In a recent ruling in the case of Punjab Financial Corporation (“the assessee”)1, the Punjab and Haryana High Court (“the Court”) held that credit for withholding tax (“WHT”) would be available in the same proportion in which the parties share the income under the provisions of section 1992 of the Income Tax Act, 1961 (the “Act”).
Facts of the case
• The assessee entered into an agreement with the State of Punjab3. The modalities of the agreement were:
– The State of Punjab deposited funds with the assessee, and in turn, the assessee invested the same in securities.
– Dividend income was earned on such investments, out of which 1% was charged by the assessee as over-head charges.
– The balance dividend income after payment of over-head charges, was agreed to be shared by the State of Punjab and the assessee in the ratio of 2:1.
• The dividend income earned by the assessee and the State of Punjab was liable to WHT.
• The assessee reported its share (one-third) of dividend income in its tax return and claimed credit for WHT in its entirety, i.e. WHT on the total dividend income.
The issue which arose before the Court was whether the assessee is to be allowed the credit for WHT in its entirety though the dividend income offered to tax by the assessee was only one-third share.
• The above issue is covered under the provisions contained in section 199 of the Act which provides that credit for taxes deducted shall be given to the person from whose income the deduction was made, or of the owner of the security, or the depositor or the owner of the property or of the unit-holder or of the shareholder, as the case may be, for the assessment year for which such income is assessable.
• Furthermore the second proviso to section 199 of the Act (prior to its amendment)provides 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 asses sable as its income.
High Court Ruling
• The Court observed that the second proviso to section 199 of the Act clearly envisages that credit for WHT is to be assigned to each such persons deriving income from common investment in the same proportion in which they share the dividend income.
• The Court thus held that there is no doubt that the credit for WHT should be available to the asseesee and the State of Punjab in the proportion of their respective dividend income i.e. 2:1.
• The Court further held that this conclusion would also apply in respect of WHT on dividend earned / received from preference shares as well.
• It is interesting here to note that the same jurisdictional High Court has expressed a contrary view on facts in the assessee’s own case in the year 2004. In that decision, the Court held that no tax was deductible at all on the portion of dividend diverted to the State Government as it is not assessable under the Act. The Court also suggested that in order to avoid litigation, the Assessing Officer may be approached to issue a NIL WHT certificate on dividends which are to be diverted to the State Government so that such tax is not deducted in future. It may be noted here that this suggestion by the Court is also in line with the provisions of section 196 of the Act, which provides for non-deduction of tax from dividend income payable to Government.
• The Finance Act, 2008 amended section 199 of the Act, whereby the second proviso was deleted. Recently, the Central Board of Direct Taxes has issued a notification (covering the essence of the deleted second proviso) clarifying that in case of joint ownership of an asset, WHT claim shall be shared between the parties in the ratio of their share, subject to prescribed conditions. However, these rules are effective from April 1, 2009 whereas the amendment to section 199 of the Act has been brought about with effect from 1 April, 2008. Thus, one should analyse whether the ratio of this judgment would be applicable for assessment year 2008-09.
• Lastly, whether or not the current judgment will hold good in case of large consortium execution contracts is an issue for debate. However, the conclusion in this decision may have some persuasive value keeping in view the rules recently notified and which would reduce litigation / dispute with the tax authorities, particularly on allowing credit with reference to payments collected by lead consortium members and subsequently distributed among st other consortium members in pre- agreed ratio.
1 CIT v. Punjab Financial Corporation.
2 Section 199 of the Act has been amended with effect from 1 April, 2008
3 Assessment Year to which the case pertains is not ascertainable from the copy of the judgment.