The court said dividend income, if received, may be taxed in accordance with law, but the company’s income cannot be directly attributed to shareholders.
“It is only the dividend income qua the shares of the company, which can be taxed and not the income of the company itself,” a division bench of justices Dinesh Mehta and Vinod Kumar said, adding that the company is a “juristic person and a separate legal entity from its members”.
The bench said it is a settled position of law that fiscal liability and provisions imposing tax are required to be interpreted strictly. It said taxation under the Income Tax Act of 1961, being a fiscal statute, can be levied only if a transaction falls within the sweep of statutory provisions and it cannot be taxed by introducing some deeming fiction or concept not married to the law.
The court noted that there is no provision under the Act to tax such transactions. It declined to tax shareholders of Carmichael Capital (CCL), each holding 20%, on rental income and capital gains arising from properties owned by the company.
Dismissing appeals by the Income Tax Department, the court upheld the income tax tribunal’s order that the shareholders were not the “beneficial owners” of the assets of British Virgin Islands-registered CCL.