The Hindu Business Line : The law on declaring dividends

Are there any norms or parameters prescribed by the Companies Act for the declaration of dividend by companies in India? If yes, is there any difference between those applicable to public and private companies?

S. Krishnamoorthy, email

There aren't any. Of course there are controls in place to ensure that the dividend once declared is not reneged on. The Companies Act requires dividend declared at the AGM to be actually paid within 30 days. Dividend is one area where the board of directors has complete and unquestioned freedom. When to declare, how much to declare and in what form to declare are all left to their discretion.

And there are no special regimes for private companies in this regard except that the income-tax law deems loans and advances given by closely-held companies to their substantial shareholders as dividend taxable in the hands of the recipients which is immune from distribution tax.

ECB loans

We are a manufacturing company in India and in construction period stage. We took ECB loans from our foreign holding company (HO) and parked the funds in Indian banks on which we got interest during the assessment year (AY) 2006-07. ECB loans are sanctioned by the RBI for capital expenditures.

Since the ECB loan is sanctioned only for capital assets, the interest charged by the HO have to be capitalised along with respective assets (as required by relevant accounting standards). On the same reasoning, we understand that any interest earned on the idle funds should be reduced from such capital assets. Or are we supposed to pay taxes on interest earned as `Income from other sources'?

Shashi Mohan, email

The Supreme Court's verdict in Tuticorin Alkali Chemicals & Fertilizers Ltd vs CIT (1997 227 ITR 172) did give some anxiety to the corporates when what it spelt began to sink in — that interest earned during the construction period is taxable as `income from other sources'. Its subsequent verdict in CIT vs Bokaro Steel (P) Ltd (1999 102 Taxman 94) soothed corporate nerves considerably when it supplied thaw to the rigour of this tax-treatment — in case a clear link is established between a capital expenditure and the interest earned from the money borrowed therefor from temporary investment of idle funds, it would be a capital receipt which can abate against such capital expenditure.

Your case perfectly fits this bill and, accordingly, you don't have to pay tax on this interest under `income from other sources'. You can certainly reduce this interest against the cost to arrive at the actual cost relevant for computing depreciation.

Interest during project stage

What happens if interest income is earned and the main business of glass manufacturing is still not started?

Praveen Chavda, Raigarh

The Supreme Court verdict in the Bokaro Steel case throws considerable light on this issue. Coming as it did after the Tuticorin Alkalies case, which judgment gave many a sleepless night to many by peremptorily ordaining such interest income to be taxed in all the cases without exception, it has relieved a lot of anxieties.

If the interest income is earned during the project stage with a view to subsidising the cost of the project, that is, if a one-to-one relationship can be established between the project and the interest, then such interest can abate against the cost of the fixed asset.

Application of Section 44AB

For a share trader what is the trigger point for Section 44AB?

Avinash Khandelwal, email

A share trader is admittedly in the business of buying and selling shares on his own account, unlike a broker who does so on clients' account. Therefore, for a trader, Section 44AB would apply if his annual sale of shares exceeded Rs 40 lakh, and to a broker if his brokerage exceeded Rs 40 lakh.

FBT during project phase

Is Fringe Benefit Tax (FBT) payable on the specified expenses during the project stage? What happens if these expenses are capitalised?

Praveen Chavda, Raigarh

FBT is payable by the employer on the specified expenses no matter whether his business is already on stream or is being set up. It also does not matter what accounting treatment is given to the specified expenses. You would appreciate that like the distribution tax on dividend, FBT is also an additional income-tax payable whether or not there is a profit and the concomitant corporate tax liability.

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