In Brief
Tata Tea Co., which cultivates tea (agricultural) and manufactures it industrially, challenged Section 115-O of the Income Tax Act, 1961, which imposes additional tax on dividends declared by domestic companies. The petitioner argued Parliament lacked power to tax dividends derived from agricultural income, which is exclusively taxable by States. The Supreme Court held Section 115-O is valid and within Parliament's competence under Entry 82 of List I (taxes on income other than agricultural income). Although a company's underlying profits may be partly agricultural, when declared as dividend, it becomes investment income arising from shareholder contractual relations, not agricultural income. The Court set aside the Calcutta High Court's limitation restricting tax to 40% of dividends, holding Section 115-O applies fully as enacted without judicial modification."
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