Supreme Court of India
UNION OF INDIA & ORS.versusM/S. TATA TEA CO. LTD. & ANR.
- Citation
- 2017 INSC 960
- Decided
- 20 September 2017
- Disposal
- Disposed off
- Bench
- A K SIKRI
Holding
Section 115‑0, which taxes dividends declared by domestic companies, is intra vires Parliament under List I Entry 82 and is not invalid for incidentally affecting agricultural income.
Summary
The Union of India challenged the constitutional validity of Section 115‑0 of the Income Tax Act, 1961, which imposes an additional 10% tax on dividends declared by domestic companies. Tea companies argued that because up to 60% of their income is agricultural, the dividend is agricultural income and therefore only the State Legislature can tax it under List II Entry 46. The Supreme Court examined the pith‑and‑substance of the provision, the definition of "income" and "dividend" in the Act, and the scope of List I Entry 82 (taxes on income other than agricultural). It held that dividend, once declared, is not impressed with the character of its source and falls within the inclusive definition of income, placing Section 115‑0 squarely within Parliament’s competence. The Court also rejected the Calcutta High Court’s rider that the additional tax could be levied only on 40% of the dividend. Consequently, the appeals by the Union were allowed and the appeal by the tea companies dismissed.
Issues considered
- The constitutional competence of Parliament to enact Section 115‑0 imposing tax on dividends of companies whose income includes agricultural income.
- Whether dividend distributed by a company is itself agricultural income within the meaning of List II Entry 46.
- Whether Section 115‑0 infringes the constitutional prohibition on Parliament taxing agricultural income.
- Whether the limitation that additional tax may be levied only on 40% of the dividend is valid.
- The proper interpretation of "income" and "dividend" under the Income Tax Act for constitutional analysis.
Legislation cited
- Constitution of Indias. Article 246, s. Article 366, s. List I Entry 82, s. List II Entry 46
- Finance Act, 1997
- Income Tax Act, 1961s. 115-0, s. 2(1A), s. 2(24)
- Income Tax Rules, 1962s. Rule 8
Subjects
constitutional validityincome taxdividendagricultural incomepith and substancelegislative competenceList IList IISection 115‑0Finance Act 1997
Judgment
[2017] 12 S.C.R. 655
UNION OF INDIA & ORS. A
v.
'
M/S. TATA TEA CO. LTD. & ANR.
(Civil Appeal No. 9178 of2012)
SEPTEMBER20, 2017 B
[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]
Income Tax Act, 1961 - s.115-0 (as inserted by Finance Act,
1997) - Constitutional validity of - Challenge to, by tea companies
carrying on the business of cultivating tea leaves in their tea gardens
and processing it in their factory for marketing the same - Section
c
115-0 imposes additional tax on the dividend distributed by a
Company - Plea of tea companies that income out of which dividend
was distributed by them was agricultural income to the extent of
60%, tax on which could only be imposed by State Legislature (under
List II, Entry 46) and the Parliament transgressed its legislative D
power in enacting s.115-0 as Parliament has no legislative
competence to tax agricultural ·income - Held: When dividend is
declared to be distributed and paid to company s shareholder it is
not impressed with character of source of its income, i.e. which on
facts is agricultural income - F11rthe1; entries in the VIJ1h Schedule
E
are not powers but fields of legislature - Words in the respective
entries have to be given the widest scope of their meaning - Each
general word should extend to ancillary or subsidiary matter which
can be comprehended in it - As per Entry 82 of List I Union/
. Parliament has full power to legislate in the field of "taxes on
income", excluding only tax on agricultural income - Income as F
defined in s.2(24) of the 1961 Act is an inclusive definition
specifically including "dividend" - S.115-0 pertains to declaration,
distribution or payment of dividend by domestic company - Thus,
imposition of additional tax on dividend is covered under Entry 82,
List I - The pith and substance of s.115-0 is clearly covered by
0
Entry 82, List I - Further, the provisions of s.115-0 cannot be said
to be directly included in the .fteld of tax on agricultural income -
Thus, any entrenchment, if at all, by the provisions of s.115-0 on
the field covered by Entry 46, List II is only incidental and the
legislation cannot be annulled on the ground of such incidental
H
655
656 SUPREME COURT REPORTS [2017) 12 S.C.R.
A trenching in the field of State Legislature - S.115-0 held to be within
the legislative competence of Parliament - Constitution of India -
Chapter I, Part XI, Art.246 - VJJlh Schedule- List I, Entry 82 and
List II, Entry 46 - Finance Act, 1997 - Chapter XllD - Income tax
Act, 1922 - Government of India Act, 1935 - Interpretation of
Statutes - Principle of pith and substance.
B
Interpretation of Statutes - Constitution of India - VII'"
Schedule- List I, Entry 82 and List II, Entry 46 - Overlapping in the
entries - Duty of Courts - Held: In the event of any overlapping is .
found in two Entries of the Lists in the Seventh Schedule or two
C legislations. it is the duty of the Court to find out its true intent and
pwpose and to examine the particular legislation in its pith and
substance - Doctrines/Principles - Doctrine of pith and substance.
Words & Phrases - "Dividend" - Nature of - Discussed -
Income Tax Act, 1961.
D Income Tax Rules, 1962 - r.8 -Income from the manufacture
of tea - Tea companies carrying on the business of cultivating tea
leaves in their tea gardens and processing it in their factory for
marketing the same - 40% of tea companies' income is taxable as
income derived from business - Writ petitions by tea companies
before Calcutta High Court challenging the vires of s.115-0 of the
E 1961 Act - Writ petition dismissed by Single Judge of High Court -
In appeal, Division Bench though upheld the constitutionality of
s.115-0 but held that such additional tax as levied by s.115-0 on
the profit distributed as dividend, will be payable only on 40% income
which is the taxable income of the tea companies - Propriety of
F Held: Provisions of s.115-0 are well within the competence of
Parliament - To put any limitation in the said provision shall be
altering the provision of s. 115-0 which is not warranted - Income
Tax Act, 1961 - s.115-0.
Disposing of the appeals, the Court
G HELD: 1. The Finance Act, 1997 inserted a new Chapter
XIlD in the Income Tax Act 1961 with heading "special provisions
relating to tax on distributed profits on domestic companies".
Section 115-0, sub-sections (1), (2) and (3) in the 1961 Act was
inserted by Finance Act, 1997. [Para 10][662-C-D]
H
UNION OF INDIA v. MIS. TATA TEA CO. LTD. 657
1.2 Part XI of the Constitution of India, Chapter I contains A
provisions relating to distribution of legislative powers. Article
246 provides for subject-matter of laws made by the Parliament
and by the Legislatures of States. Sub-clause (1) of Article 246
begins with non obstante clause that is "Notwithstanding anything
in clauses (2) and (3), Parliament has exclusive power. to make B
laws with respect to any of the matters enumerated in List I in
the Seventh Schedule. The State as per clause (3) of Article 246,
subject to clauses (1) and (2), of Article 246 has exclusive power
to make laws for such State or any part thereof with respect to
any of the matters enumerated in List II in the Seventh Schedule.
Entry 82, List I deals with "Taxes on income other titan agricultural C
income". Entry 46 in List II which is State List deals with "Taxes
on agricultural income". [Paras 12-15][663-D-E; 664-A-C)
1.3 Agricultural income has been defined in Article 366 of
the Constitution of India, sub-clause (1) of which statcs-
"agricultural income" means agricultural income as defined for D
the purposes of the e11act111ents relati11g to I11dian income-tax. In
the Income Tax Act, 1961 agricultural income has now been
defined in Section 2(1A). The words agricultural income as used
in the legislative entries, thus has to be given the meaning as
contained in the Income Tax Act, 1961. The entries in the Seventh
Sc·hcdulc arc not powers but fields of legislature. The words in E
the respective entries have to be given the widest scope of their
meaning, each general word should extend to ancillary or
subsidiary matter which can be comprehended in it. As per Entry
82, Union/Parliament, thus, has full power to legislate in the field
of "taxes on income". The subject excluded from its field arc F
agricultural income. The word income has also been defined in
the Income Tax Act in Section 2(24) which states that "income"
includes dividend. The definition given in 1961, Act of the word
'income' is an inclusive definition. [Paras 16-18)(664-D-G; 665-
A]
G
1.4 In the event, any overlapping found in two Entries of
Seventh Schedule or two legislations, it is the duty of the Court
to find out its true intent and purpose and to examine the particular
legislation in its pith and substance. Entry 82 of List I embraces
entire field of "tax on income". What is excluded is only tax on
H
658 SUPREME COURT REPORTS [2017] 12 S.C.R.
A agr.icultural income which is contained in Entry 46 of List II.
Income as defined in Section 2(24) of the 1961, Act is the inclusive
definition including specifically "dividend". Dividend is statutorily
regulated and under the article of association of companies arc
required to be paid as per the Rules of the companies to the
shareholders. Section 115-0 pertains to declaration, distribution
B
or payment of dividend by domestic company and imposition of
additional tax on dividend is thus clearly covered by subject as
embraced by Entry 82. The provisions of Section 115-0 cannot
be said to be directly included in the field of tax on agricultural
income. Even if for the sake of argument it is considered that the
C provision trenches the field covered by Entry 46 of List II, the
effect is only incidental and the legislation cannot be annulled on
the ground of such incidental trenching in the field of the State
legislature. There is substance in the submission of Union oflndia
that when the dividend is declared to be distributed and paid to
company's shareholder it is not impressed with character of
D
source of its income. Looking to the nature of the provision of
Section 115-0 and its consequences, the pith and substance of
the legislation is clearly covered by Entry 82 of List I. Thus, the
provision of Section 115-0 cannot be said to be beyond the
legislative competence of the Parliament. [Paras 22, 24, 25 and
E 33] [667-D;669-F-H ;670-A-B]
2.1 Ruic 8 of the Income Tax Rules, 1962 deals on the
subject "income from the manufacture of tea". There is no dispute
regarding computation of income of Tea Co., manufacture of tea,
as provided in Rule 8. The provisions of Section 115-0 are well
F within the competence of Parliament. To put any limitation in the
said provision as held by the Calcutta High Court shall be altering
the provision of Section 115-0 for which there is no warrant. The
Calcutta High Court having upheld the vires of Section 115-0 no
further order was necessary in that writ petition. [Paras 27,
34][670-C, G; 673-F)
G
Kartar Singh v. State of Punjab (1994) 3 SCC 569 :
(1994) 2 SCR 375; Mrs. Bacha F. Guzdar, Bombay v.
Commissioner of Income Tax, Bombay AIR 1955 SC
74 : [1955] SCR 876 - followed.
The Commissioner of Income-Tax, Calcutta v. Na/in
H
UNION OF INDIA v. MIS. TATA TEA CO. LTD. 659
Behari Lal Singha, etc., (1969) 2 SCC 310 : (1970] A
1 SCR 665; Union of India and others vs. Shah
Govedhan L. Kabra Teachers' College (2002) 8 SCC
228 : [2002] 3 Suppl. SCR 220 - relied on.
A.L.S.P.P.L. Subrahma11ya11 Chettiar v. Muttuswami
Goundan AIR 1941 FC 47; Prafulla Kumar Mukherjee B
and others v. Bank of Commerce, Limited Khulna, Vol.74
1946-47 - relied on.
Case Law Reference
[1994] 2 SCR 375 followed Para 22
[2002] 3 Suppl. SCR 220 relied on Para 23 c
[1955] SCR 876 followed Para 28
[1970] 1 SCR 665 relied on Para 30
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9178
of2012.
D
From the final Judgment and Order dated 28.07.2006 passed by
the High Court of Calcutta in APO No.64 of 2002 (W.P. No.794 of
2001).
WITH
Civil Appeal Nos. 9179 and 9180 of2012. E
S. Ganesh, K. Radhakrishnan, Sr. Advs., Ms. Ruby Singh Ahuja,
Vishal Gehrana, Shubham Saigal, Arvind Chari, Manik Karanjawala,
Arjit Prasad, Ms.Gargi Khanna, Mrs.Anil Katiyar, B.V. Balaram Das,
S. Sukumaran, Anand Sukumar, Bhupesh Kumar Pathak, Ms.Meera
Mathur, Ad vs. for the appearing parties. F
The Judgment of the Court was delivered by ·
ASHOKBHUSHAN, J. 1. The constitutional validity of Section
115-0 of the Income Tax Act, 1961 (hereinafter referred to as '1961,
Act') as inserted by Finance Act, 1997 is in issue in these appeals. The
Civil Appeal No. 9178 of2012 and Civil Appeal No. 9180 of2012 have G
been filed by the Union oflndia against the common judgment dated
28. 07 .2006 of Calcutta High Court by which judgment although, Calcutta
High Court has upheld the constitutionality of Section 115-0, but a rider
has been put that additional income tax to be charged under Section l I 5-
0 can only be on 40 per cent of income which is taxable under Income
H
660 SUPREME COURT REPORTS [2017] 12 S.C.R.
A Tax Act. The Civil Appeal No. 9179 of2012 has been filed by the writ
petitioner who had also challenged the constitutional validity of Section
115-0 before the Gauhati High Court which writ petition has been
dismissed vide judgment and order dated 22.06.2007. The Gauhati High
court had also noted the judgment of Calcutta High Court dated
28.07.2006 as referred to above. All the appeals have been heard together
B
and are being decided by this common judgment.
2. The facts giving rise to Civil Appeal No. 9178 of2012 and 9180
of2012 needs to be briefly noted. Several writ petitions were filed before
the Calcutta High Court questioning the vires of Section 115-0 of the
1961 Act. The petitioner's case in the writ petition is that the petitioner is
c a Tea Company which cultivate tea in gardens and processes it in its
own factory/plants for marketing the same: The cultivation of tea is an
agricultural process although, the processing of tea in the factory is an
industrial process. The agricultural income is within the legislative
competence of the State and not in the legislative competence of the
D Parliament. Section 115-0 imposes tax on the dividend distributed by
the company which is nothing but imposing the tax on agricultural income.
of the writ petitioner: The petitioner Mis Tata Tea Company Ltd. and
others filed a Writ Petition No. 1699 of2000 where the vires ofSeetion
115-0 was challenged. The writ petition was dismissed by learned Single
Judge vide its judgment dated 20.9.2001 against which judgment, appeals
E were: filed before the Division Bench of the Calcutta High Court. Division
Bench vide its judgment dated 28. 7.2006 disposed of the appeals, setting
aside the judgment of the Icarried Single Judge. Operative portion of the
judgment of the Division Bench is as follows:
"We are, however, in agreement with Dr. Pal on a limited issue.
F We are of the view that Rs. 501- as a whole could not be taxes
. at the prescribed rate of additional tax. Such additional ta)(
would be levied on Rs. 201- being 40% of Rs. 501-. Hence, at
the end of the day the company would have to pay income tax
at the prescribed rate on Rs. 401- as well as additional income
G tax at the prescribed rate on Rs. 201-.
Result
The judgment and order of the learned Single Judge is set
aside. We hold that the provision of section 115-0 is
constitutional and we have given the proper interpretation of
H
UNION OF INDIA v. MIS. TATA TEA CO. LTD. 661
[ASHOK BHUSHAN, J.]
the subject section as observed hereinafter. A
The appeals are disposed of accordingly without any order
as to costs."
3. Union oflndia questioning the said judgment has come up in
Civil Appeal No. 9178 of2012and Civil Appeal No. 9180 of2012.
B
4. In Writ Petition(C)No.3827 of2000, the writ petitioner has been
carrying on the business of growing green tea leaves in its tea gardens
and manufacturing black tea out of the same and thereafter selling the
black tea in India and also outside India. The writ petitioner challenged
the constitutional validity of Section 115-0 sub clause (1) and sub clause·
(3) in so far as it purports to levy the income tax on the profit which is C
decided to be distributed as dividend thereby imposing an additional
income-tax even on the portion of the composite income which represents
agricultural income and. which is also to be made available for the
distribution of dividend and, therefore, transgresses the limits oflegislative
power. The Parliament has no competence to levy income tax on D
agricultural income.
5. The writ petition has been dismissed by the Division Bench of
the Gauhati High Court vide judgment dated 22.06.2007 against which,
the Civil Appeal No. 9179 of2012 has been filed by the writ petitioner.
6. We have heard, Shri S. Ganesh, learned senior counsel for the E
appellant in Civil Appeal No. 9179 of2012. ShriArijit Prasad, learned
counsel has appeared on behalf of the Union of India. We also heard
learned counsel appearing for the respondent in Civil Appeal No. 9178
of 2012 and Civil No. 9180 of 2012. The parties shall hereinafter be
referred to as described in the respective writ petitions.
F
7. Learned counsel appearing for the writ petitioners submitted
that Section 115-0 imposes additional tax on the dividend distributed by
the Company which distribution arises out of the income received from
agriculture, 60 per cent of the income is the agricultural income which is
exempt from tax. The Parliament has no legislative competence to tax
G
the agricultural income and Section 115-0 of the 1961 Act transgresses
the legislative field which is assigned to the State Legislature under List
IrEntry 46 of Seventh Schedule of the Constitution.At the best, the
amount of dividend distributed by the Company to the extent of 40 per
cent on which income tax is charged can only be subject to addiHonal
tax. The Parliament cannot touch the agricultural income. H
662 SUPREME COURT REPORTS [2017] 12 S.C.Ro
A 8. The above submission has been refuted by the learned counsel
appearing for the Union of India. He submitted that dividend which is
decided to be distributed by the Company to its shareholders no longer
remains an agricultural income. The Company is being asked to pay
additional tax on the amount of dividend distributed by it and not on its
agricultural income. It is contended that the Parliament has full legislative
B
competence to enact Section 115-0. Both, the Calcutta High Court and
Gauhati High Court have rightly held that provisions of Section 115-0 is
intra vires.
9. We have considered the submissions and perused the records.
C I0. Finance Act, 1997 inserted a new Chapter XIID in the 1961,
Act with heading "special provisions relating to tax on distributed profits
on domestic companies". Section 115-0, sub-sections (1), (2) and (3) as
it was inserted by Finance Act, 1997 is as follows:
"115-0. Tax on distributed profits of domestic companies.-
D (1) Notwithstanding anything contained in any other provision
of this Act and subject to the provisions of this section, in
addition to the income-tax chargeable in respect of the total
income of a domestic company for any assessment year, any
amount declared, distributed or paid by such company by
E way of dividends (whether interim or otherwise) on or after
the 1st day of June, 1997, whether out of current or
accumulated profits shall be charged to additional income-
tax (hereafter referred to as tax on distribut-ed profits) at the
rate of ten per cent.
F (2) Notwithstanding that no income-tax is payable by a
domestic company on its total income computed in accordance
with the provisions of this Act, the tax 011 distributed profits
under sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the
G company shall be liable to pay the tax on distributed profits
to the credit. of the Central Government within .fourteen days
from t!Je date of- .
(a) declaration of any dividend;or
H
UNION OF INDIA v. MIS. TATA TEA CO. LTD. 663
[ASHOK BHUSHAN, J.]
(b) distribution of any dividend;or A
(c) payment of any dividend,
whichever is earliest. "
11. The vires of the above provisions of the 1961, Act was
challenged before the High Court. The main plank of attack of learned B
counsel for the writ petitioners is, lack oflegislative competence in the
Parliament to enact Section 115-0 so as to impose additional income
tax. The income out of which dividend is declared, distributed or paid is
an agricultural income to the extent of 60%, tax on which can only be
imposed by State legislature. The Parliament has transgressed its
legislative power in enacting Section 115-0. C
12. Part XI of the Constitution of India Chapter I contains
provisions relating to distribution oflegislative powers. Article 246 provides
for subject-matter oflaws made by the Parliament and by the Legislatures
of States. Article 246 of the Constitution of India is as follows:
D
"246. Subject-matter of laws made by Parliament and by the
Legislatures of States.- (1) Notwithstanding anything in
clauses (2) and (3), Parliament has exclusive power to make
laws with respect to any of the matters enumerated in List I in
the Seventh Schedule (in this Constitution referred to as the
"Union List") E
(2) Notwithstanding anything in clause (3), Parliament, and,
subject to clause (I), the Legislature of any State also, have
power to make laws with respect to any of the matters
enumerated in List Ill in the Seventh Schedule (in this
Constitution referred to as the "Concurrent List'J F
(3) Subject to clauses (I) and (2), the Legislature of any State
has exclusive power to make laws for such State or any part
thereof with respect' to any of the matters enumerated in List ·
II in the Seventh Schedule (iii this Constitution referred to as
the 'State List J G
(4) Parliament.has power to make ·1aws with respect to any
matter for any part of the territory of India not included in a
State notwithstanding that such matter is a matter enumerated
in the State List. "
H
664 SUPREME COURT REPORTS [2017] 12 S.C.R.
A 13. Sub-cl~use (I) of Article 246 begins with non obstante clause
that is "Notwithstanding anything in clauses (2) and (3), Parliament has
exclusive power ro make laws with respect to any of the matters
enµmerated in List I in the Seventh Schedule". The State as per clause
(3) of Article 246 "Subject to clauses (I) and (2) of Article 246 has
exclusive power to make laws for such State or any part thereof with
B
respect to any of the matters enumerated in List II in the Seventh
Schedule".
14. Entry 82 of List I reads:
"82. Taxes on income other than agricultural income. '·'
c 15. List II that is State List contaills Entry46 which reads:
"46. Taxes on agricultural income".
16. Agricultural income has been defined in Article 366 of the
Constitution oflndia, sub-clause (I) of which is to the following effect:
D "(l) "agricultural income" means agricultural income
as defined for the purposes of the enactments relating
to Indian income-tax;"
17. The definition of agricultural income was contained in Income-
taxAct, 1922. In the Income-tax Act, 1961 agricultural income has now
E been defined in Section 2(1A). The words agricultural income as used in
the legislative entries, thus, has to be given the meaning as contained in
Income-tax Act, 1961. The entries in the Seventh Schedule are not powers
but fields oflegislature. The words in the respective entries have to be
given the widest scope of their meaning, each general word should extend
to ancillary or subsidiary matter which can be comprehended in it. As
F
per Entry 82, Union/Parliament, thus, has full power to legislate in the
field of "taxes on income". The subject excluded from its field are
agricultural income. The word income has also been defined in the
Income-tax Act in Section 2(24) which is to the following effect:
"2(24) "income" inc/udes-
G
(i) - profits and gains;
(ii) dividend;
xxx xxx xxx xxx
H
UNION OF INDIA v. MIS. TATA TEA CO. LTD. 665
[ASHOK BHUSHAN, J.)
18. The definition given in 1961,Act of the word 'income' is an A
inclusive definition. The pivotal question to be answered in these appeals
is as to whether the provisions of Section I I5-0 which contains a provision
imposing additional tax on the dividends which are declared, distributed .
or paid by a company are within the fold of legislative field covered by
Entry 82 of List I or it relates to legislative field assigned to State legislature B
under Entry 46 List II that is tax on agricultural income.
19. For answering the above, we need to recapitulate the principles
of statutory interpretation of the legislative entries contained in Seventh
Schedule of the Constitution. Prior to enforcement of the Constitution,
the Government oflndia Act, 1935 contained the Seventh Schedule
containing three legislative lists, namely, List I- Federal Legislative List, c
List II - Provincial Legislative List and List III- Concurrent Legislati vc
List.
20. In A.L.S.P.P.L. Subrah111anya11 Chettiar vs. Muttuswami
Goundan, AIR 1941 FC 47, the Federal Court had considered the
principles of statutory interpretation oflegislative lists contained in the D
Government oflndia Act, 193 5. Madras Agriculturists ReliefAct, 193 8
was enacted by Madras legislature. The 1938 Act applies to debts payable
by an 'agriculturist' at the commencement of the Act. Debt was defined
as any liability in cash or kind, whether secured or unsecured, due from
an agriculturist, whether payable under a decree or order of a civil or E
revenue court or otherwise. The Federal Legislature had an exclusive
power to legislate with respect to cheques, bills of exchange, promissory
notes and other like instruments (List I, No.28). The challenge was raised
to 193 8 Act before the Madras High Court by the appellant on the ground
that State legislature has no competence to enact the legislation which
· had effect of discharging debt including the debts based on the promissory F
notes. The Chief Justice, Gwycr speaking for the Court held that,
however, carefully and precisely lists oflegislative subjects are defined,
it is practically impossible to ensure that they never overlap. Laying
down the principle to be adopted in a case where subject in one list,
.touches also on a subject in another list, following was held: G
"It must inevitably happen from time to time' that legislation,
though purporting to deal with a subject in one list, touches
also on a subject in another list, and the different provisions·
of the enactment may be so closely intertwined that blind
adherence to a strictly verbal interpretation would result in a H
666 SUPREME COURT REPORTS [2017] 12 S.C.R.
A large number of statutes being declared invalid because the
Legislature enacting them may appear to have legislated in a
forbidden sphere. Hence the rule which has been evolved by
the Judicial Committee whereby the impugned statute is
examined to ascertain its "pith and substance", or its "true
nature and character", for the purpose of determining whether
B
it is legislation with respect to matters in this list or in
that:(1881) 7 AC 96; (1882) 7 AC 829; (!899) AC 580; 1930
AC 111; 1940 AC 513. /11 my opinion, this rule of interpretation
is eq11al(v applicable to the Indian Constitution Act. On this
point I find myself in agreement with the Madras High Court,
c and I dissent from the contrary view which appears to have
been taken in a recent case by the High Court at Patna: 3
FLJ HC 119.
It is clear that the pith and substance of the Madras Act,
whatever it maybe, cannot at any rate be said to be legislation
D with respect to negotiable instruments or promissory notes;
and it seems to me quite immaterial that many, or even most,
of the debts with which it deals are in practice evidenced by
or based upon such instruments. That is an accidental
circumstance which cannot affect the question. Suppose that
at some later date money-lenders were to adopt a different
E method of evidencing the debts of those to whom they lend
money; how could the validity or invalidity of the Act vary
with money-lenders' practice? I am of opinion therefore that
the Act cannot be challenged as invading the forbidden field
of List/, for, it was not suggested that it dealt with any item in
F that List other than No.28. "
21. The Privy Council in Pra/ulla K11mar M11kherjee and others
vs. B,ank of Commerce, Limited Khulna, Vol. 74 1946-47 Indian
Appeals 23, had considered principles of statutory interpretation and
the doctrine of pith and substance. The vires of the Bengal Money
G Lenders Act, l 940<:ame for consideration. It was held that the provincial
legislature was in pith and substance - "money lending and money
lenders". It held that legislature did not trench the legislative field
earmarked for Federal legislation. The Privy Council referring to the
observation of Sir Maurice Gwyer, C.J. held following:
H
UNION OF INDIA v. MIS. TATA TEA CO. LTD. 667
[ASHOK BHUSHAN, J.]
"(2) .... No doubt experience of past difficulties has made the A
provisions of the Indian Act more exact in some particulars,
and the existence of' the Concurrent List has made it easier to
distinguish between those matters which are essential in
determining to which list particular provisions should be
attributed and those which are merely incidental. But the
B
overlapping of subject-matter is not avoided by substituting
three lists for two, or even by arranging fiir a hierarchy of'
jurisdictions. Su~iects must still overlap, and where they do
the question must be asked what in pith and substance is the
effect of the enact111ent of which complaint is made, and in
what list is its tnie nature and character to be found. If' these c
questions could not be asked, much beneficent legislation
would be stifled at birth, and many of the subiects entrusted
to provincial legislation could never <f:ffectively be dealt with.
(3) Thirdly, the extent of the invasion by the provinces into
subjects enumerated in the Federal List has to be considered. D
No doubt it is an important matte1; not, as their Lordships
think, because the validity of an Act can be determined by
discriminating between degrees of invasion, but ji1r the
pwpose of determining what is the pith and substance of the
impugned Act. Its provisions 111ay advance so ji.1r into Federal
territory as to show that its true nature is not concerned with E
provincial matters, but the question is not, has it trespassed
more or less. but is the trespass, whatever it be, such as to
show that the pith and substance of the impugned Act is not
money lending but promissory notes or banking? Once that
question is determined the Act falls on one or the other side F
of the line ·and can be seen as valid or invalid according to
its true content. This view places the precedence accorded to
the three lists in its proper perspective.... "
22. This Court has time and again emphasised that .in the event of
any overlapping is found in two Entries of Seventh Schedule or two
legislations, it is the duty of the Court to find out its true intent and G
purpose and to examine the particular legislation in its pith and substance.
In Kartilr Singh vs. Stllte of Punjab, 1994 (3) SCC 569, paragraphs
59, 60 and 61 following has been held:
"59 ...• But before we do so we may briefly indicate the
principles that are applied for construing the entries in the H
668 SUPREME COURT REPORTS [2017] 12 S.C.R.
A legislative lists. It has been laid down that the entries must
not be construed in a narrow and pedantic sense and that
widest amplitude must be given to the language of these
entries. Sometimes the entries in different lists or the same list
may be found to overlap or to be in direct c011flict with each
other. In that event it is the duty of the court to find out its
B
true intent and purpose and to examine the particular
legislation in its 'pith and substance' to determine whether it
fits in one or other of the lists. [See: Synthetics and Chemicals
Ltd. v. State of U.P.;- India Cement Ltd. v. State of T.N. "
60. This doctrine of 'pith and substance' is applied when the
c legislative competence of a legislature with regard to a
particular enactment is challenged with reference to the entries
in the various lists i.e. a law dealing with the subject in one
list is also touching on a subject in another list. In such a
case, what has to be ascertained is the pith and substance of
D the enactment. On a scrutiny of the Act in question, if found,
that the legislation is in substance one on a matter assigned
to the legislature enacting that statute, then that Act as a whole
must be held to be valid notwithstanding any incidental
· trenching upon matte1:~ beyond its competence i.e. on a matter
included in the list belonging to the other legislature. To say
E differently, incidental encroachment is not altogether
forbidden.
23. Further in Union of India and otlzers vs. S/zalz .Govedha11
L. Kabra Teachers' College, 2002 (8) SCC 228 in paragraph 7
following was laid down:
F
"7. It is further a we/I-settled principle that entries in the
different lists should be read together without giving a narrow
meaning to any of them. Power of Parliament as well as the
State Legislature are expressed in precise and definite terms.
While an ent1y is to be given its widest meaning but it cannot
G be so interpreted as to override another entry or make another
entry meaningless and in case of an apparent conflict between
different entries, it is the duty of the court to reconcile them.
When it appears to the court that there is apparent overlapping
befl1.!een the two entries the doctrine of "pith and substance"
has to be applied to find out the true nature of a legislation
H
UNION OF INDIA v. M/S. TATA TEA CO. LTD. 669
[ASHOK BHUSHAN, J.]
and th.e entry within which it would fall. In case of conflict A
between entries in List I and List II, the same has to be decided
by application of the principle of "pith and substance". The
doctrine of ''pith and substance" means that if an enactment
substantially.falls within the powers expressly conferred by
the Constitution upon the legislature which enacted it, it cannot B
be held to be invalid, merely because it incidentally
encroaches on matters assigned to another legislature. When
a law is impugned as being ultra vires of the legislative
competence, what is required to be ascertained is the true
character of the legislation. If on such an examination it is
found that the legislation is in substance one on a matter C
assigned to the legislature then it must be held to be valid in
its entirety even though it might incidentally trench on matters
which are beyond its competence. Jn order to examine the
true character of the enactment, the entire Act, iis object, scope
and effect, is required to be gone into. The question of invasion D
into the territory of another legislation is to be determined
not by degree but by substance. The doctrine of "pith and
substance" has to be applied not only in cases of conflict
between the powers of two legislatures but in any case where
the question arises whether a legislation is covered by
particular legislative power in exercise of which it is purported E
to be made, "
24. As noted above Entry 82 of List I embraces entire field of
"tax on income". What is excluded is only tax on agricultural income
which is contained in Entry 46 of List II. Income as defined in Section
2(24) of the 1961, Act is the inclusive definition including specifically F
"dividend". Dividend is statutorily regulated and under the article of
association of companies arc required to be paid as per the Rules of the
companies to the shareholders. Section 115-0 pertains to declaration,
distribution or payment of dividend by domestic company and imposition
of additional tax on dividend is thus clearly covered by subject as
embraced by Entry 82. The provisions of Section 115-0 cannot be said G
to be directly included in the field of tax on agricultural income. Even if
for the sake of argument it is considered that the provision trenches the
field covered by Entry 46 of List II, the effect is only incidental and the
legislation cannot be annulled on the ground of such incidental trenching
H
670 SUPREME COURT REPORTS [2017] 12 S.C.R.
A in the field of the State legislature. Looking to the natw·e of the provision
of Section 1i5-0 and its consequences, the pith and substance of the
legislation is clearly covered by Entry 82 of List I.
25. We, thus, repel the argument of the learned counsel for the
writ petitioners that provision of Section 115-0 is beyond the legislative
B competence of the Parliament.
26. As noticed above, the Guahati High Court has dismissed the
writ petition whereas the Calcutta High Court while upholding the vires
of Section 115-0 has put a rider that the additional tax as levied by
Section 115-0 on the dividend declared, distributed or paid additional tax
c shall be only to the extent of 40% which is taxable income of the Tea
Co. Learned counsel for the writ petitioners has referred to Rule 8 of
the Income Tax Rules, 1962. Rule 8 deals on the subject "income from
the manufacture of tea". Rule 8 is as follows:
"Income from: tlte manufacture of tea.
D 8.(1)/ncome derived from the sale of tea grown and
manufactured by the seller in India shall be computed as if it
were income derived from business, and forty per cent of such
income shall be deemed to be income liable to tax.
(2)1n computing such income an allowance shall be made in
E respect of the cost ofplanting bushes in replacement of bushes
that have died or become permanently useless in an area
already planted, if such area has not previously been
abandoned, and for the purpose of determining such cost,
no deduction shall be made in respect of the amount of any
F
subsidy which, under the provisions of clause (30)of section
10, is not includible in the total income. ,.
27. There cannot be any dispute regarding computation of income
of Tea Co., manufacture of tea, as provided in Rule 8. The question.to
be considered is as to when a company in its Annual General Meeting
G declares dividend which is distiibuted and paid to its shareholders whether
on the dividend so declared tax liability shall be only upto 40% as has
been held by the Calcutta High Court ?
28. This Court in ftlrs. Bae/ta F. G11zdar, Bombay vs.
Commissioner ofIncome Tax, Bombay.AIR 1955 SC 74, had occasion
to consider the nature of an income in the hands of shareholders of
H
l]I\TION OF INDIA v. MIS. TATA TEA CO. LTD. 671
[ASHOK BHUSHAN, J.]
company consequent to payment of dividend amount. The appellant in A .
the above case was paid dividend by two Tea companies of which she
was shareholder. The income received by the appellant was held taxable
by the Revenue Authority which was also upheld by the High Court. In
paragraph 2 of the judgment question referred to the High Court was
noticed which was to the following effect:
B
'"2. The question referred by the Tribunal to the High Court
of Judicature al Bombay was staled thus :
'."Whether 60% of the dividend amounting to Rs. 2,750 -
received by the assessee from the two Tea companies is
agricultural income and as such exempt under section C
4(3)(viii) of the Act."
Chagla, C.J. and Tendolkar J., who heard the reference,
answered the question in the negative by two separate but
concurring judgments dated 28, March, 1952."
29. In paragraph 6 of the following was stated by this Court D
"'6. In order, however, that dividend may be held to be
agricultural income it will be incumbent upon the appellant
to show that, within the terms of the definition, it is rent or
revenue derived from land which is used for agricultural
putposes. Mr. Ko/ah, for the appellant, contends that it is E
revenue derived from land because 60% of the profits of the
company out of which dividends are payable are referable to
the pursuit of agricultural operations on the part of the
company. It is true that the agricultural process renders 60%
of the profits exempt from tax in the hands of the company
F
fim11 land which is used for agricultural pmposes but can it
be said that when such company decides to distribute its
profits to the shareholders and declares the dividends to be
allocated to them, such dividends in the hands of the
shareholders also partake of the character of revenue derived
from land which is used for agricultural purposes ? G
' .
Such a position if accepted would extend the scope of the
vital wordv 'revenue derivedfrom land' beyond its legitimate
limits. Agricultural income as defined in the Act is obviously
intended to refer to the revenue received by direct association
H
672 SUPREME COURT REPORTS [2017] 12 S.C.R.
A with the land which is used for agricultural purposes and not
by indirectly extending it to cases where that revenue or part
thereof changes hands either by way of distribution of
dividendy or otherwise. In fact and truth dividends is derived
from the investment made in the shares of the company and
the foundation of it rests on the conti:actual relations between
B
the company and the shareholder. Dividend is not derived by
a shareholder by his direct relationship with the land.
There can be no doubt that the initial source which has
produced the revenue is land used for agricultural purposes
but to give to the words 'revenue derived from land" the
c unrestricted meaning apart from its direct association or
relation with the land, would be quite unwarranted. For
example, the proposition that a creditor advancing money on
interest to mi agriculturist and receiving interest out of the
produce of the lands in the hands of the agriculturist can
D claim exemption of tax upon the ground that it is agricult11ral
income within the meaning of section 4, sub-section (3)(viii),
is hardly statable.
The policy of the Act as gathered from the various sub-
clauses of section 2(1) appears to be to exempt agricultural
E income from the purview of Income-tax Act. The object
appears to be not to subject to tax either the actual titler of
the soil or any other person getting land cultivated by others
for deriving benefit therefrom, but to say that the benefit
intended to be conferred upon this class of perfons should
extend to those into whosoever hands that revenue falls,
F however remote thereceiver of such revenue may be; is hardly
warranted."
30. In The Co111111issio11er of Income-Ta.-.:, Calcutta vs. Na/in
Behari Lal Sing/1a, etc., 1969 (2) SCC 310, this Court held that dividend
distributed by a company being a share of its profits declared as
G distributable among the shareholders, is not impressed with the character
of the profits from which it reaches the hands of the shareholder. Following
was stated in paragraph 3:
"3 ... Dividend distributed by a company being a share of its
profits declared as distributable among the shareholders, is
H
UNION OF INDIA v. MIS. TATA TEA CO. LTD. 673
[ASHOK BHUSHAN, J.]
- .
nof' impressed with the character of the profits from which it A
reaches the hc:nds of the shareholder." -
31. Learned Single Judge of the Calcutta High Court relying on
judgment of this Court in Mrs. Bacha F G11zdar (supra) has dismissed
the writ petition. The Division Bench of the Calcutta High Court, however,
held that Single Judge's decision relying on Mrs. Bai:/la F G11zdar B
(supra) was not correct preposition of law.
32. This Court in Mrs. Bacha F G11zdar (supra) was considering
the nature of dividend income in the hands of shareholders. Under the
Income-tax Act, 1961 earlier the dividend was taxable aMhe hands of
shareholder. By Finance Act, ·1997 it was made taxable in the hand of c
company when additional tax was imposed.
33. This Court, however, while considering the nature of dividend
in the ~bove case held that although when the initial source which has·
produced the revenue is land used for agricultural purposes but tci give
to the words 'revenue derived from land', apart from its direct association D
or relation with the land, an unrestricted meaning shall be unwarranted.
Again as noted above Na/in Beliari Lal Sing/ta (supra) o_bservation
was made that shares of its profits declared as distributable among the
shareholders is n9t impressed with the character of the profit from which
it reaches the hands of the shareholder. We, thus, find substances in the
submission of the learned counsel for the Union of India that when the E
dividend is declared to be distributed and paid to company's shareholder
it is not impressed with character of source of its incotne.
34. The provisions of Section 115-0 arc wen within the competence
of Parliament. To put any limitation i~ the said provision as held by the
Calcutta High Court that additional tax can be levied only on the 40% of F
the dividend income shall be altering the provision of Section 115-0 for
which there is no warrant. The Calcutta High Court having' upheld the
vires of Section 115-0 no further order was necessary in that writ petition.
35. In view of the foregoing discussion, Civil Appeal Nos. 9178
and 91 80 of 2012 are allowed and Civil Appeal No. 9179 of 2012 is G
dismissed .
.Divya Pandey Appeals disposed of.
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