The Hindu Business Line : To govt, from govt

There is no equity about a tax. There is no presumption to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.

Service tax provisions in the Finance Bill, 2006, ensure that the Reserve Bank of India does not pay any service tax. The same situation exists in regard to income-tax by the RBI Act, 1934 (RBI Act). But there is no exemption with regard to dividend distribution tax as far as the RBI is concerned.

Section 115-O

Section 115-O of the I-T Act provides for tax on distributed profits of domestic companies. The important elements for chargeability to tax under the Section are:

The assessee concerned has to be a domestic company;

It must have declared, distributed or paid `dividend' — later, clarified in the section as `distributed profit';

Tax on such dividend, also referred to as tax on distributed profits, is to be paid at the prescribed rate — 12.5 per cent, at present.

Sub-section (2) of Section 115-O clarifies that notwithstanding that no income-tax is payable by a domestic company on its total income... the tax on the distributed profits under sub-section (1) shall be payable by such company.

Status of RBI

The RBI has been established by the RBI Act (subsequently amended by Act 23 of 1997). Sub-section (2) thereof states, "The bank shall be a body corporate by the name of the Reserve Bank of India, having perpetual succession and common seal, and shall by the said name sue and be sued."

Section 48 of the RBI Act exempts it from income-tax and super tax.

Liable for distribution tax

The immunity provided by Section 48 extends only to income-tax (super tax being no longer leviable) on the income — profits or gains — and not to any tax which is leviable on distribution of income exempt from tax even if it is labelled as `additional income-tax,' but clarified as `tax on distributed profits'.

Under Section 115-O, `domestic companies' are liable to pay tax on distributed profits even if, as per sub-section (2) thereof, no income-tax is payable by a domestic company on its total income.

This provision makes it clear that tax on distributed profit is not income-tax. Therefore, Section 48 of the RBI Act, exempting the RBI from paying income-tax on its income, will not absolve the bank from its liability to pay tax under Section 115-O of the I-T Act. And, this would subsist, if such liability fastens on it as per sub-section (1) of Section 115-O.

RBI is a domestic company

Under sub-section (22A) of Section 2 of the I-T Act, a `domestic company' means an Indian company. Under sub-section (26) of Section 2 of the I-T Act, the definition of "Indian Company" includes "a corporation established by or under a Central, State or Provincial Act".

Having regard to the definition of `domestic company', as contained in the I-T Act, and also having regard to the provisions in the RBI Act as to the establishment of the RBI, the Bank is a domestic company for the purposes of the I-T Act.

Sub-section (22) of Section 2 defines "dividend". Clause (a) thereof lays down that `any distribution by a company of accumulated profits' constitutes dividend. Thus, the amount appropriated to the Union Government by the RBI becomes liable to distribution tax whether it is called `dividend' or `distribution of profits'. Under Section 47 of the RBI Act, the RBI is obliged to pay the `surplus profits' to the Union Government. Such distributed surplus is nothing but `dividend'. Certainly, it is `distributed profits' for the purposes of Section 115-O.

The RBI is liable to pay tax under Section 115-O in respect of the amount paid to the Union Government out of its profits — current or accumulated. Every year, the RBI pays substantial amounts to the government as its share consequent to Section 47 (supra), but it is not paying any tax under Section 115-O, which is apparently payable because it is not a tax on income.

It could be argued that paying dividend distribution tax by the RBI would be a mere formality because all the profits of the RBI belong to the Government of India and it should not matter whether it is paid as `dividend' or as `distribution tax'. But such a view cannot absolve the RBI of paying dividend distribution tax.

Over the years, the judicial view had been that if the person sought to be taxed comes within the letter of law, he must be taxed. As per the Rowlatt J. In Cape Brandy Syndicate vs IRC 1 KB 64 ruling, in a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.

Therefore, either the RBI should pay dividend distribution tax (with interest for past years) or the RBI Act may be amended retrospectively to exempt the RBI from payment of distribution tax also. The non-payment of this tax does not augur well for the central bank.

(The author is a former chairman of CBDT.)

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