Dividend Distribution Tax under Section 115-O is a tax on the shareholder's dividend income; therefore, the more beneficial DTAA rate of 10% overrides the domestic rate under Section 90(2), entitling the company to a refund of excess tax paid.

Headnote:(A) Income-tax Act, 1961 - Sections 2(43), 4, 10(34), 90(2), 115-O, and 237 - Double Taxation Avoidance Agreement (DTAA) between India and Japan, and India and Thailand - Article 10 of DTAA - Article 265 of the Constitution of India - Dividend Distribution Tax (DDT) - The assessee claimed that the tax rate on dividends distributed to non-resident shareholders should be governed by the DTAA at 10%, not the effective rate of 17.304% under Section 115-O of the Act - The court held that DDT is a tax on the dividend income of the shareholder, though the incidence of tax has shifted from the shareholder to the company - Therefore, the more beneficial provisions of the DTAA (capping the tax at 10%) override the domestic law under Section 90(2) of the Act - The court relied on the Supreme Court's decision in Tata Tea Co. Ltd. (398 ITR 260) and the Bombay High Court in Colorcon Asia Private Ltd. - The assessee is entitled to a refund of the excess DDT paid. (Paras 55-61)

(B) Income-tax Act, 1961 - Section 37 - Club membership fees - The expenditure incurred towards admission fee for corporate membership was held to be for the benefit of the assessee's business and not of a personal or capital nature - The court followed the decision of the Delhi High Court in Samtel Color Ltd., holding that such expenditure facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus, making it a revenue expenditure deductible under Section 37. (Paras 19-20)

Facts of the case:
The assessee, a private limited company, filed appeals against the order of the CIT(A) for Assessment Years 2017-18 and 2018-19. The primary issue concerned the rate of tax on dividends distributed to its non-resident shareholders. The assessee had paid Dividend Distribution Tax (DDT) at an effective rate of 17.304% under Section 115-O of the Act, but claimed that under the DTAA with Japan and Thailand, the tax rate should be limited to 10%. The assessee sought a refund of the differential amount. A secondary issue for AY 2018-19 was the disallowance of club membership fees as personal expenses by the Assessing Officer.

Findings of Court:
The court held that DDT is fundamentally a tax on the dividend income of the shareholder, not a tax on the company's own income. Consequently, the more beneficial provisions of the DTAA, which cap the tax rate at 10%, prevail over the domestic law under Section 90(2) of the Act. The court allowed the claim for a refund of the excess DDT paid. Regarding the club membership fees, the court held that the expenditure was for business purposes and was revenue in nature, thus allowable as a deduction under Section 37.

Issues: 1. Whether the Dividend Distribution Tax (DDT) paid by a company is a tax on the company or a tax on the dividend income of the shareholder, for the purpose of applying DTAA benefits? 2. Whether the expenditure on club membership fees is a revenue or capital expenditure, and whether it is incurred for business purposes? 3. Whether the assessee is entitled to a refund of the excess DDT paid under Section 237 of the Act?

Ratio Decidendi: The court reasoned that DDT is a tax on the dividend income of the shareholder, and the incidence of taxation has been shifted to the company for administrative convenience. Since Section 90(2) of the Act mandates that the more beneficial provisions of a DTAA override domestic law, the tax on dividends distributed to non-resident shareholders cannot exceed the rate prescribed in the DTAA (10%). For the club membership fees, the expenditure was incurred for the business purpose of facilitating corporate operations and did not create an enduring benefit of a capital nature, making it deductible under Section 37. Result : Appeals allowed. Both appeals for AY 2017-18 and 2018-19 are allowed. The assessee is entitled to restrict the tax rate on dividends to 10% under the DTAA and claim a refund of the excess DDT paid. The disallowance of club membership fees for AY 2018-19 is deleted. (Paras 12, 14, 21)

Table of Content
1. facts about appeals, common issues, and lead case. (Para 1 , 2)
2. facts about assessee's business and return filing. (Para 3)
3. ao's rejection and cit(a)'s partial allowance of goodwill claim. (Para 4 , 5)
4. grounds of appeal concerning ddt and dtaa. (Para 6)
5. ddt as tax on shareholder for dtaa benefit. (Para 7 , 8 , 9 , 10 , 11)
6. appeal allowed for ay 2017-18 and 2018-19 on ddt. (Para 12 , 13)
7. club membership fees are revenue and business expenditure. (Para 14 , 15 , 16 , 17 , 18 , 19 , 20)
8. both appeals allowed. (Para 21)

ORDER

PER S. RIFAUR RAHMAN, AM :

1. These appeals are filed by the assessee against the order of Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi[“Ld. CIT(A)”, for short] dated 14.05.2025 for the Assessment Years 2017-18 and 2018-19.

2. Since the issues are common and the appeals are connected, hence the same are heard together and being disposed off by this common order. For the sake of brevity, we are taking the appeal for the Assessment Year 2017-18 as lead case.

3. Brief facts of the case are, assessee is a private limited company engaged in the business of import, export and trading of steel and allied products. Assessee filed is return of income for AY 2017-18 on 29.11.2017 declaring total income of Rs.12,19,83,430/-. The case was selected for scrutiny and statutory notices under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee. In response, assessee filed various details as asked for.

4. After considering the submissions of the assessee, the AO observed that assessee has claimed depreciation on goodwill to the extent of Rs.36,12,964/-. In response, assessee submitted the details of tangible and intangible assets and submitted details of determining goodwill and heavily relied on the decision of CIT vs. Smifs Services Limited 348 ITR 302. The issue under consideration is similar to the issues raised in AYs 2011-12, 2012-13 and 2013-14 and in those assessment years, the claim of the assessee was allowed. After considering the submissions of the assessee, the AO rejected the same and observed that the goodwill is intangible asset but it has to be valued for the purpose of accounting. Assessee has not submitted any valuation report of asset of metal division of Mitsubishi Corporation India Limited, therefore, the above additional payment has not been made on account of goodwill. He further observed that the additional payment could have made on account of fair value of assets or on account of non-compete clause or on account of close connection between the assessee and the selling company. With the above observation, he disallowed the claim made by the assessee.

5. Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi. After considering the detailed submissions of the assessee, ld. CIT (A) allowed the claim of the assessee. Before ld. CIT (A) assessee has raised additional grounds of appeal on the issue of benefit applicable under Double Taxation Avoidance Agreement between India and Japan qua the rate of tax on payments of dividends to the shareholders. This issue was elaborately dealt by ld. CIT (A) at pages 33 to 37 of the appellate order and he dismissed the additional grounds raised by the assessee as per above discussion.

6. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :-

“Ground 1: That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not allowing claim of the Appellant and not appreciating that Dividend Distribution Tax ("DDT") is a tax on the dividend income of the shareholders and hence, the tax rate on the dividend distributed by the Appellant to its shareholders (residents of Japan and Thailand) should be governed by Article 10 of the India-Japan DTAA and India-Thailand OTAA.

Ground 1.2: That the Ld. CIT(A) has erred in not appreciating that in terms of s

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2026 Supreme(Online)(ITAT) 12172

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)METAL ONE CORPORATION INDIA PRIVATE LIMITED NEW DELHI – AppellantVersusTHE DEPUTY COMMISSIONER OF INCOME TAX NEW DELHI – RespondentITA 4710/DEL/2025[2017-18]

Dividend Distribution Tax under Section 115-O is a tax on the shareholder's dividend income; therefore, the more beneficial DTAA rate of 10% overrides the domestic rate under Section 90(2), entitling the company to a refund of excess tax paid.

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
METAL ONE CORPORATION INDIA PRIVATE LIMITED NEW DELHI – Appellant
Versus
THE DEPUTY COMMISSIONER OF INCOME TAX NEW DELHI – Respondent
ITA 4710/DEL/2025[2017-18]