2016 (5) TMI 212 - HC - Income Tax

High Court Upholds Tribunal Decision on Dividend Provision Interest Levy

Commissioner of Income-Tax Versus NMDC Ltd.

The High Court dismissed two appeals by the Revenue concerning the levy of interest under section 115P of the Income-tax Act on the provision for payment ... Levy of interest under section 115P - Tribunal held that dividend was declared for the assessment year 2003-04 on September 24, 2003, and tax was paid on October 3, 2003 which was within the time limit prescribed under section 115-P, hence no levy of interest - Held that:- The power of the Board of Directors of Company is only to declare interim dividend, whereas final dividend is to be declared only by the company in its general meeting. It is evident, therefore, that the power of the board of directors is only to 6 recommend dividend; and it is for the shareholders of the company, in the general meeting, to declare the dividend. It is not in dispute that dividend tax, under section 115P of the Act, was paid by the assessee well within 14 days of declaration of dividend by the shareholders in the annual general meeting. The contention of the Revenue that a provision for payment of dividend, in the balance-sheet of the assessee, would itself amount to declaration of dividend does not merit acceptance, as provision for payment of dividend does not automatically result in payment of dividend. It is only after the board of directors decide to recommend dividend, and the shareholders in the general meeting approve the recommendation of the board of directors, can dividend be held to have been declared. We find no error in the orders of the Tribunal, much less a substantial question of law, necessitating interference under section 260A of the Act. - Decided against revenue Issues:Levy of interest under section 115P of the Income-tax Act, 1961 on provision for payment of dividend.Analysis:The High Court heard two appeals filed by the Revenue against the Tribunal's orders concerning the assessment years 2003-04 and 2009-10. The main issue revolved around the levy of interest under section 115P of the Act on the provision for payment of dividend. The Assessing Officer imposed interest on belated payment of dividend tax, considering the provision for payment of dividend as the declaration of final dividend. The assessee argued that making a provision for dividend in the accounts does not constitute the declaration of dividend, which only occurs when shareholders declare it in the annual general meeting. The Commissioner (Appeals) agreed with the assessee, emphasizing that finalization of accounts is not equivalent to dividend declaration, which is a decision taken by the board and shareholders in the general meeting.The Tribunal upheld the Commissioner's decision, stating that the declaration of dividend is not automatic upon finalization of accounts and profits/reserves presence. It clarified that the board of directors and management are responsible for declaring dividends, and the actual declaration occurs in the general meeting. The Tribunal noted that the dividend for the relevant years was declared in the general meeting within the prescribed time limit, leading to the conclusion that the interest levy was unwarranted. The Court referred to relevant sections of the Companies Act and case law to highlight that the power to declare final dividend lies with the shareholders in the general meeting, not solely with the board of directors.The Court rejected the Revenue's argument that a provision for dividend automatically equates to its declaration, emphasizing that the declaration requires a formal decision by the board and approval by shareholders. It affirmed the Tribunal's orders, finding no substantial legal question warranting interference under section 260A of the Act. Consequently, both appeals were dismissed, and any pending petitions were also rejected without costs.