2006 (12) TMI 166 - AT - Income Tax

Tribunal Rules Government Not Shareholder; Payments Not Dividends, Orders Refund Under Tax Act Section 2(22) and 115-O.

Life Insurance Corporation Of India. Versus Joint Commissioner Of Income-tax, Special Range - 36, Mumbai.

The Tribunal concluded that the Central Government is not a shareholder of the assessee Corporation as its capital is not divided into shares. ... Liability to pay tax u/s 115-O - Life Insurance Corporation - deemed dividend u/s 2(22) (e) - Payment made to Central Government out of the surplus profit - Whether the assessee can be said to be in default u/s 115Q of the Act on account of non-payment of tax on distributed profits u/s 115-O - HELD THAT:- The Hon'ble Supreme Court had to consider the question with reference to section 2(6A) of 1922 Act corresponding to section 2(22) of the Act of 1961; held that - ''Dividend', in its ordinary connotation, means the sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed.' In the present case, the assessee is the creation of Life Insurance Corporation Act, 1956. Section 5 of the said Act provides that original capital of the Corporation would be 5 crores of rupees which shall be provided by the Central Government. Reading of section 5, clearly shows that capital of the company is not divided into shares and therefore Central Government cannot be said to be shareholder. The position of the Central Government is akin to the sole proprietor of a business concern. The learned CIT(A) has himself given a finding that Central Government cannot be called a shareholder. This finding has also been upheld by us in the earlier part of the order. Therefore, in our considered opinion, the payment made by the assessee to the Central Government could not be treated as 'dividend' within the ambit of definition clause (22) of section 2 of the Act. Having held that payment by assessee to Central Government is not dividend, it is not necessary for us to deal with the other arguments of the parties since payment of dividend is the condition precedent for invoking the provisions of section 115-O. Accordingly, it is held that the provisions of section 115-O of the Act were not applicable to the present case. Consequently, the assessee could not be declared as assessee in default u/s 115Q of the Act. In view of the same, the orders of both the authorities below are quashed. The payment, if recovered, shall be refunded to the assessee in accordance with law. In the result, appeal of the assessee is allowed. Issues Involved:1. Whether the Central Government is a shareholder of the assessee Corporation.2. Whether the payment in question is dividend.3. Whether the payment can be called declaration, distribution, or payment of dividend.Issue-wise Detailed Analysis:1. Whether the Central Government is a shareholder of the assessee Corporation:The assessee argued that the Central Government is not a shareholder because:- The Life Insurance Corporation does not have shares.- It does not maintain a register of members.- Its capital is not divided into shares.The CIT(A) confirmed that the assessee is a domestic company but agreed that the Central Government is not a shareholder since the capital of the Corporation is not divided into shares. The Tribunal upheld this finding, noting that the revenue did not challenge this conclusion. Thus, the Central Government cannot be considered a shareholder.2. Whether the payment in question is dividend:The assessee contended that the payment to the Central Government cannot be considered a dividend because:- It does not fall within the meaning of section 2(22) of the Act or the ordinary connotation of the term 'dividend' under the Companies Act.- The Life Insurance Corporation does not declare dividends in an Annual General Meeting.- The payment is a consideration for the Central Government's guarantee of the sum assured under life insurance policies.The CIT(A) held that the payment out of surplus profit amounted to a dividend, relying on various judicial precedents, including the Supreme Court's decision in Kantilal Manilal v. CIT and the Bombay High Court's decision in Life Insurance Corpn. of India v. CIT. However, the Tribunal disagreed, emphasizing that the ordinary meaning of 'dividend' requires the existence of shareholders and proportional payment based on shareholding. Since the capital of the Corporation is not divided into shares, the payment to the Central Government cannot be treated as a dividend.3. Whether the payment can be called declaration, distribution, or payment of dividend:The Tribunal examined whether the payment under section 28 of the LIC Act could be considered a declaration, distribution, or payment of dividend. The Tribunal noted that:- The capital of the Corporation is not divided into shares, and thus there are no shareholders.- The payment to the Central Government is a statutory obligation and not a distribution of profit to shareholders.The Tribunal concluded that the payment made by the assessee to the Central Government could not be treated as a dividend within the meaning of section 2(22) of the Act. Consequently, the provisions of section 115-O, which impose tax on distributed profits, do not apply. The assessee could not be declared in default under section 115Q.Conclusion:The Tribunal allowed the appeal, quashing the orders of the lower authorities and directing that any payment recovered be refunded to the assessee in accordance with the law.