No Dividend Distribution Tax to be paid on Dividend declared pursuant to amalgamation of companies

Torrent Private Limited Vs. CIT (Gujarat High Court); Special Civil Application No. 5857 of 2004; Dated: 15.01.2013; A.Y. 2000-01

No Dividend Distribution Tax to be paid on Dividend declared pursuant to amalgamation of companies.

Brief details about the case:

Torrent Private Limited was formerly known as Torrent Investment Private Limited.

In this case, Torrent Group of companies including Torrent Limited, Torrent Power Limited, Torrent Finance Limited, Torrent Leasing and Finance Limited, Torrent Drugs and Chemicals Private Limited, Torrent Veterinary Products Limited, Torrent Holdings Limited and Tide Pharmaceutical Private Limited agreed to amalgamate and form a new entity named Torrent Investment Private Limited.

The companies proposed a scheme of amalgamation on 01^st August, 1999 before the High Court of Gujarat which was duly approved by the high court on 20^th June, 2000 with effect from 01^st August, 1999. During the period of 01^st August, 1999 to 20^th June, 2020; the company Torrent Power Limited declared an Interim dividend of Rs. 53,90,62,550/- and paid such sum of dividend to the group companies i.e. Torrent Investment Private Limited Rs. 14,37,50,000/- ; Torrent Limited Rs. 25,15,62,500/- and Torrent Leasing and Finance Limited Rs. 14,37,50,000/-. Subsequently, Torrent Power Limited deposited Dividend Distribution Tax of Rs. 5,92,96,875/- on the Interim Dividend to the Revenue Department.

The Company Torrent Investment Private Limited was of the view that since the company paying dividend and receiving dividend got amalgamated before the declaration of Interim Dividend i.e. on 01^st August, 1999 there is in effect no distribution of Dividend. Thus, the Dividend Distribution Tax paid shall be refunded to the company.

In view of the above, the company made an application to the Assessing Officer on 30^th July, 2001 seeking refund of Dividend Distribution Tax so paid on such Interim Dividend earlier. The company also mentioned that the note of amalgamation has been annexed to the Return of Income of the company for the AY 2000-01 and by virtue of section 115-O of Income Tax Act, 1961, the company has no liability to pay tax on such dividend. The Assessing Officer passed a speaking order wherein the claim of the company was rejected.

The company aggrieved by the order passed by the Assessing Officer made an application before the commissioner of Income Tax u/s 264 of Income Tax Act, 1961. The Commissioner of Income Tax rejected the application of the company on the ground that it was a mere correspondence between the Assessee and the Assessing Office. Also. the Commissioner of Income Tax passed an order on such application stating that the claim made by the company is not genuine as the DDT is to be paid within 14 days from the date of declaration or distribution or payment of dividend whichever is earliest.

Against the orders of the commissioner of Income Tax, the assessee made a writ petition before the High Court of Gujarat. The questions that were raised before the Honourable High Court were as under :

1. Whether the Commissioner of Income Tax has the power to reject the application of the assessee solely on the ground that the application made by the assessee was not a formal application and whereas on the other hand passing an order of rejection of assesses claim on the same application?

2. Whether the dividend declared by the company after the effective date of amalgamation but before the date of sanction by the High Court would cease to be dividend declared by the company?

Extract of Section 115-O of Income Tax Act, 1961 :

Tax on distributed profits of domestic companies.

115-O (1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent:

Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this sub-section shall have effect as if for the words “fifteen per cent”, the words “thirty per cent” had been substituted.

(1A) The amount referred to in sub-section (1) shall be reduced by,—

(i) the amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,—

(a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or

(b) where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend:

Provided that the same amount of dividend shall not be taken into account for reduction more than once;

 (ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10.

Explanation.—For the purposes of this sub-section, a company shall be a subsidiary of another company, if such other company, holds more than half in nominal value of the equity share capital of the company.

(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,

whichever is earliest.

Decision of Honourable Gujarat High Court:

The Honourable High court of Gujarat held that the Commissioner of Income tax has erred in holding the application made by the company to be not maintainable in law and on the other hand proceeding further on the application and coming to a conclusion that the claim of the company for refund of dividend is not tenable. This act done by the Commissioner of Income Tax seems to be contradictory in nature because the commissioner has passed an order on the application which as per his belief was not maintainable in law. Thus, how can an application be decided by the commissioner which he thinks to be invalid in law. The court also held that the correct course of action by the commissioner would have been dismissing the proceedings of the application. In other words, the Commissioner could not have examined the merits of the companies claim unless he himself was convinced that the revision petition was maintainable.

The Honourable High Court also held that when 2 or more entities blend to form a new entity, the amalgamating companies loses their entity. The effect of this legal proposition of amalgamation is that it creates a deeming fiction relating to the effective date of amalgamation and transaction of payment of dividend. Thus, the transaction would not retain the character of dividend.

The honourable court also relied on the judgement of Bombay High court in the case of Mafatlal Gagalbhai & Company Pvt Ltd that a company cannot pay dividend to itself. In the case of Mafatlal Gagalbhai & Company Pvt Ltd, the company Mafatlal Gagalbhai & Company Pvt Ltd declared dividend and paid to another company on 02^nd September, 1968 which was a major shareholder of Mafatlal Gagalbhai & Company Pvt Ltd. The negotiations for amalgamation were on-going between both the companies and both the companies presented a scheme of amalgamation before the High Court. The high Court sanctioned the scheme of amalgamation on 06^th January, 1969 and the effective date of amalgamation was 01^st April, 1968. The high court held the company cannot hold its own share after amalgamation and thus, it cannot receive dividend out of its own profits.

The facts of the case were similar to that of Mafatlal Gagalbhai & Company Pvt Ltd and Gujarat High Court held that the dividend declared by Torrent Power Limited of Rs. 53,90,62,550/- to Torrent Investment Private Limited Rs. 14,37,50,000/- ; Torrent Limited Rs. 25,15,62,500/- and Torrent Leasing and Finance Limited Rs. 14,37,50,000/- was not holding the character of dividend after amalgamation. Thus, the Dividend Distribution Tax deposited by the company may thus be refunded along with Interest thereon.

Answer to the above 2 questions :

1. Whether the Commissioner of Income Tax has the power to reject the application of the assessee solely on the ground that the application made by the assessee was not a formal application and whereas on the other hand passing an order of rejection of assesses claim on the same application?

Ans. The Commissioner of Income Tax does not have the authority to reject an application merely on the grounds that the application was not presented in a formal manner. Also, if the application is rejected by the Commissioner then he has no authority to act on such application. Thus, the decision given by the Commissioner of Income Tax on the application which is not maintainable in law is not appropriate.

2. Whether the dividend declared by the company after the effective date of amalgamation but before the date of sanction by the High Court would cease to be dividend declared by the company?

Ans. It is a well stated law that a person cannot earn from own self. Since, the amalgamating companies does not hold any shares post amalgamation, they are not eligible for dividend. Thus, any such transaction will not be in the nature of dividend and accordingly no dividend distribution tax need to be paid on such amount. If any dividend distribution tax has already been paid, it shall be refunded.

Form the above, it is well settled that the company Torrent Private Limited (formerly known as Torrent Investments Private Limited) has not distributed any dividend and therefore eligible for refund of Tax already paid on such transactions.