted. Again as noted above Nalin Behari Lal Singha (supra) observation was made that shares of its profits declared as distributable among the shareholders is not impressed with the character of the profit from which it reaches the hands of the shareholder. We, thus, find substances in the submission of the learned counsel for the Union of India that when the dividend is declared to be distributed and paid to companys shareholder it is not impressed with character of source of its income34. The provisions of Section 115-O are well within the competence of Parliament. To put any limitation in the said provision as held by the Calcutta High Court that additional tax can be levied only on the 40% of the dividend income shall be altering the provision of Section 115-O for which there is no warrant. The Calcutta High Court having upheld the vires of Section 115-O no further order was necessary in that writ petition.The word income has also been defined in the Income-tax Act in Section 2(24) which is to the following effect:2(24) income includes(i) profits and gains;