T N Pandey: Credit TDS in the year the dividend is taxed

CHAT ROOM

Shares were issued for raising capital for a new company on which application money was received. Later, the contemplated business could not be taken up. The company had to be dissolved under Section 560 of the Companies Act. The 10 shareholders of the company (who belonged to the same family) had filed a suit for the recovery of the application money. Later, after some persuasion, they waived the claim on the application money. This was done before the company was dissolved.

Now, the IT Department has raised demand treating the waived application money as income under Section 176 of the Income Tax Act. Can the department do so?

No. Such a view has been taken by the Delhi Bench of the Income Tax Administrative Tribunal (ITAT) in the case of Impast (P) Ltd vs Income Tax Office, (2004) 91 ITD 354 (Del). The tribunal held that Section 176 of the IT Act is not applicable in the case of dissolved company.

During the previous year, relevant to the Assessment Year 2003-04, I accounted for the dividend on the shares held on accrual basis and no credit for tax deducted at source (TDS) could be claimed as the TDS certificate had not been received.

While filing the return for the year 2004-05, I claimed credit for TDS, which has been rejected by the assessment officer (AO) on the ground that since the dividend income, to which the TDS relates, has not been taxed in the year 2004-05, no credit for TDS can be allowed. Is the AO correct and what is the year in which credit for TDS can be claimed?

As per Section 8 of the IT Act, dividend income is to be taxed in the previous year in which it is declared, distributed or paid. Obviously, the queriest has accounted for dividend on the basis of declaration, which cannot be said to be wrong.

Sub-section (3) of Section 199 was inserted by the Finance (No.2) Act, 2004 effective from April 1, 2005 and reads as under: "Where any deduction is made in accordance with the foregoing provisions of this Chapter on or after the 1st day of April, 2005 and paid to the Central Government, the amount of tax deducted and specified in the statement referred to in section 203AA shall be treated as tax paid on behalf of the persons referred to in sub-section (1) or, as the case may, sub-section (2) and credit shall be given to him for the amount so deducted in the assessment made under this Act for the assessment year for which such income is assessable without the production of certificate."

In the spirit of the new law, the queriest should get credit for TDS in the year in which dividend income has been taxed, though the TDS certificate was issued next year.

Further, almost on similar facts, the Hyderabad Bench of the ITAT in the case of Stallion Sumiths Ltd vs Income Tax Office, (2004) 91 ITD 38 (Hyd-Trib), has decided that the assessee is entitled to claim credit for the TDS in respect of the dividend income in the year when it became assessable and not in the year when it was assessed.

We are carrying on business in partnership. Two other business units are also run as partnerships, where some of the partners of our firm are also partners. On July 1, 2000, our firm had a cash balance of Rs 2,00,000, out of which advances of Rs 75,000 each were given to the other two firms free of interest.

Later, in August, we needed funds to finance a project obtained in bid in response to tender floated by the local municipal corporation. We took a loan from the bank of Rs 2,00,000. We claimed interest paid to bank as a deduction. The AO has disallowed interest attributable to Rs 1,50,000 on the ground that the interest would not have been payable if the sum of Rs 1,50,000 had not been given as interest-free advances to the two firms. Can the AO take this reasoning for disallowing the interest paid to the bank?

No. Section 36 (iii) of the IT Act provides that the amount of interest paid in respect of capital borrowed for the purposes of business is to be allowed as a deduction. Since the sum of Rs 2,00,000 has been taken as a loan 'for the purposes of business', there is no ground for the disallowance of the interest.

There can be no co-relation between loan taken at a time when funds were needed by the firm and loans advanced to sister concerns when there was no business necessity. There is obviously no case to say that the funds borrowed from the bank were diverted.

The Calcutta High Court in Caldern Pharmaceuticals Ltd. vs Commissioner of Income Tax (CIT), (2004) 265 ITR 244 (Cal) has observed that the language of S36(1) (iii) held that since no case was made out that capital borrowing had not been utilised by the assessee for its business, interest paid on such borrowing could not be disallowed.

The Delhi High Court in CIT vs Tin Box Co., (2003) 260 ITR 637 (Del) held that the findings of the tribunal that the assessee had substantial capital and funds which far exceeded the interest-free advances and the department had not been able to disprove it, are based on relevant evidence on record and, therefore, no question of law, much less substantial question of law, arose from the order of the tribunal. A similar view has been held by the Chandigarh Third Member Bench of the tribunal in Malwa Cotton Mills vs ACIT, (2004) 83 TTJ (Chd) T.M.72.

In view of the position, there is no legal ground to disallow the interest paid to the bank. How an assessee uses its surplus fund cannot be decided by the IT Department.