2008 (3) TMI 112 - HC - Income Tax

Ownership vs. Registration: Dividend Entitlement & Tax Burden

COMMISSIONOR OF INCOME-TAX Versus AATUR HOLDINGS P. LTD.

The court held that the assessee company, despite being the de facto owner of shares, was not entitled to receive dividends as it was not the registered ... Taxability of the dividend - even though the amounts were paid for acquiring the shares, shares have not been delivered to the assessee company - change in ownership of the shares haven’t been registered & notified & therefore the assessee’s name did not appear in the share registers of the respective companies on the record date - therefore, it could not have received the dividend at all - such dividend income could not form part of the total income of the assessee – revenue appeal dismissed Issues:1. Taxability of dividend income in the hands of the assessee.2. Interpretation of provisions under Section 206 of the Indian Companies Act and Section 27 of the Securities Contracts (Regulation) Act, 1956.3. Application of Accounting Standard (AS) 9 in determining taxability of dividend income.4. Burden of proof on the department to establish taxable income.5. Ownership and registration of shares affecting entitlement to receive dividends.Issue 1: Taxability of Dividend Income:The case involves the question of whether the assessee company, although the de facto owner of shares, is entitled to receive dividends declared by a company without being the registered shareholder. The ITAT held that the dividend did not accrue to the assessee and thus could not form part of its total income. The court examined the provisions of Section 206 of the Indian Companies Act, emphasizing that dividends must be paid to the registered shareholder or their order. Additionally, Section 27 of the Securities Contracts Act highlighted that the person whose name appears on the company's books is entitled to receive dividends, unless the transferee has lodged documents for registration. The court also referenced Accounting Standard (AS) 9, which outlines the recognition of revenue from dividends based on ownership rights. Ultimately, the court upheld the decision that the assessee, not being the registered shareholder, was not entitled to the dividend income.Issue 2: Interpretation of Provisions under Indian Companies Act and Securities Contracts Act:The court analyzed the provisions of Section 206 of the Indian Companies Act and Section 27 of the Securities Contracts Act to determine the entitlement to receive dividends. These sections mandate that dividends are to be paid to the registered shareholder or the person whose name appears on the company's books. The court emphasized that ownership as reflected in the company's records is crucial in establishing the right to receive dividends. The provisions also address the transfer of securities and the conditions under which a transferee can claim dividends, underscoring the importance of registration for dividend entitlement.Issue 3: Application of Accounting Standard (AS) 9:The court considered Accounting Standard (AS) 9 in assessing the taxability of dividend income. AS 9 outlines the recognition of revenue from dividends based on the owner's right to receive payment. The court noted that in the absence of any other statutory provision, accounting standards should be followed. By referencing AS 9, the court reinforced the importance of ownership rights and registration in determining the tax treatment of dividend income.Issue 4: Burden of Proof on the Department:The court reiterated the principle that the burden of proving taxable income lies with the department. Citing previous judgments, the court emphasized that income must be received by the assessee for it to be taxable. The court highlighted that income tax is levied on actual income received, and hypothetical income that does not materialize cannot be taxed. This principle underscores the necessity for actual receipt of income to establish tax liability.Issue 5: Ownership and Registration of Shares Impacting Dividend Entitlement:The court examined the ownership and registration status of shares to determine the entitlement to receive dividends. The AO noted various categories of shares in the balance sheet, including non-delivered shares and shares in custody of the Custodian. The court found that ownership of the shares had not been recognized by any authority, and dividends had been received by other parties. The absence of share transfer documentation further supported the conclusion that the assessee was not entitled to the dividend income. The court upheld the findings of the Commissioner and CIT, dismissing the appeal based on the lack of ownership recognition and registration affecting dividend entitlement.This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the court's reasoning in deciding the taxability of dividend income in the case.