It is important to bear in mind uncontroverted claim of the assessee that there were sufficient reserves and surplus, which were eligible for distribution as ‘dividend’, and the NIPL had sufficient cash balances as well. The nature of amounts distributed as dividend has not been altered as a result of, what the revenue authorities describe as, colourable device to evade taxes. It is difficult to comprehend the rationale in revenue’s approach. Here is a company which has amounts available, in accordance with the law, for distribution of dividends, and when this company is in the process of changing ownership, it declares all, or most of, such available funds, as ‘dividends’ to the existing shareholders. There is nothing wrong in this approach on the first principles. If the amounts available for distribution of dividends are distributed, even if in entirety, before entire shareholding is to change hands – and particularly when surplus cash funds are available, this is what ought to have been done anyway. The deferment of distribution of dividends can be justified when the funds are required for business purposes, but then, right now, we are dealing with a situation in which entire shareholdings is to be change hands, and, if dividends are not distributed, what is in the nature of undistributed profits to the shareholders will change the character as of capital appreciation on value of share. There is also no dispute that the distribution of dividend has been implemented, as evident from the fact, as recorded in the assessment order itself, that bank debit for dividend is reflected on 28th March 2006. The decision to distribute dividends, on these facts, cannot be termed as a ‘dubious’ method to evade taxes; it is not a case where dividend distribution exercise is not a bonafide exercise, is not intended to be acted upon and is used as a cloak to conceal a different transaction. The fact that this distribution of dividend also ends up saving taxes on sale of NIPL shares cannot end up negating the effect of the lawful and legitimate action of distribution of dividend by NIPL. We have also noted that the NIPL has duly paid dividend distribution tax and the same has been duly accepted in its assessment. Once the taxes on distribution of dividend have been duly accepted, the character of such dividend payments in the hands of the assessee cannot be recharacterized just because by such characterization of receipt, revenue ends up getting higher taxes. As observed by Hon’ble Gujarat High Court in Banyan & Berry v. CIT 222 ITR 831, which is approved by Hon’ble Supreme Court in Azadi Bachao Andolan’s case (supra), Hon’ble Supreme Court has “nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act”. Undoubtedly, the course adopted by the assessee was tax advantageous inasmuch as if NIPL, assessee’s wholly owned subsidiary, was not to distribute dividend and sell the shares without this exercise, the tax outgo would have been Rs 94 lakhs more than under the present arrangement, but then every tax advantageous action or inaction cannot be treated as a colourable device unless such an action or inaction is not bonafide, it conceals the true nature of transaction or is an exercise without any commercial justification. In view of these discussions, and bearing in mind entirety of the case, we are of the considered view that on the facts and in the circumstances of this case, distribution of dividend by NIPL, prior to sale of its shares by the assessee, even though tax advantageous cannot be termed as a colourable device or sham transaction and the receipt of these dividends cannot be recharacterized as sale consideration of shares in the hands of the assessee. We, therefore, approve and uphold the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
IN THE ITAT KOLKATA BENCH ‘C’
Assistant Director of Income-tax (International Taxation
Maersk Line UK Ltd.
IT Appeal No. 2150 (Kol.) of 2009
[Assessment year 2006-07]
September 21, 2012
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