37. Taxation of dividends received from U.K. after April 5, 1965 for the purpose of section 5(1)(c) – Applicability of Supreme Court decision in Clive Insurance’s case

1. The following instructions had earlier been issued by the Board regarding the taxation of dividends received from the United Kingdom :

– F. No. 2/1/68-IT(A-I), dated 7-3-1968, and

– F. No. 491/18/75-FTD, dated 29-1-1976.

It was explained in these instructions that for purposes of section 5(1) (c), the gross amount of the dividends paid by U.K. companies after April 5, 1965 (wrongly stated as April 5, 1966) should be taken as the income of the Indian shareholder and not the net amount.

2. The Board had occasion to re-examine the above question in the light of the decision of the Supreme Court in the case of CIT v. Clive Insurance Co. Ltd. [1978] 113 ITR 636.  In that case, the Court had to consider whether the assessees could be said to have paid income-tax in U.K. by deduction or otherwise in respect of the net dividends of Rs. 15,266 so as to be eligible for the relief contemplated by section 49D of the Indian Income-tax Act, 1922. It was observed that according to the Statute Law of U.K. and the interpretation put on it by the highest Court in that country, the dividends which have borne tax in the hands of the paying company were treated as franked income in the hands of the assessee.  The income in the form of dividends has already been subjected to tax.  Dividends which are styled as franked income have, thus, borne tax at the source.  That being so, it is the income in respect of which income-tax has been paid by deduction or otherwise in accordance with the law in force in the country in which the income accrued.  If it is again charged to tax under the 1922 Act, it would become a doubly-taxed income and one of the requirements of section 49D would be satisfied.  The above decision of the Supreme Court related to the period prior to 1965 and thus it can be said that in respect of dividends paid by U.K. companies even before April 5, 1965, it is the gross dividend and not the net dividend that has to be brought to tax in India.

3. The Kerala High Court has held in the unreported decision in the case of J.N.A. Hobbs [Now reported as CIT v. Y.N.S. Hobbs [1979] 116 ITR 20] that dividends received from United Kingdom would be taxed in India on net basis.  The question whether the construction placed in paragraph 2 would apply notwithstanding the decision of the Kerala High Court has been considered by the Board.  The Board are advised that the construction that the dividends received from the United Kingdom would be taxed in India on gross basis would cover the cases of Kerala charge as well.

4. The provisions governing the taxation of dividends in U.K- underwent a change through U.K. Finance Act, 1965, w.e.f. 6-4-1965.  The amended provision contained in section 47 of the U.K. Finance Act, 1965 states that a company would pay corporation tax only in respect of income which was not distributed either by way of dividends or otherwise and it would further pay income-tax on all dividends and other distributions made by it.  Section 47(1), in terms, provides “… and for purposes of income-tax all such distributions shall be regarded as income, however they fall to be dealt with in the hands of the recipient”.  Sub-section (2) of section 47 also provides that “the distribution shall be deemed for purposes of income-tax to represent income of an amount equal to that sum, on which income-tax has been borne by deduction”.  After April 1973, U.K. tax laws have undergone a further change inasmuch as a part of the income-tax paid by the company is treated to have been paid on behalf of the shareholder by adopting, what is called the “imputation method”.  The decision of the Supreme Court in the case of Clive Insurance Co. (supra) applicable in relation to the years prior to 1965 will, therefore, apply with greater force in relation to post-1965 period.

Circular : No. 369 [F. No. 506/89/76-FTD], dated 17-9-1983.

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