Financial Daily from THE HINDU group of publications
Friday, Mar 08, 2002
Dividend cos have no escape -- `SC verdict in Express case settles the issue'
KOLKATA, March 7
THE calculated move by corporates (with high single promoter holding) to declare an interim dividend and thereby escape the proposed new tax burden on dividend receipts may have already come unstuck, with the reported Securities and Exchange Board of India fiat to stock exchanges not to waive the mandatory notice periods.
Even as some companies have announced an honourable retreat, the Revenue Department appears quite unperturbed by all the hoopla.
According to senior CBDT (Central Board of Direct Taxes) officials, corporates may not find themselves in an exactly comfortable position simply by declaring an interim dividend, as the landmark judgement by the Supreme Court in the celebrated case of Commissioner of Income-Tax vs Express Newspapers Ltd (230 ITR-1998) has clearly established that the key expressions are "declared and distributed".
It is also pointed out that any pre-emptive move by the corporate sector to bypass the tax route can be countered by the Finance Minister when moving the Finance Bill in Parliament, simply by proposing an amendment giving retrospective effect to the proposal on dividend tax. Section 8 (b) of the Income-Tax Act, (which deals with dividend income, for the purpose of inclusion in the total income of an assessee) states that "any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it".
In the Express Newspapers case, while determining the amount of tax payable by the company for assessment year 1964-65, the Income-Tax officer came to the conclusion that the rebate available to the company under the Finance Act, 1964 had to be reduced to the extent of the interim dividend paid to shareholders in January 1963. The company went in appeal stating that the board had declared dividend on December 6, 1962, i.e., before start of the relevant previous year, and payment was made in the subsequent previous year, and therefore, as per the explanation in the said Finance Act, rebate cannot be reduced. And the same was upheld by the high court, but later set aside by the Supreme Court.
It was submitted in the apex court that the high court had erred in coming to the conclusion that there was any declaration of dividend as under- stood under the Companies Act. The department's counsel submitted that the resolution of the board cannot be regarded as declaration of dividend by the company, and what was relevant is to see the date when the interim dividend was distributed.
Since the distribution took place in the previous year relevant to the assessment year 1964-65, the rebate to that extent was rightly withdrawn.
The Supreme Court, according to tax authorities, has clarified that a declaration by a company in a general meeting gives rise to an enforceable obligation, but a resolution of the board to pay interim dividend, pursuant to the authority conferred upon them by the articles of association, gives rise to no such enforceable obligation, as the resolution is always capable of being rescinded.
In other words, the corporates have an exit route. The apex court has also clarified that the nature of the interim dividend is such that it gives no right to the shareholders to receive it merely on the passing of the resolution by the board of directors, whereas on a dividend being declared by the company at AGM, "a vested right accrues to the share- holders".
Taking a holistic view of the rush by companies to declare an interim dividend to avoid tax, Mr Narayan Jain, tax lawyer, quoting from the verdict by SC in the McDowell & Co Ltd vs CTO case, said: "There is a sense of injustice and inequality which tax avoidance arouses in the hearts of those who are unwilling or unable to profit by it."
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