Is Dividend Distribution Tax A Tax On Company Or Shareholder? Bombay High Court Refers 'Cleavage Of Opinion' To Larger Bench

"There is a cleavage of opinion considering the view taken by the Division Bench in the case of M/s. Colorcon Asia Pvt. Ltd. and the view taken by the Division Bench in Godrej & Boyce Pvt. Ltd. (as confirmed by the Supreme Court)... necessitated reference to a Larger Bench," Bombay High Court, in a significant order dated April 27, 2026, has referred the contentious issue of whether Dividend Distribution Tax (DDT) constitutes a tax on the company or the shareholder to a Larger Bench.

A bench of Justice G. S. Kulkarni and Justice Aarti Sathe observed that a clear "cleavage of opinion" exists between coordinate benches of the High Court regarding the applicability of beneficial rates under Double Taxation Avoidance Agreements (DTAA) to DDT payments made under Section 115-O of the Income Tax Act, 1961.

The appellant, Foseco India Ltd., a manufacturer of foundry chemicals, distributed dividends to its UK-based parent shareholders and paid DDT at the statutory rate of 16.994% between Assessment Years 2014-15 and 2020-21. The company subsequently filed refund applications under Section 237, contending that since the beneficial owners were UK residents, the tax rate should be capped at 15% (or 10%) as per Article 11 of the India-UK DTAA. The Revenue and the Income Tax Appellate Tribunal (ITAT) rejected the claim, relying on the Special Bench decision in Total Oil India Pvt. Ltd., which held that DDT is an additional tax on the company, not the shareholder.

The primary question before the court was whether DDT under Section 115-O is in substance a tax on the dividend income of non-resident shareholders, thereby attracting beneficial DTAA rates. The court was also called upon to determine if the decision in M/s. Colorcon Asia Pvt. Ltd. v. JCIT, which favored the assessee, laid down the correct law or was per incuriam in light of the Supreme Court's ruling in Godrej & Boyce Mfg. Co. Ltd.

Statutory Framework of Section 115-O

The Court began by analyzing the plain language of Section 115-O, noting that it falls under Chapter XII-D of the IT Act. The bench observed that the provision begins with a non-obstante clause, conferring an overriding effect on other provisions of the Act. The court noted that the section stipulates an "additional income tax" on the amount declared, distributed, or paid by a domestic company as dividends.

Court Notes DDT Is Primarily A Tax On The Company

On a prima facie reading, the Court remarked that the liability to pay DDT rests solely on the domestic company and its principal officer. The bench emphasized that under sub-section (4), the tax paid is treated as the "final payment of tax" and no further credit can be claimed by the company or any other person. It observed that once DDT is paid, the dividend becomes exempt in the hands of the shareholder under Section 10(34).

"The tax on distributed profits so paid by the company shall be treated as the final payment of tax... and no further credit therefore shall be claimed by the company or by any other person."

Conflict Between Coordinate Benches

The bench highlighted a significant judicial conflict, noting that the Division Bench in Colorcon Asia Pvt. Ltd. (2025) had previously held that DDT is ultimately a tax on the dividend income of shareholders, shifted to the company only for "administrative convenience." That bench had concluded that DTAA benefits would apply to DDT. However, the current bench noted that this view appears to clash with earlier rulings.

Revenue Claims Previous Ruling Is Per Incuriam

The Additional Solicitor General (ASG) argued that the Colorcon Asia decision failed to properly consider the Division Bench ruling in Godrej & Boyce Mfg. Co. Ltd. v. DCIT, which was upheld by the Supreme Court. In that case, the court held that DDT is a tax on the profits of the company and not a tax on dividend income. The Revenue contended that the Colorcon view was also contrary to the Small Industries Development Bank of India (SIDBI) ruling.

"The additional income-tax under section 115-O is a tax on profits and not a tax on dividend... the company is chargeable to tax on its profits as a distinct taxable entity."

The Doctrine of Distinct Taxable Entities

The Court referenced the general principle that a company is a distinct taxable entity from its shareholders. It noted that the charge under Section 115-O is on a component of the company's profits, not on the income received by the shareholder. The bench observed that in the absence of a specific treaty provision, like in the India-Hungary DTAA, the DTAA protection might not be triggered by the payment of DDT by a domestic company.

Necessity of Reference to a Larger Bench

Given the conflicting interpretations of Section 115-O and the varying applications of DTAA Article 11, the Court determined that it could not decide the matter sitting as a coordinate bench. It noted that the interpretation of whether DDT is an "additional tax" on profits or a "withholding tax" on shareholders has vast implications for multinational corporations and the Revenue.

"We are of the clear view that there is a cleavage of opinion... necessitated reference to a Larger Bench."

Final Directions and Questions for Reference

The Court admitted the appeals and framed two specific questions for the Larger Bench. The first asks whether Colorcon Asia correctly holds that DDT entitles shareholders to DTAA benefits. The second asks whether, in light of the Supreme Court's ruling in Godrej & Boyce, the Colorcon Asia decision is per incuriam. The Registry was directed to place the matter before the Chief Justice for the constitution of a Full Bench.

The Bombay High Court has effectively stayed the definitive application of beneficial DTAA rates to Dividend Distribution Tax by referring the matter to a Larger Bench. The resolution of this "cleavage of opinion" will determine whether Indian companies can claim refunds for excess DDT paid when distributing dividends to foreign parent companies, balancing administrative convenience against treaty obligations.

Date of Decision: 27 April 2026