By TIOL News Service

MUMBAI, MAY 03, 2017: THE issue is - Whether levying tax on transfer of unclaimed dividend to Reserve Fund would amount to double taxation, when such dividend has not been debited to its P&L A/c. YES is the verdict.

Facts of the case:

The AO during the assessment noted that the Assessee had shown an amount of Rs.6.56 lakhs as unclaimed dividend under the head 'statutory reserve fund'. This unclaimed dividend, according to AO, was in the nature of income. Thus, he called upon the Assessee to explain the same who contended that the amount of Rs.6.56 lakhs dividend was not claimed by its shareholders. This dividend had been declared out of its net profits on which the tax had already been paid. However, this was not accepted by the AO and therefore he added the amount of Rs.6.59 lakhs to the income of assessee. On appeal, the CIT(A) upheld the view of the AO that once the dividend had been declared, the bank was merely a custodian of the amounts on behalf of the shareholder. Consequently, the character of the unclaimed dividend became income in the hands of the Assessee. On further appeal, the ITAT held that seeking to tax the unclaimed dividend transferred to Reserve Fund would amount to double taxation.

On appeal, the HC held that,

++ the grievance of the Revenue before us is that once dividend is declared by the Assessee, it becomes the property of the shareholder and the same is merely held by the bank as a custodian/ trustee for the shareholder. Therefore, transferring it to its Reserve Fund, changes the character of its holding. It, thereafter, owns the amount on its own account and not on behalf of the shareholder. It is an undisputed position that in the present facts, the dividend had not been charged to the Profit & Loss Account. It forms part of appropriation of income as it is not debited to its Profit & Loss Account. In the above view, it is not disputed that the unclaimed dividend which has been transferred to the Reserve Fund, has already borne income tax. Thus, bringing the same to tax, would amount to double taxation. Our view is fortified by the observations of this Court in CIT v/s. M/s. Deogiri Nagari Sahakari Bank Ltd. - 2015-TIOL-1963-HC-MUM-IT on an identical fact situation, that the view of the Tribunal that no tax is payable on transfer of unclaimed dividend to Reserve Fund, calls for no interference.

(See 2017-TIOL-839-HC-MUM-IT)