Commissioner of Income Tax vs Punjab Financial Corporation

J.S. Khehar, J.—In this batch of four Income Tax references, the following substantial questions of law have been framed at the hands of the Revenue:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in directing the assessing authority to determine the quantum of interest year to year on accrued basis in respect of suit filed cases?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that deduction u/s 36(1)(viii) of the Income Tax Act, 1961, is allowable at the prescribed percentage of the total income before making deduction u/s 36(1)(viii) itself?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing deduction u/s 36(1)(viii) in respect of the assessee''s income from other sources?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing credit of tax deducted at source out of the dividend income belonging to the Punjab Government?

In so far as the first question referred to above, it is the conceded position at the hands of the learned Counsel for the rival parties that the same has already been decided by the Supreme Court in UCO Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal, . It is also pointed out that the aforesaid reference has to be answered in favour of the assessee and against the Revenue. Answered accordingly.

In so far as the second and third substantial questions of law (noticed hereinabove) are concerned, it is the conceded position at the hands of the learned Counsel for the rival parties that the controversy has been settled by this court in CIT v. Punjab Finance Corporation Ltd. [2007] 295 ITR 510 (P & H) (I.T.R. No. 113 of 1990 decided on March 12, 2007) as also by the apex court in Commissioner of Income Tax Vs. Andhra Pradesh State Financial Corporation and Bihar State Financial Corporation, . It is also pointed out that in terms of the aforesaid determination at the hands of this court, the second and the third questions framed for the purposes of reference have to be answered in favour of the assessee and against the Revenue. Answered accordingly.

In so far as the fourth question posed hereinabove is concerned, the issue pertains to the benefit of tax deducted at source. The respondent in this case, i.e., the Punjab Financial Corporation Limited, has an agreement with the State of Punjab. In terms of the aforesaid agreement, the amounts deposited by the State of Punjab with the Punjab Financial Corporation Limited are invested by the Punjab Financial Corporation Limited. The exactitude of the manner of sharing profits is admittedly in terms of the Gujarat pattern, wherein, so far as the dividend income is concerned, the equity dividend declared by the company (in which the investment has been made), one per cent, thereof has to be paid to the Punjab Financial Corporation Limited as overhead charges. Out of the remaining balance, 2/3rds amount of the dividend is to be paid to the State Government and the remaining 1/3rd of the dividend is to be retained by the Punjab Financial Corporation. It is, therefore, apparent, that in the arrangement between the State of Punjab and the Punjab Financial Corporation Limited, the income is shared between the State of Punjab and the Punjab Financial Corporation Limited in the ratio of 2 : 1. Whatever income is derived on account of equity dividend, by the aforesaid two sharing parties, is also liable to deduction of tax at source. The aforestated benefit of deduction on account of tax deducted at source, in our view, is liable to be in the same ratio in which the parties share the income. This conclusion of ours is in consonance with the mandate of the second proviso u/s 199 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). Section 199(1) of the Act is being extracted hereunder:

Credit for tax deducted.-(1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of property or of the unitholder, or of the shareholder, as the case may be, and credit shall be given to him for the amount so deducted on the production of the certificate furnished u/s 203 in the assessment made under this Act for the assessment year for which such income is assessable:

Provided that-

(i) in a case where such person or owner or depositor or unitholder or shareholder is a person, whose income is included under the provisions of Section 60, Section 61, Section 64, Section 93 or Section 94 in the total income of another person, the payment shall be deemed to have been made on behalf of, and the credit shall be given to, such other person ;

(ii) in any other case, where the dividend on any share is assessable as the income of a person other than the shareholder, the payment shall be deemed to have been made on behalf of, and the credit shall be given to, such other person in such circumstances as may be prescribed:

Provided further that where any property, deposit, security, unit or share is owned jointly by two or more persons not constituting a partnership, the payment shall be deemed to have been made on behalf of, and credit shall be given to, each such person in the same proportion in which rent, interest on deposit or on security or income in respect of unit or dividend on share is assessable as his income.

The second proviso, extracted hereinabove, clearly envisages that the credit for tax deduction at source, is to be assigned to, each of such persons deriving income from the common investment (i.e., in the same proportion in which they share the income). In this context, it would be pertinent to mention that when the liability of the respondent-assessee on the dividend income was sought to be assessed in the present assessment, out of total dividend income of Rs. 89,915, the respondent claimed deduction of Rs. 61,521 by asserting that the said income belonged to the Punjab Government. In other words, out of the total dividend income of Rs. 89,915 the income of the respondent-assessee was only Rs. 28,394 and that of the State of Punjab Rs. 61,521. There can, therefore, be no doubt, that the credit for tax deduction at source should be available to the Punjab Financial Corporation Limited as also the State of Punjab in the same proportion as their income referred to hereinabove. Thus viewed, while answering the fourth question, it is held that the apportionment of tax deducted at source, is to be in the same proportion, as the income earned by the parties (sharing the fruits of the common investment).

Our aforesaid determination would again lead to the same conclusion (as has been drawn hereinabove) mutatis mutandis in so far as the benefit of deduction on account of tax deducted at source in respect of income from preference shares as well.

In view of the above, the fourth question is answered in favour of the Revenue by holding that the respondent-assessee, i.e., the Punjab Financial Corporation could claim credit on account of the tax deduction at source in the same proportion as it shares the income from dividend income/income from preference shares with the State of Punjab.