| SooperKanoon Citation | sooperkanoon.com/53589 |
| Court | Authority for Advance Rulings |
| Decided On | Apr-04-2005 |
| Judge | S S Quadri, K Singh, A Narang |
| Reported in | (2005)195CTRAAR113 |
| Appellant | In Re: Briggs of Burton (India) (P) |
Syed Shah Mohammed Quadri, J. (Chairman), K.D. Singh and A.S. Narang, Members Income Tax Act, 1961 - Sections 2(6A), 2(22) and 245Q(1); Income Tax Act, 1922; Companies Act, 1956 - Section 80A CIT v. Dalmia Investment Co, Ltd., (1964) 52 ITR 567 (SC); Sashibala Navnitlal v. CIT, (1964) 54 ITR 478 (Guj) Dividend--DEEMED DIVIDEND UNDER SECTION 2(22)(a)Allotment of bonus redeemable preference shares to existing non-resident equity share holdersIssue of bonus redeemable preference shares to the existing non-resident equity shareholders would not be treated as deemed dividend at the time of issue, but only when it can be said that there is a release of assets of the company to the shareholders within meaning of sub-clause (a) of section 2(22). The appellant company was not, therefore, required to deduct tax at source.
1. In this case, an application under Section 245Q(1) of the IT Act, 1961 was received on 27th Dec., 2004 in Form No. 34D (meant for resident applicant) seeking advance ruling from this Authority on the following question : "Whether, when the applicant allots bonus redeemable preference shares to the existing equity shareholders, any income would accrue to the non-resident equity shareholders being the allottees and, therefore, the company is required to deduct tax at source ?" 2. The applicant is a private limited company registered under the Companies Act, 1956, having its registered office at Bangalore. The applicant is a wholly owned subsidiary of Briggs of Burton Plc England (U.K.). The applicant's present paid up capital is Rs. 20 lakhs, held by the following shareholders :Name and address of the No. of shares held Face value of the Shareholders sharesBriggs of Burton Plc (U.K.) 99.95% 19990 shares of Rs. 100Mr. Giri Subramaniam 0.05% 10 shares of Rs. 100Total 100.00% 3. In the application in Form No. 34D the shareholding was shown in the name of Dr. John Andrews (99.95 per cent). However, in the rejoinder dt. 3rd March, 2005, the applicant has clarified that the entire shareholding (99.95 per cent) is in the name of Briggs of Burton Plc (U.K.).
As on 31st March, 2004, the free reserves (General Reserve) of the applicant is Rs. 84,11,398. The applicant intends to capitalize the free reserves by allotting fully paid redeemable bonus preference shares to the existing shareholders. In particular, the applicant intends to allot 80000 redeemable 12 per cent preference shares of Rs. 100 each as fully paid bonus preference shares to the existing shareholders in the ratio of their shareholding. These bonus preference shares are redeemable within the next ten financial years from the date of allotment.
Since the free reserves will be converted into redeemable shares, the applicant desires to know whether this would tantamount to dividend within the meaning of Section 2(22) of the IT Act, 1961. It has been further stated that upon the issue of bonus preference shares, the assets of the company will not be released and the case would not fall within the scope of Section 2(22)(a). That, in the case of preference shares, one cannot conclude that there is a release of assets as the payment of amount to the shareholders can be done only at the time of redemption of the preference shares. Further, the redemption of preference shares can still be a contingent event inasmuch as under Section 80A of the Companies Act, 1956, no preference shares can be redeemed unless an equal amount is transferred to the reserves or out of fresh issue of capital. Thus, redemption of preference shares is not a strait jacket transaction where the company can pay the amount to the shareholders. Before the shares are redeemed, the company should have transferred a matching amount to the preference shares redemption reserve account or the redemption is carried out of fresh issue of shares. Either of these situations is contingent. In view thereof, it is submitted that there is no release of assets at the time of allotment of bonus preference shares and, hence, it cannot be covered under the above sub-clause.
4. The jurisdictional Commissioner in his comments has stated that from the reading of Section 2(22), it will be clear that not only there has to be a distribution by the company of accumulated profits, but such distribution must entail the release of assets by the company to the shareholders. The question is, therefore, whether issue of bonus preference shares results in distribution of accumulated profits as well as entailing a release of assets of the company to the shareholders. The Supreme Court in the case of CIT v. Dalmia Investment Co, Ltd. (1964) 52 ITR 567 (SC) has held that after the accumulated profits are converted into capital and bonus shares are issued and credited as fully paid up, the company employs that money not as a reserve of profits, but as its proper capital issued to and contributed by the shareholders. It has, therefore, been submitted that mere issue of redeemable bonus preference shares would not tantamount to payment of dividends unless these shares are redeemed by the company. Only at that stage there will be release of assets of the company to the shareholders and due taxes would have to be deducted on the amounts paid out on such redemption.
5. From a careful consideration of the (definition of dividend given in the IT Act), it is clear that distribution of accumulated profits by the company through issue of bonus redeemable preference shares to the existing equity shareholders would not bring it within the mischief of Section 2(22) of the IT Act, 1961. The relevant provisions are as under : (a) any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; (b) any distribution to its shareholders by a company of debentures, debenture-stock or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalized or not" From a reading of the Sub-clause (a), it will be clear that not only there has to be a distribution by the company of accumulated profits, but such distribution must entail the release of assets by the company to the shareholders. This issue has been dealt with in a number of judicial pronouncements, and the following passages from the decision of Hon'ble Gujarat High Court in the case of Sashibala Navnitlal v. CIT (1964) 54 ITR 478 (Guj), lucidly explains the legal position : "As observed by Hidayatullah J. in CIT v. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC) after the accumulated profits are converted into capital and bonus shares are issued credited as fully paid up "the company employs that money not as reserves of profit, but as its proper capital issued to and contributed by the shareholder". If this be the correct legal analysis of what happens when bonus shares are issued by a company, it is clear that at that stage there is a distribution of capitalized accumulated profits, though that distribution does not take the form of payment of accumulated profits in cash to the shareholders and does not, therefore, entail release of any assets of the company so as to fall within Section 2(6A)(a) [of the 1922 Act).
This view which we are taking is amply supported by authorities but, more than the authorities, there is a statutory enactment which clearly shows that when bonus shares are issued credited as fully paid up out of capitalized accumulated profits, there is distribution of capitalized accumulated profits though such distribution does not entail release of assets of the company." The above view of the Hon'ble Gujarat High Court is based on the decision of Hon'ble Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd (supra). It has been held by the Hon'ble apex Court as under : "A dividend in the strict sense means a share in the profits and a share in the profits can only be said to be paid to the shareholder when a part of the profits is released to him in cash and the company pays that amount and the shareholder takes it away. The conversion of the reserves into capital does not involve the release of the profits to the shareholder; the money remains where it was, that is to say, employed in the business. Thereafter the company employs that money not as reserves of profits, but as its proper capital issued to and contributed by the shareholder." "The Indian IT Act defines "dividend" and also extends it in some directions but not so as to make the issue of bonus shares a release of reserves as profits so that they could be included in the term." The above interpretation is further clarified by reading of 2(22)(b) [for which there is no corresponding provision in the 1922 Act], in which the words "if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company" are omitted. In other words, distribution of accumulated profit by way of issue of bonus shares to preference shareholders of the company will have to be treated as deemed dividend at the time of issue itself. It necessarily follows that the legislative intent is that issue of bonus preference shares, to equity shareholders should not be treated as deemed dividend at the time of issue, but only when it can be said that there is a release of assets of the company to the shareholder within the meaning of Sub-clause (a).
"When the applicant allots bonus redeemable preference shares to the existing equity shareholders, no income would accrue to the non-resident equity shareholders being the allottees and, therefore, the company is not required to deduct tax at source at this stage."