JUDGMENT
N.K. Sud J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short “the Tribunal”), has referred the following question of law arising out of its order dated June 12, 1984, relating to the assessment year 1978-79, for the opinion of this court:
“Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing credit for tax deducted at source in respect of dividends diverted to the State Government by the assessee ?”
2. The assessee claimed credit of the entire amount of tax deducted on dividend. A sum of Rs. 63,410 was deducted at source on the total dividend income of Rs. 2,75,695 out of which dividend of Rs. 1,87,909 belonged to the State Government and the balance Rs. 87,786 was assessable in the hands of the assessee. The Inspecting Assistant Commissioner of Income-tax (Assessment) observed that the credit for tax deducted at source was to be allowed in the same proportion in which dividend was assessable in the hands of the joint holders, i.e., the assessee and the State Government. The assessee, however, claimed that it was the sole owner of the shares out of which it paid to the State Government the share of dividend received as finance charges. However, this contention was not accepted by the Assessing Officer who observed that according to the provisions of Section 199 of the Income-tax Act, it was immaterial as to in whose hands the shares stood and in view of the second proviso below that section, the credit for tax deducted at source was to be given proportionately only. The Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer.
3. The assessee preferred a further appeal before the Tribunal. The Tribunal allowed its claim in the following terms :
“A perusal of the above conclusion of the Tribunal would reveal that the arrangement was one by which an overriding charge was created on the dividends before they become the income of the corporation. The dividends to the extent of 2/3rds were to be diverted to the State Government and only 1/3rd of the dividends were assessable in the hands of the assessee-corporation. The apportionment of 1/3rd and 2/3rds between the assessee and the State Government was of course, after deduction of 1% service charges from the gross dividends. Viewed from the fact that it was a case of diversion of income, the companies in which the assessee held shares were not required to deduct tax at source on that portion of the dividends which was diverted to the State Government. It was required to deduct only with reference to the 1/3rd share pertaining to the assessee-corporation. Since diversion of 2/3rds dividend income was in favour of the State Government, no tax was required to be deducted at source as the State Government is not assessable under the Income-tax Act. Considered thus the companies deducting tax at source have deducted the tax which was not required to be deducted. The burden of the tax deducted at source has entirely fallen on the assessee-corporation. In this view of the matter, we are of the opinion that the assessee-corporation is entitled to the full credit of tax deducted at source on dividends. It may not be out of place to mention that the Assessing Officer has accepted the above principle inasmuch as he has included on 1/3rd share of the dividends in the total income of the assessee. This position having been accepted by the Revenue, we may suggest that the assessee-corporation may consider approaching the Assessing Officer to issue a certificate for not deducting tax at source on dividends which are to be diverted to the State Government so that such tax is not deducted in future. In this way, litigation on this point could be avoided.”
4. From a perusal of the order of the Tribunal, it is clear that no tax was deductible at all on the portion of dividend diverted to the State Government as it is not assessable under the Income-tax Act. The entire tax deducted at source clearly pertains to the dividend payable to the assessee and it has been found as a fact that the entire burden of this amount had fallen on the assessee-corporation. The Tribunal has taken a possible view which, in our opinion, is the correct view in the facts and circumstances of the case. At any rate, it is quite evident that even if the Revenue were to succeed, the balance amount would still be refundable as no tax was deductible on the dividend payable to the State Government. Since the burden had been fully borne by the assessee, such refund would also go back to the assessee. Thus, the whole exercise would be an exercise in futility.
5. In view of the peculiar facts and circumstances of the case, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.