1. Both the appeals of the Revenue relate to Assessment Years 1997-98 and 1998-99 arising out of the common order passed by the CIT(A) for both the Assessment Years. Therefore, we heard both the appeals together and disposing of the same by this common order. The only issue arises for consideration is whether the tax levied under Section 115(O) of the Income Tax Act on, the distribution of dividend can be added back to the book profit under Section 115JA.2. Mr. K. Anangapal, the learned Departmental Representative (D.R.) submitted that on an identical situation in the assessee's own case, the CIT(A), when the matter came up before him in an appeal arising out of an assessment order under Section 143(3) for the Assessment Year 1997-98, upheld the order of the Assessing Officer on the basis of the Sub-section (5) of Section 115(O) of the Income Tax Act. The assessee accepted the decision of the CIT(A). According to the learned D.R., no appeal was filed against the order of the CIT(A) dated 13.10.2000.
Therefore, the order of the CIT(A) attained finality. According to the learned D.R., in respect of earlier year the assessee accepted the decision of the CIT(A), therefore, the same issue cannot be reagitated for the subsequent years.
3. The learned D.R. further submitted that distribution tax is nothing but an additional income tax on the assessee. According to the learned D.R., the dividends received by the respective share holders are exempted from taxation under Section 10(33) of the Income Tax Act.
Therefore, the tax paid by the assessee on such profit or dividend which is distributed to the respective share holders is nothing but income tax. Therefore, it has to be added back to the book profit in view of specific provisions contained in explanation to Section 115JA.4. On the contrary, Mr. R. Vijayaraghavan, the learned Counsel for the assessee submitted that the issue arises for consideration in both the appeals is whether tax on distributed profit amounts to income tax paid or payable within the meaning of Clause (a) of Explanation to Section 115JA. According to the learned Counsel, Sub-clause (5) of Section 115(O) is not relevant since the assessee has not claimed any deduction out of the book profit. The learned Counsel further submitted that the definition "book profit" is exhaustive. According to the learned Counsel, the Assessing Officer is empowered to make only adjustments as specified in explanation when the income was computed under Section 115JA of the Income Tax Act. The learned Counsel for the assessee placed his reliance on the judgment of the Apex Court in the case of Apollo Tyres Ltd. v. CIT . According to the learned Counsel, tax on distributed profit cannot be called as income tax.
According to the learned Counsel, fringe benefit tax is also an additional tax permitted to be deducted in computing the book profit.
The learned Counsel placed his reliance on the C.B.D.T. circular No. 8 of 2005 : 277 ITR 20 (St.). According to the learned Counsel, tax on distribution of profit is identical to fringe benefit tax, therefore, the tax paid by the assessee on distribution of profit cannot be added back in computing the book profit.
5. The learned Counsel for the assessee placed his reliance on the judgment of the Bombay High Court in the case of CIT v. Echjay Forgings Pvt. Ltd. and submitted that wealth tax cannot be added back in computing the book profit since the Section 115J provides for adding back only income tax. According to the learned Counsel, the provisions of Section 1I5JA have to be strictly construed and there cannot be any tax by analogy or by inference. Since the tax paid by the assessee on distribution of profit is not an income tax paid or payable, it cannot be added back to the book profit under Section 115JA.6. We have considered the rival submissions on either side, and also perused the material available on record. As rightly submitted by the learned Counsel for the assessee, the issue arises for consideration is whether the tax paid or payable on distributed profits or dividend amounts to income tax paid or payable within the meaning of Clause (a) of Explanation to Section 115JA. We have carefully gone through the provisions of Section 115(O). Section 115(O) reads as follows: Notwithstanding anything contained in any other provision of this Act and subject to provisions of this section, in addition to income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1^st day of June, 1997 but on or before the 31^st day of March, 2002, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of ten per cent.
7. In view of Section. 115(O), the domestic companies which declare or distribute profit or dividend on or after 1.6.1997 shall pay an additional income tax on the amount distributed as profit or dividend.
The question arises for consideration is whether the tax on distribution of profit or dividend constitutes a tax on income. It is not in dispute that the assessee-company is a separate independent assessable unit under the Income Tax Act. Therefore, the income or profit earned by the assessee has to be necessarily included in the total income for the purpose of levying income tax. Under the Companies. Act, a company can declare and distribute the profit to its share holders. Once the profits were declared and distributed to the share holders, the individual share holder who received such profit in the name of dividend is liable to pay tax on such amount. The legislature in their wisdom thought it fit to collect the tax in the hands of the company itself instead of collecting tax on various individual share holders who received the dividend. Accordingly, Section 115(O) was introduced for levying tax on distributed profit of the domestic companies. As a consequence, the profit or dividend on which the tax was levied under Section 115(O) was exempted in the hands of the individual share holders under Section 10(33) of the Income Tax Act. Therefore, the legislature shifted the burden of paying the income tax by the individual share holders to the domestic company which distributes profit or dividend. Therefore, what was collected by the Revenue as tax on distribution of profit remains to be tax on income.
In our opinion, merely because the tax or profit distributed to the share holders was levied and collected from the domestic companies, it will not loose its character as tax on income. Therefore, we are unable to accept the contention of the learned Counsel for the assessee that tax on distribution of profit will not constitute tax on income.
8. We have also carefully gone through the circular issued by the CBDT in circular No. 8 of 2005 dated 29.8.2005. While explaining the provision relating to fringe benefit tax, the CBDT clarified in its answer to question No. 103 that the provisions contained in Section 40 of the Income Tax Act for deduction of the amount of fringe benefit tax paid for the purpose of computing the income under the head "Profit and gains of business or profession" does not apply to computation of book profit for the purpose of Section 115AB. Accordingly, it was clarified that fringe benefit tax is an allowable deduction in computation of book profit under Section 115AB of the Income Tax Act. In the case on our hand, it is not the case of the assessee that the tax paid or payable on distribution of profit is an allowable deduction. In fact, the learned Counsel for the assessee clarified that the assessee is not claiming deduction out of the book profit. Therefore, in our opinion, this explanation of the CBDT may not be of any assistance to the assessee.
9. We have also carefully gone through the judgment of the Bombay High Court in the case of Echjay Forgings Pvt. Ltd. (supra). One of the issues before the Bombay High Court was whether the wealth tax paid by the assessee can be added to the net profit. The learned Counsel for the assessee before the Bombay High Court conceded that the net profit as shown in the Profit & Loss Account will not be increased by the amount wealth tax paid because Clause (a) to Explanation to Section 115J(1A) contemplates only the amount of income tax paid. In view of this judgment of the Bombay High Court, it is very clear that only the income tax paid or payable by the assessee shall be added back to the net book, profit shown in the Profit & Loss Account. Therefore, in our opinion, this judgment of the Bombay High Court is also not helpful to the assessee.
10. As we have already discussed, tax on distribution of profit by domestic companies is nothing but an income tax. Furthermore, Sub-section (5) of Section 115(O) clearly says that no deduction under any other provisions of Income Tax Act shall be allowed to a company or to a share holder in respect of the amount which has been charged to tax under Section 115(O)(1) of the Income Tax Act. Furthermore, for the Assessment Year 1997-98, the CIT(A) disallowed similar claim of the assessee against which admittedly, no appeal was filed. In those factual circumstances, in our opinion, tax on distribution of profit or dividend by domestic companies is nothing but income tax, therefore, it shall be added back to the book profit shown in the Profit & Loss Account. In view of the above discussion, we are unable to uphold the order of the CIT(A). the order of the CIT(A) restore that of the Assessing Officer.
11. In the result, both the appeals filed by the Revenue stand allowed.
However, there will be no order as to costs.