TaxTMI 
TaxTMI 
2006 (12) TMI 166
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....amining the assessment record and the accompanying documents and details furnished by the assessee, the Assessing Officer noticed that it had distributed surplus income/profit to its sole shareholder i.e., a Government of India as per sections 28 and 28A of Life Insurance Corporation Act, 1956, but has not paid the tax on distributed profits under section 115-O of the Act. It was noticed that the surplus income of Rs. 2,35,69,60,648/- was paid to the Government of India for the financial year 1997-98 on 24th March, 1999. A notice was issued to the assessee to explain as to why the tax has not been paid under section 115-O of the Act for the assessment year 1998-99. In response to the same, the assessee furnished detailed submission vide letter dated 1st October, 1999 which, inter alia, stated as under: (a) That the assessee cannot be said to be a domestic company within the meaning of section 2(22A) of the Act inasmuch as the company is not required to make prescribed arrangement for declaration and payment of dividend in India. (b) That the assessee Corporation is constituted by members, nominated by the Government who are not shareholders inasmuch as they do not participate i....
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....ove, another opportunity was given to the assessee to furnish its comments, in response to which the assessee vide letter dated 5th November, 1999 reiterated the submissions made earlier and also submitted that section 28 of the LIC Act, gives an overriding title to the Government to the extent of 5 per cent of the surplus emerging from the actuarial valuation. Therefore, the payment under section 28 cannot be taken to mean distribution of profit by Life Insurance Corporation to the Central Government. Further, the dividend when declared is always linked to share capital, whereas, in the case of Life Insurance Corporation the surplus is allocated between the policyholders and the Government, irrespective of the share capital of the Corporation. Not satisfied with the submissions of the assessee, the Assessing Officer held that provisions of section 115-O of the Act applied to the case of the assessee. Since the assessee failed to pay tax, the Assessing Officer declared the assessee in default under section 115Q of the Act. Consequently the demand of Rs. 23,56,96,064/- was raised on account of tax liability. In addition, the Assessing Officer also charged interest under section 115P....
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....ourt in the case of Hari Prasad Jayantilal & Co. v. V.S. Gupta, ITO [1966] 59 ITR 794 and in the case of CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849 relied upon by the assessee's Counsel for the proposition that the dividend in its ordinary connotation means the sum paid or received by a shareholder proportionate to his shareholding in the company, out of the total sum distributed. The learned CIT(A) distinguished these decisions on the ground that they related to the companies, formed under the Companies Act. On the other hand, he referred to an earlier decision of the Hon'ble Supreme Court in the case of Kantilal Manilal v. CIT [1961] 41 ITR 275 for the proposition that dividend in its ordinary meaning is a distributive share of the profits or income of a company given to its shareholders. He noted the use of the word 'ordinary' from the judgment of the Hon'ble Supreme Court. According to him, the word 'ordinary' means a normal situation, but in the special or extraordinary situation, meaning could be different. He also relied on the decision of the Hon'ble Madras High Court in the case of A. Veerappan v. CIT [1963] 49 ITR 280, wherein it was....
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....nly to shift the tax liability from shareholder to the company. (iii) As per article 289(1) of the Constitution of India, the Income of the Union Government or State is exempt from tax. Therefore, taxing the payment in question which is made to the Central Government will be violative of the Constitution. (iv) The Bombay High Court held in the case of LIC v. CIT 119 ITR 900 that the amount required to be paid to the Central Government is only in pursuance of an obligation imposed upon the Corporation by a statute. Therefore, it is not a dividend." These arguments were rejected by the learned CIT(A) by observing as under:- "(i) There is no basis to assume that the payment made to the Central Government is in lieu of the guarantee given by it. The Central Government gives guarantee in several cases without any consideration, for example, the currency notes issued by the Reserve Bank of India are guaranteed by the Central Government. Similar guarantees have been given by the Central Government in connection with the investments made by the foreign companies in the power sector. (ii) The 5 per cent surplus paid to the Central Government before 1-6-1997 was not subjected to TDS....
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....der consideration is in the nature of dividend whereas the other one is not." Aggrieved by the order of the learned CIT(A), the assessee is in appeal before the Tribunal. 7. The learned counsel for the assessee, Shri Irani has vehemently assailed the order of the learned CIT(A) by raising various submissions. At the outset, he drew our attention to the relevant provisions of sections 115-O and 115-Q of the Act to point out that such provisions can be applied only when (i) the assessee is a domestic company, (ii) the payment made by the assessee is by way of dividend, and (iii) the so-called payment can be called declaration, distribution or payment of dividend. It was also submitted that as per the provisions of Explanation to section 115-Q the expression 'dividend' is to be understood as per the definition provided in clause (22) of section 2 of the Act, but it would not include the deemed dividend as per sub-clause (e) of clause (22) of section 2. He drew our attention to the provisions of section 2(22) to point out that all the sub-clauses (a) to (d) are applicable only when the payment is made to the shareholder. In this context, he drew our attention to the provision....
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....ssee-company is not required to declare any payment inasmuch as it has to make the payment compulsorily under the provisions of section 28 of LIC Act. Further, question of distribution does not arise since the entire payment is to be paid only to the Central Government. In view of these submissions, it was prayed by him that appeal of the assessee be accepted. 8. On the other hand, the learned senior Departmental Representative has vehemently supported the order of the learned CIT(A) by reiterating the reasonings given by the Assessing Officer as well as learned CIT(A). According to him, the definition of the expression 'dividend' in section 2(22) of the Act and does not cover all types of payment falling within the meaning of the word 'dividend'. Therefore, general meaning of the same has to be taken for the purpose of section 115-O. He drew our attention to the definitions given in the Law Lexicon as well as Webster's Law Dictionary. Regarding the board circular, it is submitted by him that the said circular only explains the provisions, as enacted and such circular cannot be said to be a circular issued under section 119 of the Act. According to him, what is....
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....charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of twelve and one-half per cent.] (2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on distributed profits under sub-section (1) shall be payable by such company. (3) The principal officer of the domestic company and the company shall be liable to pay the tax on distributed profits to the credit of the Central Government within fourteen days from the date of- (a) declaration of any dividend; or (b) distribution of any dividend; or (c) payment of any dividend, (d) whichever is earliest. (4) The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the ta....
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....es by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not." The perusal of the above clauses shows that payment or distribution under either of the clauses must be to/among the shareholders of the company. The learned CIT(A), vide paras 21 and 22 of his order has given a finding that Central Government cannot be called as shareholder since capital of the assessee has not been divided into shares. It would be advantageous to refer to the said paras which are quoted bellow: "21. I have carefully considered the contentions and the arguments of the rival sides. In my opinion, the Asse....
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....ntilal & Co. 13. Now, the question arises what is the ordinary meaning of the word 'dividend'. It is not necessary for us to look into the dictionaries inasmuch as the answer to such question is no more res integra. The Hon'ble Supreme Court had to consider this question with reference to section 2(6A) of 1922 Act corresponding to section 2(22) of the Act of 1961. Their Lordships held as under:- "'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." The above definition presupposes (i) the existence of shareholders of a company and (ii) payment must be proportionate to his shareholding. In our opinion, these conditions can be fulfilled only when the capital of the company is divided into shares which are held by persons called shareholders. In a given case, all the shares may be held by Government or a holding company etc. Existence of shares representing the capital of the company as well as the shareholder(s) is a sine qua non. Thus, even according to the ordinary meaning of the word 'dividend', it represents proportionate payment....