2006 (3) TMI 283 - AT - Income Tax

Summary

Issues:
- Whether tax levied under section 115-0 on the distribution of dividend can be added back to the book profit under section 115JA.

Analysis:
1. The appeals of the revenue for assessment years 1997-98 and 1998-99 were heard together as they related to a common order by the CIT(A). The main issue was whether the tax on dividend distribution could be added back to the book profit under section 115JA.

2. The Departmental Representative argued that the tax on distributed dividends is additional income tax and should be added back to the book profit. The representative cited the CIT(A)'s decision in a previous year's appeal, which was accepted by the assessee, implying finality.

3. The counsel for the assessee contended that the tax on distributed profit is not income tax as per the definition of "book profit." They referenced the Apex Court's judgment and argued that the tax on distribution of profit is akin to fringe benefit tax, which is deductible in computing book profit.

4. The counsel further cited a Bombay High Court judgment to support the argument that only income tax, not other taxes like wealth tax, should be added back to book profit under section 115JA.

5. After considering the arguments, the Tribunal analyzed section 115-0, which imposes additional income tax on distributed profits of domestic companies. The Tribunal concluded that the tax on distributed profits constitutes income tax, shifting the tax burden from individual shareholders to the distributing company.

6. The Tribunal also examined a CBDT Circular on fringe benefit tax deductions, clarifying that the tax on distributed profit is not claimed as a deduction by the assessee, unlike fringe benefit tax. The Tribunal found no merit in the CBDT explanation supporting the assessee's case.

7. Referring to the Bombay High Court judgment, the Tribunal emphasized that only income tax paid or payable should be added back to the net book profit, not other taxes like wealth tax. The Tribunal reiterated that tax on distributed profit by domestic companies is essentially income tax.

8. Considering the legislative intent and previous decisions, the Tribunal held that tax on distribution of profit by domestic companies is indeed income tax and should be added back to the book profit. Consequently, the Tribunal set aside the CIT(A)'s order and reinstated that of the Assessing Officer.

9. Both appeals by the revenue were allowed without costs, affirming that the tax on distributed dividends should be added back to the book profit under section 115JA.