1981 (12) TMI 7 - HC - Income Tax

High Court Upholds Relief for Dividends under Income-tax Act

The High Court upheld the Tribunal's decision to grant relief under section 236 of the Income-tax Act, 1961, for dividends distributed from the taxed ... Relief under section 236 of the Income-tax Act - traceability of taxed reserves and attribution of dividends - amalgamation and continuity of corporate identity - refund under section 237 and appealability under section 246(n)Relief under section 236 of the Income-tax Act - amalgamation and continuity of corporate identity - traceability of taxed reserves and attribution of dividends - Entitlement of the assessee to relief under s.236 in respect of dividends declared in 1968-1970 attributable to taxed profits of Tennur Bank assessed before 1 April 1960. - HELD THAT: - The scheme of amalgamation transferred the assets and liabilities of two transferor banks to Tennur Bank, which continued in existence albeit under a new name (Trichy United Bank). The court held that a change of name without liquidation of the transferee company did not break the corporate identity of the Tennur Bank which had earned and been assessed on the taxed profits up to 31 March 1960. Section 236 must be read in the context of corporate appropriation practices; the word 'actually' in s.236 does not require physical segregation of taxed profits in a separate ledger. Where taxed profits have been carried to reserve and thereafter form part of an amalgamated reserve, those taxed profits are capable of being traced and attributed to dividend distributions. Given that the quantum of Tennur Bank's taxed profits and reserves is ascertainable, the statutory requirement for relief under s.236 is satisfied and the Tribunal was correct to allow relief to the extent dividends are attributable to Tennur Bank's taxed profits.Relief under s.236 is available to the assessee in respect of dividends declared in 1968-1970 to the extent attributable to Tennur Bank's taxed profits up to 1 April 1960; the Tribunal's conclusion in favour of the assessee is upheld.Refund under section 237 and appealability under section 246(n) - character of relief under section 236 as refund - Whether an order of the ITO refusing (in whole or in part) relief under s.236 is appealable under the general refund provisions (s.237) and s.246(n). - HELD THAT: - Section 236 effects repayment of tax already paid where dividends are declared out of past taxed profits; in substance such relief is a refund of tax paid. There is no material distinction between refunds under s.236 and refunds contemplated by s.237; the placement of s.236 in a separate chapter does not alter its substance. Consequently an ITO order refusing refund under s.236 is to be treated as within the ambit of s.237 and is therefore appealable under s.246(n). The absence of a specific procedure for an application under s.236 does not preclude the maintenance of an application where filed, nor does it oust the appellate remedy when relief is refused.An ITO order refusing relief under s.236 (in whole or in part) is a refund order within s.237 and is appealable under s.246(n); the Tribunal was correct in holding the appeal maintainable.Final Conclusion: The reference is answered in favour of the assessee: relief under s.236 is available in respect of dividends attributable to Tennur Bank's taxed profits up to 1 April 1960, and an ITO's order refusing such relief is appealable under the refund provisions (s.237) and s.246(n); the Tribunal's orders are upheld. Issues Involved:1. Entitlement to relief under section 236 of the Income-tax Act, 1961.2. Maintainability of appeal against the Income Tax Officer's order under section 236.Issue-wise Detailed Analysis:1. Entitlement to Relief under Section 236 of the Income-tax Act, 1961:The case involves three banking companies in Trichirapalli that amalgamated in 1965, resulting in the formation of the Trichy United Bank. The amalgamation transferred all assets and liabilities of the Woraiyur Commercial Bank Ltd. and the Palakkarai Bank Ltd. to the Tennur Bank Ltd., which was subsequently renamed Trichy United Bank. The profits of the three banks prior to the amalgamation were carried to reserves and not distributed as dividends.Post-amalgamation, Trichy United Bank distributed dividends in 1968, 1969, and 1970 from these reserves and claimed relief under section 236 of the Income-tax Act, 1961, on the basis that the dividends were distributed out of reserves representing taxed profits up to March 31, 1960. The Income Tax Officer (ITO) denied the relief, arguing that the distributing entity was a new entity and not the same as the original banks that earned the profits.The Assistant Appellate Commissioner (AAC) allowed the claim, but the Tribunal partially upheld and partially denied the relief. The Tribunal held that relief under section 236 was not available for dividends attributed to the profits of Woraiyur Commercial Bank and Palakkarai Bank, as these banks were dissolved. However, it granted relief for the dividends attributed to the taxed profits of Tennur Bank, reasoning that Tennur Bank continued to exist under a new name.The High Court upheld the Tribunal's decision, emphasizing that the Tennur Bank, despite the name change, remained the same entity that earned the profits and suffered tax thereon. The Court noted that section 236 applies as the taxed profits of Tennur Bank, which had suffered tax prior to April 1, 1960, were distributed as dividends by the same bank, now known as Trichy United Bank. The Court rejected the Department's argument that the taxed profits must be kept intact and separately appropriated for the dividends to qualify for relief under section 236.2. Maintainability of Appeal against the Income Tax Officer's Order under Section 236:The Department argued that an appeal against the ITO's order under section 236 was not maintainable, contending that section 237, which relates to refunds generally, does not cover orders under section 236. The Tribunal rejected this contention, holding that an appeal is maintainable.The High Court supported the Tribunal's view, stating that section 237 encompasses refunds where the tax paid exceeds the amount properly chargeable. The Court reasoned that a refund under section 236 is essentially a refund of tax already paid, subject to certain calculations, and thus falls within the ambit of section 237. Consequently, an order refusing or partially granting a refund under section 236 is appealable under section 246(n) of the Act.The Court also referred to the legislative history, noting that the relief under section 236 was previously part of the general refund provisions in the Indian Income-tax Act, 1922. The Court concluded that the restructuring of provisions in the current Act does not alter the substance of the relief, and the order under section 236 is appealable.Conclusion:The High Court answered all the questions in favor of the assessee, upholding the Tribunal's decision to grant relief under section 236 for dividends distributed from the taxed profits of Tennur Bank and affirming the maintainability of the appeal against the ITO's order under section 236. The Department was ordered to pay the costs of the assessee, with counsel's fee set at Rs. 500.