In Brief
The Supreme Court upheld the constitutional validity of Section 115-O of the Income Tax Act, 1961, which imposes additional tax on dividends distributed by domestic companies. The case involved a tea company that argued the tax invaded the State's exclusive power to tax agricultural income, since 60% of tea company profits are derived from agriculture. The Court held that although underlying profits may contain agricultural income, once profits are declared as distributable dividend, the dividend itself is severed from its source and derives character from the shareholder investment relation. Dividend, being defined in the Income Tax Act as income, falls within Parliament's exclusive competence under Entry 82 (tax on income). The Court rejected the High Court's limitation restricting additional tax to 40% of dividends. Civil Appeals 9178 and 9180 (Union of India) were allowed; Appeal 9179 (writ petitioner) was dismissed.
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