THE AY is 1972-73. And the issue before the High Court is : who – the firm or the partners – are entitled to avail credit for TDS deducted on dividend income?
Basic facts : The assessee Mr S.P. Patel and his brother were partners in a firm known as M/s Patel Brothers and held 50% share each in the profit and loss of the firm. The assessee held several equity shares of limited companies from which dividend income was received. Till the AY 1971-72, the assessee was given TDS credit for tax deducted on dividend income. But in the AY in dispute, the AO declined to give credit as the shares belonged to the firm and only the firm was entitled to the credit.
The CIT(A) and the Tribunal upheld the order of the AO. The issue finally went to the High Court observed that
++ Under Section 199, TDS credit is given to the share-holder;
++ However, the First proviso to Section 199 carves out an exception – clause (ii) to the first proviso provides that where the dividend income is assessable as an income of a person other than the share-holder, then, the tax deducted at source shall be deemed to have been made on behalf of such other person and the credit of such tax deducted at source shall be given to such other person;
++ Clause (vii) of Rule 30A provides that where the shares owned by a firm are held in the name of its partners, then credit of the TDS shall be given to the firm and not to the share-holder;
++ Thus, the first proviso to Section 199 read with Rule 30A of the Income Tax Rules inter alia provide for giving credit of tax deducted at source to the firm where the the dividend income is to be taxed in the hands of the firm and not the shareholder.
++ In the present case, the dividend income is admittedly taxed in the hands of the assessee/ shareholder. Once the dividend income is assessed in the hands of the assessee / share-holder, the proviso to Section 199 of the Act would have no application and consequently denying the credit of TDS to the assessee / shareholder does not arise at all.
++ The first proviso to Section 199 read with Rule 30A apply inter alia, where the dividend income is to be taxed in the hands of a person other than the shareholder. As the case of the assessee falls in the first part of Section 199, the assessee could not be denied credit of TDS.
++ The fact that the Tribunal in the A.Y. 1974-75 has denied credit of TDS to the assessee / shareholder and the assessee has not challenged the same would not make any difference.
Finally, the HC ruled in favour of the assessee and found it entitled to the credit.