2026 (3) TMI 1576 - HC - Income Tax

Dividend repatriation with security allowed despite tax dispute; refund adjusted against demand and lien on deposits lifted.

Dividend repatriation to foreign shareholders was permitted despite pending tax demands because accumulated dividend could not be withheld indefinitely ... Permission to repatriate the amount of dividend which the petitioner-company is required to pay to its shareholders situate outside India - Interim protection against tax demand - Adjustment of refund against demand -- Balancing of equities by securing revenue Petitioner is a company registered in India. Many of its shareholders are outside India and the ultimate parent/holding company is situated in China Permission to repatriate dividend to its foreign shareholders despite pending tax demands and earlier restraint orders - HELD THAT: - The Court held that, although substantial demands had been raised, those demands were already under challenge and had been stayed by the High Court or the appellate authority without any condition requiring further security. In that situation, the continuing prohibition on dividend remittance could not be justified merely on a prior apprehension of revenue risk, especially when other payments and royalty remittances had already been permitted. The Court found that an indefinite embargo would unjustifiably curtail the rights of the petitioner and its shareholders, but considered it necessary to protect the revenue by directing that dividend remittance be permitted only upon furnishing an auto-renewable interest-bearing FDR of an equivalent amount, subject also to compliance with foreign remittance requirements and deduction of tax at source. Consequentially, the earlier lien on the existing FDRs of Rs. 200 crores was lifted. [Paras 21, 22, 23, 24, 26] Dividend may be declared and repatriated in accordance with law, subject to applicable remittance guidelines, tax deduction at source, and furnishing of an equivalent auto-renewable interest-bearing FDR to secure the revenue. Adjustment of refund against demand - Concession by counsel - HELD THAT: - The Court permitted adjustment of the refund for AY 2021-22 against the demand of AY 2018-19, while clarifying that, since such adjustment was allowed on the petitioner's concession, the Department could not be accused of contempt if the refund were adjusted against the outstanding demand of AY 2020-21. [Paras 25] Adjustment of the refund was allowed on concession, with protection to the Department against any allegation of breach of the interim order in the event of such adjustment. Final Conclusion: The Court allowed the petitioner to repatriate dividend to its foreign shareholders, but only upon furnishing an equivalent auto-renewable interest-bearing FDR and complying with applicable remittance and tax requirements. The existing lien over the earlier FDRs was lifted, and the refund for AY 2021-22 was permitted to be adjusted against the outstanding demand on the petitioner's concession. Issues: (i) whether the petitioner-company could be permitted to repatriate dividend to its foreign shareholders despite pending tax demands and earlier restraint orders, and on what conditions; (ii) whether the income-tax refund for the relevant assessment year could be adjusted against the outstanding demand and whether the lien on the existing fixed deposit receipts could be lifted.Issue (i): whether the petitioner-company could be permitted to repatriate dividend to its foreign shareholders despite pending tax demands and earlier restraint orders, and on what conditions.Analysis: The accumulated dividend could not be withheld indefinitely merely because the Department had earlier frozen accounts on apprehension of demand, particularly when the assessed demands were under challenge and stood stayed by the appellate forum or the Court. The Court balanced the competing interests by recognising the shareholders' entitlement to receive dividend while safeguarding the Department through a security mechanism linked to the amount proposed to be repatriated.Conclusion: The petitioner-company was permitted to declare and repatriate dividend in accordance with law and foreign remittance requirements, subject to deduction of tax at source and furnishing an auto-renewable interest-bearing fixed deposit receipt of equal amount in a nationalized bank.Issue (ii): whether the income-tax refund for the relevant assessment year could be adjusted against the outstanding demand and whether the lien on the existing fixed deposit receipts could be lifted.Analysis: Since the demand had already crystallised and the refund was available with the Department, adjustment of the refund against another outstanding demand was permitted. The Court also removed the lien on the earlier fixed deposit receipts, leaving it open to the petitioner-company to withdraw them if so desired.Conclusion: The refund was allowed to be adjusted against the outstanding demand, and the lien on the existing fixed deposit receipts was lifted.Final Conclusion: The application was allowed in part by permitting dividend repatriation with security, while also permitting refund adjustment and lifting the lien on the existing security deposits.Ratio Decidendi: Where a tax demand is stayed without any security condition, interim restraint on dividend repatriation cannot be continued indefinitely; the proper course is to balance shareholder rights with departmental protection by permitting remittance subject to equivalent security and tax compliance.