1. Introduction

An inquiry into the innate nature of a tax presupposes examination of an intricate web of variables, which on most occasions results into raging debates. For examples, whether a tax on service provider is a tax on service or a professional tax,[1] whether a tax on capital value of assets is same as wealth tax,[2] whether a tax on tobacco is luxury tax,[3] nature of expenditure tax,[4] etc. are some intriguing controversies into the true nature of various taxes which have received exposition of the Supreme Court. In such cases, the complexities often issue when the characteristics of the tax legislation depart from the ordinarily understood dimensions of a particular tax.


The immediate case at hand is of “tax on distributed dividend”, or dividend distribution tax (DDT), as it is popularly called which is imposed under a separate chapter of the Income Tax Act, 1961 (ITA). This tax was introduced in 2000, omitted and reintroduced after a brief hiatus. DDT has since then been in vogue up to March 2020 when its levy was discontinued. Its contours have been examined twice by the Supreme Court, yet the debate on its true nature continues. The exact issue for consideration is whether DDT is a tax on income of the shareholder, which has resulted into extensive debates, particularly in the context of international tax. This article seeks to demystify the cause of controversy and the run-up to the present status.


  1. Scheme of DDT

Section 4 of ITA creates a “charge of income tax”. It encompasses all heads of income, including income deemed to accrue or arise in India. However, a distinct charging provision exists in the ITA insofar as Section 115-O provides that “any amount declared, distributed or paid by [a domestic] company by way of dividends … shall be charged to additional income tax (hereafter referred to as ‘tax on distributed profits’)”. The supporting paraphernalia and the machinery provisions relevant for DDT are also housed together under Chapter XII-D of the ITA. In a sense, therefore, the provisions relating to DDT are a complete code in itself even though housed under the ITA.


The ITA further provides that DDT shall be payable “notwithstanding that no income tax is payable by a domestic company on its total income”.[5] In other words, levy of DDT is not contingent upon the taxability of the company distributing the dividend. Furthermore, the levy of DDT is dehyphenated from the remaining provisions of the ITA insofar as the provision declares that DDT “shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid”.[6] The standalone nature of the DDT is further vindicated by the declaration in the ITA that “no deduction under any other provision of [the ITA] shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax” under DDT.[7]


There is another unique feature about the DDT. It is provided in the ITA that for computing the DDT, “any amount by way of dividends … (hereafter referred to as ‘net distributed profits’), shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits”.[8] This is an indirect way of stating that the DDT shall not form part of the dividend declared by instead be in addition to the dividend. In other words, if the dividend being distributed is 100 and the DDT is @15%, then the company shall pay 100 as dividend to the shareholder and 15 as DDT to the Government. This stipulation in the ITA rules out the ability of the company to pay only 85 as dividend to the shareholder and take 15 (and pay it to the Government) out of the 100 declared as dividend. Thus, a company paying 100 as dividend actually ends up paying 115 where the shareholder receives the entire amount of declared divided without any deduction. Put pithily, both in legal and economic terms the company declaring the divided ends up bearing the cost of the DDT.


Furthermore, even though a shareholder is liable to pay tax on dividend income,[9] the ITA exempts the shareholder from paying income tax on the dividend which has been subjected to DDT.[10] In other words, dividend is not taxed twice and is taxed only once and that too in the hands of the distributing company.


  1. Judicial Advertence to Nature of DDT

The peculiarity as to the nature of DDT has resulted into multiple judicial inquiries regarding the true nature of DDT as a tax. Even though the aforesaid scheme of DDT reveals that the shareholder is agnostic in the DDT design, most of the judicial inquiries have arisen on account of challenges seeking to link DDT to the shareholders receiving the dividend.


The first in line of inquiry are the decisions of Calcutta High Court[11] and Gauhati High Court[12] which upheld the constitutional validity of DDT. These decisions rejected the challenge to levy of DDT on the ground that a company paying the dividend should not be subjected to DDT when the company was earning agricultural income i.e. undertaking an exempt activity. The challenge was rejected but as such there was no finding in these decisions that dividend (which is subject to DDT) is the income of the company. Thus, doubts continued whether DDT is a “tax in income” or a non-descript tax.[13]


In a detailed judgment, the Bombay High Court in Godrej & Boyce[14] enunciated the legal characteristics of DDT to declare that a company paying the dividend “is chargeable to tax on its profits as a distinct taxable entity. It does not do so on behalf of the shareholder. The company does not act as an agent of the shareholder in paying the tax under Section 115-O. In the hands of the recipient shareholder dividend does not form part of the total income. On the contrary, Section 10(33) clearly evinces parliamentary intent that incomes from dividend (and from mutual funds) are not includible in the total income”.[15] Thus, the decision of the Bombay High Court settled that DDT was not a tax on income of the shareholder but was instead a tax on the company. However, this legal position remained only short-lived as the decision of the Bombay High Court was reversed by the Supreme Court. The irony is that the Supreme Court in its detailed judgment in Godrej & Boyce[16] noted the submissions on this aspect[17] but did not categorically opine whether DDT was a tax on the income of the shareholder or a tax on the company.


Within a few months of the Supreme Court’s decision in Godrej & Boyce[18], there was another decision of the Supreme Court in Tata Tea[19] wherein the issue for consideration was correctness of the Calcutta High Court decision upholding the constitutional validity of DDT. The exact claim before the Supreme Court in Tata Tea[20] arose because the company earned 60% of income from exempt agricultural activity and it contended that DDT should be levied only in proportion to the 40% of the dividend declared by the company. However, again, without adverting to the real nature of DDT and whether it is a tax on the company or the shareholder, the Supreme Court in Tata Tea[21] upheld the constitutional validity of DDT inter alia for the following key reason:


25. As noted above, List I Entry 82 embraces entire field of “tax on income”. What is excluded is only tax on agricultural income which is contained in List II Entry 46. “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 articles of association of companies is required to be paid as per the rules of the companies to the shareholders. Section 115-O 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-O 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 provision trenches the field covered by List II Entry 46, 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. Looking to the nature of the provision of Section 115-O and its consequences, the pith and substance of the legislation is clearly covered by List I Entry 82.

26. We, thus, repel the argument of the learned counsel for the writ petitioners that the provision of Section 115-O is beyond the legislative competence of Parliament.


As a net consequence, despite two decades of judicial advertence to DDT and two decisions of the Supreme Court specifically examining DDT, there is little judicial guidance on the true nature of DDT. This has resulted into a significant controversy, especially in the international tax treaty context, as explained in the next section.


  1. Unravelling the Ongoing Debate on True Nature of DDT

Before addressing the decisions debating on the true nature of DDT, it is expedient to appreciate the context in which the debate arises. This takes us to the framework of international tax treaties, popularly known as “double taxation conventions” internationally and “double taxation avoidance agreements” (DTAA) in India.


DTAA are treaties signed by Government of India with other countries in order to obviate double taxation which arises from the same income (which is being taxed in India) being taxed in such countries. The scope of these DTAA is limited insofar as the relief accorded under the DTAA is limited under the “taxes covered” clause. To illustrate, Article 2 of the Organisation for Economic Cooperation and Development  (OECD’s) Model Double Taxation Convention[22] (OECD DTC) states that it “shall apply to taxes on income and on capital”. Furthermore, by design, the DTAA make special provision in respect of enumerated species of income. To illustrate, Article 10 of the OECD DTC provides that “dividends paid by a company which is a resident of a contracting State to a resident of the other contracting State may be taxed in that other States”. For example, dividend – paid by an Indian company to a shareholder who is resident of Country Y – may be taxed in Country Y. Simultaneously, Article 10 permits that “dividends paid by a company which is a resident of a contracting State may also be taxed in that State according to the laws of that State….” In our example, this implies that dividend paid by an Indian company may be taxed in India. Thus, levy of tax on dividend paid by Indian companies to shareholders resident in the DTAA countries is permitted by the DTAA.


While allowing the Source State (i.e. the country in which the company declares the dividend) to tax the dividend, Article 10 of the OECD DTC also stipulates a limit upon the rate of tax. In other words, the levy of tax by Indian on dividend paid by Indian companies to shareholders resident in the DTAA countries is permitted but only upto a specified percentage of tax. This limit of tax rate depends upon the individual DTAA which India has signed with other countries. In most Indian DTAAs, this limit is of 10% and in some cases even 5%. This implies that the levy of tax by India on dividend paid by Indian companies to shareholders resident in these DTAA countries cannot exceed 10% or 5%, as the case may be, under the respective DTAA. DDT is levied @15%. This has resulted into some Non-Resident shareholders challenging the levy of DDT on the ground that 15% DDT violated the lower limit on rate of tax on dividends under the DTAA. These challenges have been recently adverted by the Income Tax Appellate Tribunal (‘ITAT’).


The first relevant case of ITAT is its order in G&D[23]. In this case the issue was whether DDT could be restricted in view of the fact that the shareholder receiving the dividend was entitled to benefit of India-Germany DTAA which stipulated a lower rate of tax on dividend. Intriguingly, the ITAT in this case noted the decision of Bombay High Court in Godrej & Boyce[24] to the effect that DDT is tax “on the company” and not “on the shareholder”. The ITAT did not note that the Bombay High Court decision had been reversed by the Supreme Court but still the ITAT went ahead to opine contrary to what the Bombay High Court had concluded. The ITAT in G&D[25] concluded that even DDT was to be subjected to restriction of the DTAA similar to the income taxed under the other provision of ITA, inter alia observing as under:


  1. 51. There is no dispute that the liability is on the payer company to pay DDT, but, at the same time, we must not lose sight of the fact that additional income tax is part of tax as defined in Section 2(43) of the Act and levy of additional income tax under Section 115-O has its genesis in charging provision of Section 4 of the Act. We must also remember that this additional income tax (DDT) levied under Section 115-O is a tax on income and definition of “income” includes dividend.
  2. 52. As per the Income Tax Rules, relevant details regarding payment of DDT have to be provided in the income tax return form and have to be disclosed in the tax audit return (Form 3-CD). Further, the income tax assessment order read with the income tax computation form quantifies DDT liability. It would not be out of place to mention that the Act does not provide for a separate adjudication/passing of separate order with regard to adjudication of liability of DDT. Section 115-Q merely provides for the consequences of non-payment of DDT, but there is no separate/specific provision in the Act for collection and recovery of DDT in default.


  1. 72. … we are of the considered view that tax rates specified in DTAA in respect of dividend must prevail over DDT.


  1. Considering the above in totality, in our considered opinion, the DDT levied by the appellant should not exceed the rate specified in Article 10 in India-Germany DTAA.


Thus, by way of curious reasoning, the ITAT effectively concluded that levy of DDT requires examination of the status of the shareholder receiving the dividend. Thereby, the ITAT effectively tied down the levy of DDT to the shareholders despite specific provisions in the ITA delinking the shareholder from levy of DDT.


Soon after the decision in G&D[26], the ITAT in Indian Oil[27] examined the issue to conclude similarly, albeit without reference to the order in G&D[28]. In Indian Oil[29], the ITAT declared that the levy of DDT upon the company was only for “for administrative convenience” and thus reference to the shareholder was necessary even for DDT. The relevant part of ITAT’s order reads as under:


8.2. In the instant case, the dividend income should be chargeable to tax in the hands of the shareholders as per the provisions of Section 4 of the Act. However, for administrative convenience, the incidence of tax is shifted to the resident company paying dividend income and as such, the company being the person responsible for distributing dividend income among the shareholders including the non-resident shareholders, the rate of tax to be paid on such dividend income would be governed by the tax rate specified in the DTAA (being more beneficial) and not the rate specified in Section 115-O of the Act.

8.3. As per the provisions of the Act, dividend distribution tax (DDT) is a tax on dividend income and not on undistributed profits of the company. Undistributed profits of a company are still the profits of the company. They constitute the income of the company. Until the company declares dividend, no portion of these profits can become the income of the shareholders.

8.4. As per the aforesaid principle, the dividend income would constitute income in the hands of the shareholders and would be chargeable to tax under Section 4 of the Act. The Finance Ministry, in the ‘memorandum explaining the provisions of the Finance Bill, 1997 to 2020’, has stated that for administrative convenience, the incidence of tax on dividend income is shifted to the resident company paying such dividend income.

8.5. Thus, it may be appreciated that once the dividend constitutes income in the hands of the shareholders, the same should be chargeable to tax as per the provisions of Section 4 of the Act. As per the provisions of Section 4 of the Act, the income tax including the additional income tax should be charged at the rate specified in the Act or DTAA, whichever is more beneficial to the assessee.

8.6. In the instant case, the dividend, being an income in the hands of non-resident shareholders in respect of which the incidence of tax is borne by the resident company paying dividend. The rate of tax as specified in the DTAA, being more beneficial to the assessee, would be applicable over the rate specified in Section 115-O of the Act.”


Being called upon to follow the views in the aforesaid two orders, another Bench of the ITAT, however, could not persuade itself to subscribe to this reasoning. In Total Oil[30], the ITAT found the decision in the earlier orders contrary to the scheme of the ITA and the DTAA to conclude that the issue required examination by the larger Bench. In concluding so, in Total Oil[31] the ITAT inter alia set out the following propositions to call upon a holistic debate upon the nature of DDT and its positioning within the DTAA:


10. (c) Under the scheme of the tax treaties, no tax credits are envisaged in the hands of the shareholders in respect of dividend distribution tax paid by the company in which shares are held. The dividend distribution tax thus cannot be equated with a tax paid by, or on behalf of, a shareholder in receipt of such a dividend. In fact, the payment of dividend distribution tax does not, in any manner, prejudice the foreign shareholder, and any reduction in the dividend distribution tax does not, in any manner, act to the benefit of the foreign shareholder resident in the treaty partner jurisdiction. This taxability is wholly tax neutral vis-à-vis foreign resident shareholder and the treaty protection, when given in respect of dividend distribution tax, can only benefit the domestic company concerned. The treaty protection thus sought goes well beyond the purpose of the tax treaties.


 (f) Wherever the contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. For example, in India-Hungary double taxation avoidance agreement, it is specifically provided, in the protocol to the Indo-Hungarian tax treaty it is specifically stated that: ‘When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend.’


 (h) Taxation is a sovereign power of the State – collection and imposition of taxes are sovereign functions. Double taxation avoidance agreement is in the nature of self-imposed limitations of a State’s inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. The dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, cannot thus be curtailed by a tax treaty provision.”


The Special Bench of the ITAT to examine the issues is yet to be constituted. Thus, the jury is still out as to what is the true nature of the DDT. However, the fact remains that this tax which was on vogue for about two decades has created considerable controversy and continues to consume judicial time despite having lost force. Clearly, however, the points of reference to be determined by the Special Bench illustrate that a fresh inquiry will commence in the nature and contours of DDT. When this debate will end, nonetheless, is anyone’s guess.


  1. Conclusion

DDT is dead, long live DDT. The irony of the debate on the nature of DDT is that this debate has arisen after the DDT has ceased to apply. Nonetheless, the continuation of debate is obvious given the fact that DDT is perhaps a unique and unprecedented in the international tax framework and given that the judicial decisions have failed to categorically expound upon the true nature of the DDT. It will indeed be interesting to await the outcome of the Special Bench which hopefully would precisely delineate the contours of DDT and institute it either as a tax on income of shareholder or a sui generis levy.


†Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.


[1]All-India Federation of Tax Practitioners v. Union of India, (2007) 7 SCC 527.

[2]Union of India v. Harbhajan Singh Dhillon, (1971) 2 SCC 779.

[3]Godfrey Phillips India Ltd. v. State of U.P., (2005) 2 SCC 515.

[4]Federation of Hotel & Restaurant Assn. of India v. Union of India, (1989) 3 SCC 634.

[5] S. 115-O(2), ITA.

[6] S. 115-O(4), ITA.

[7] S. 115-O(5), ITA.

[8] S. 115-O(1-B), ITA.

[9] S. 56(2)(i), ITA.

[10] S. 10(34), ITA.

[11]Jayshree Tea and Industries Ltd. v. Union of India, 2001 SCC OnLine Cal 795 : (2002) 253 ITR 608.

[12]George Williamson (Assam) Ltd. v. Union of India, 2007 SCC OnLine Gau 567 : (2007) 292 ITR 322.

[13] See, Tarun Jain, Dividend Distribution Tax: A Rejoinder to 339 ITR (J) 52, (2012) 343 Income Tax Reports (Journal) 42-51, available <HERE> for a detailed discussion.

[14]Godrej & Boyce Mfg. Co. Ltd. v. CIT, 2010 SCC OnLine Bom 1174 : (2010) 328 ITR 81.

[15]Id. at para 37.

[16]Godrej & Boyce Mfg. Ltd. v. CIT, (2017) 7 SCC 421.

[17]Id. at para 31.

[18] (2017) 7 SCC 421.

[19]Union of India v. Tata Tea Co. Ltd., (2017) 10 SCC 764.

[20] Ibid.

[21] Id., pp. 775-76

[22] Available <HERE>.

[23]Giesecke & Devrient (India) (P) Ltd. v. CIT, 2020 SCC OnLine ITAT 419.

[24] 2010 SCC OnLine Bom 1174 : (2010) 328 ITR 81.

[25] 2020 SCC OnLine ITAT 419.

[26] Ibid.

[27]CIT v. Indian Oil Petronas (P) Ltd.,  ITA/1884/KOL/2019 dated 30-4-2021.

[28] 2020 SCC OnLine ITAT 419.

[29] CIT v. Indian Oil Petronas (P) Ltd.,  ITA/1884/KOL/2019 dated 30-4-2021

[30]CIT v. Total Oil India (P) Ltd., ITA/6997/MUM/2019 dated 23-6-2021.

[31] Ibid.


  • I think it is wrong to tax dividends at the hands of shareholders, as the company has already paid tax on the profits. Such taxes will actually discourage dividend investors and also make dividend-paying shares very unattractive.

  • Sir my case is regarding capital reduction by Fresenius kabi oncology ltd who deduct tax under 194 on my capital and premium. I allotted share 1994 DABUR LTD AND ITS PHARMA UNIT DEMERGE IN 2003 IN RATIO 2 DABUR LTD SHARE WITH 1 DABUR PHARMA AS SUCH THIS DABUR PHARMA 50 SHARE ALLOTTED TO ME at a price of Rs.3367 which is my cost of acquisition in 1994 and 2008 name change Fresenius kabi ltd acquire and listed on stock exchange at Rs.130-140 in 2013 and later in 2014 the promoter delisted this co from stock exchange and in 2018 after share holder approval by the promoter being 97%share with them file application in NCLT and approved capital reduction at a price of 58.40 per share in feb.2020. in Aug.2020 co. Paid me 29200 after deducting TDS UNDER SECTION 194 WHICH IS NOT JUSTIFY AS MY IMPROVED COST OF ACQUISTION IS 17400 BU I HAVE PAY TAX ON WHOLE RS.29200 BEING DEEMED DIVIDEND DEDUCTION. SINCE MY SLAB RATE IS 30% THE AMOUNT PAID TO ME IS MUCH LESS. PLEASE GUIDE ME.

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