Wednesday 6 February 2013

Whether when transferor company sanctions dividend after date of amalgation but before same was sanctioned by competent court, such payment can still retain the character of dividend - NO: HC

was sanctioned by a competent court, such payment can still retain the character of dividend and Whether tax paid on such dividend is liable to be refunded. And the verdict goes in favour of the assessee.
Facts of the case
Torrent Power Limited declared interim dividend of Rs 53,90,62,550/- and also paid out such sum to three shareholder companies. A scheme for amalgamation was formulated by eight different companies, including Torrent Power Ltd., Torrent Leasing and Finance Ltd. and Torrent Ltd. The said scheme envisaged 1st August 1999 as the effective date from which such amalgamation would take effect. According to such scheme, eight different companies
amalgamated into Torrent Investment Ltd with effect from 1st August 1999. It is stated that the Torrent Investment Ltd is now renamed as Torrent Private Ltd, i.e. the petitioner Company. Torrent Power Ltd. had after the effective date of amalgamation, but before the same was actually sanctioned by the HC, declared and paid out total dividend of Rs.53,90,62,500/- to three shareholder companies. The said Company had also deposited with the department the dividend distribution tax of Rs.5,92,96,875/-. The petitioner moved an application before the AO and claimed refund of the dividend distribution tax. The AO rejected the claim and was of the opinion that the liability to pay tax would arise as soon as the dividend was credited or distributed or deemed to have been paid, credited or distributed to the shareholders. The CIT rejecting revision petition u/s 264 observed that the petition itself was not maintainable as the same was not filed against the order passed by the AO. Mere correspondence between the petitioner and the AO cannot be treated to be an order stipulated u/s 264. Despite such conclusion, he examined the petitioner’s claim on merits and held that the same was not acceptable.

Before the HC the Assessee's Counsel submitted that any dividend declared or paid after the effective date of the amalgamation, but before the same was sanctioned would cease to bear the character of dividend since no dividend could be paid by the company to its own self. That being the position, liability to pay any tax under section 115-O would therefore cease. The Revenue Counsel submitted that u/s 115-O, liability to pay dividend distribution tax arose the moment the dividend was paid, declared or distributed.

Having heard the parties, the Tribunal held that,

++ the CIT could not have examined the merits of the petitioner’s claim unless he himself was convinced that the revision petition was maintainable. Merely because such application was not in a formal format, the same would not change the character of the application being one seeking refund. Likewise, the AO, after hearing the petitioner made a detailed speaking order dealing with the petitioner’s claim for refund. Such order also cannot be simply brushed aside as one being correspondence between the assessee and the AO. The order passed by the AO was certainly one to which the CIT revisional powers u/s 264(1) apply;

++ it is well settled that a merger or amalgamation scheme once sanctioned by the competent court would take effect from the date of the order envisaged in the scheme itself unless, of course, the court sanctioning such scheme otherwise provides. The effect of this legal proposition would be that by virtue of deeming fiction of amalgamation relating back to the date envisaged in the scheme, transaction of payment of dividend by the transferor company to other three companies would not retain the character of dividend;

++ by virtue of such subsequent developments, the payment of dividend could no longer retain the character of dividend paid by Torrent Power Ltd since there cannot be payment of dividend by one company to its own self;

++ the petitioner was perfectly justified in seeking refund of the tax already paid. Section 237 provides that if any person satisfies the AO that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any A.Y exceeds the amount with which he is properly chargeable under the Act for that year, he shall be entitled to a refund of the excess amount. The case of the petitioner would, thus, be clearly covered under the said statutory provisions.

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