Dividends Received By IFFCO From OMIFCO Oman Can't Be Disallowed Under Income Tax Act: Delhi High Court

The Delhi High Court has held that the dividends received by Indian Farmers Fertiliser Cooperative (IFFCO) from Oman India Fertiliser Company S.A.O.C (OMIFCO) Oman cannot be disallowed under the Income Tax Act.

The division bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora has observed that since the dividend received by the assessee from OMIFCO, Oman is chargeable to tax in India under the head "Income from other sources" and forms part of the total income, it is included in taxable income in the computation of income filed by the assessee.

The court noted that a rebate of tax has been allowed to the assessee from the total taxes in terms of Section 90(2) of the Income Tax Act read with Article 25 of the Indo-Oman DTAA. Thus, the dividend earned can be said to be in the nature of excluded income and, therefore, the provisions of Section 14A would not be attracted.

The appellant/department stated that the expenditure incurred for earning dividend income of Rs.113.86 crores from OMIFCO-OMAN, an overseas company in Oman, cannot be disallowed under Section 14A of the Income Tax Act, 1961. No tax is payable on the dividend in Oman and India as a tax sparing credit of notional tax on the dividend is allowed under Article 25 of the India-Oman DTAA. The ITAT has erred in not appreciating the fact that the assessee is effectively not paying any tax on the income, either in the source country or in India, and thus, dividend income for all purposes is exempted from tax.

The department stated that the ITAT had erred in restricting the disallowance to the tune of Rs.74.26 lakhs as against Rs.9.10 crore, the disallowance made by the AO under Section 14A read with Rule 8D after excluding the investment in OMIFCO-Oman.

The court held that, in view of Section 14A(1), no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. As per Section 2(45) of the Act, "total income" means the total amount of income referred to in Section 5, computed in the manner laid down in the Income Tax Act. Section 14A pertains to the disallowance of deduction in respect of income which does not form part of the total income.

Case Title: PCIT Versus IFFCO LTD

Citation: 2022 LiveLaw (Del) 1012

Date: 11.10.2022

Counsel For Petitioner: Sr. Standing Counsel Ruchir Bhatia

Counsel For Respondent: Advocates Mayank Nagi, Tarandeep Singh

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