There had been considerable lobbying in the past from the Chambers of Commerce, Trade Associations, individual high-income taxpayers and various other quarters, generally before the presentation of the budget, for exempting dividend income from Income-Tax. The main ground given was to avoid double taxation. The argument was that it is wrong to tax the same income twice — once when it is earned by companies in their own assessments, and then to subject such income to tax once again, in the hands of the shareholders, as dividends. In this argument, it was conveniently forgotten that the company and its shareholders are two different legal entities. This position has been undisputedly accepted by courts in India and abroad, and by jurists such as Lord Halsbury. In India, the separate legal entities of the company and the shareholders has been accepted by the Supreme Court, in the case of Mrs Bacha F. Guzdar vs. CIT (1955) 27 ITR 1, where the court has said that “the company is a juristic person and is distinct from the shareholders….”. There is nothing in the Indian law to warrant the assumption that a shareholder, who buys shares, buys any interest in the property of the company, which is a juristic person, entirely different from the shareholders. Hence, there cannot be any injustice and hardship, if the two separate entities are taxed separately.
Source : http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/article2439802.ece?homepage=true
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