T N Pandey: Interest income on securities is taxable

CHAT ROOM

How a person can become member of a company? In whose hands dividends declared by a company are taxable, if the shares stand not in the name of the person, who has subscribed to the shares of the company but in somebody else's name?

A person can become a member of a company as a subscriber to memorandum of association of the company; by agreeing to take shares in it; as transferee of shares either by gift or purchase of the shares; by becoming owners of the shares as successor of the owner; and getting allotment of shares through public issue or by private placement.

Section 41 of the Companies Act, 1956 also stipulates that the person, whose name is entered in the register of member, shall be a member of a company. Practically, there is no other mode of entering a name in the register of members, other than the modes mentioned above.

The earlier law was that any dividend declared, distributed or paid by a company to its shareholders, was chargeable to tax under the head "income from other sources" irrespective of the fact whether shares were held by the assessee as investment or stock-in-trade.

But if a dividend is paid; distributed or declared after May 31, 1997 (barring dividends declared between April 1, 2002 and March 31, 2003), then it is not taxable in the hands of the shareholders.

On such dividend, the company, declaring dividend, pays dividend tax under Section 115-O of the Income-Tax Act, 1961. From April 1, 2003, the rate of tax on distributed dividend is 12.5 per cent.

What is understood by the term "interest on securities"? How this income is being taxed after the deletion of this head of income from Section 14 and omission of Sections 18 to 21 by the Finance Act, 1988 with effect from April 1, 1989?

Income by way of interest on securities is now taxable under the head "income from other sources", if the same is not taxable as business income under Section 28.

The word "security" is not defined in the Income-Tax Act. One has, therefore, to depend upon its natural meaning and the meaning ascribed to it under various judicial pronouncements.

The Shorter Oxford English Dictionary defines the word "security" as "a document held by a creditor as guarantee of his right to payment". In other words, unless the payment of debt is accrued in some way, a mere debt is not a "security".

Lord Shaw in the Singer vs Williams case (1921) 1 AC 4) observed: "A security means a security upon something""the term involves the idea of relation of creditor with a debtor, the creditor having a security over property""or other things of the debtor". The "Security" must be something beyond mere liability, though its nature and form may differ in various cases.

Lord Cave in the Singer vs Williams case (supra), pointed out: "The word (security) denotes a debt or a claim, the payment of which is in some way secured. Where the word is used in its normal sense, some form of secured liability is postulated. The word "securities" must be construed in the sense above defined and accordingly does not include shares or stick in a company.

Income by way of interest on securities is taxable on the "receipt" basis if books of account are maintained on the "cash basis". It is taxable on the "due" basis when a person maintains books of account on the basis of "mercantile system". In case of companies, who are required to maintain their accounts under the Companies Act on accrual basis, the interest will be taxable on accrual basis only.

Kindly enumerate the categories of persons, who are exempt from tax. I am a trustee of a charitable trust. Is the income of this trust exempt from tax?

It is not possible to enumerate the full list of persons exempt from tax under this column. For ascertaining the categories of persons, who are exempt from tax, and regarding the extent of exemption, you are advised to refer to the provisions of the Income-Tax Act, 1961, particularly Section 10.

As far as charitable institution, of which you are a trustee, is concerned, no straight answer can be given without knowing the full facts of your case, the nature of income that the trust derives and whether it satisfies the conditions prescribed by Sections 1 to 13 of the Income-Tax Act. You may, therefore, co-relate the facts of your case with the provisions in the Income-Tax Act to decide whether the trust is entitled to exemption under Income-Tax Act, 1961 or not.

I have suspended my business and let out the building and plant to another concern. How income from letting out is to be taxed?

Income from machinery, plant or building, belonging to the assessee and let on hire is taxable as income from other sources if the same is not chargeable to tax under the head "profits and gains of business or profession".

Where the assessee company leased out printing machinery and a distillery plant on rent and the assessee never carried on at any time either the business of printing or that of a distillery, it was held that the income received by the assessee by way of rent from leasing of printing machinery should be assessed under the head "income from other sources" (see the Dharak Ltd vs Commissioner of Income Tax case, (1986) 25 Taxman 196 (Kerala)).

I have won a Rs 50,000 lottery. What is the income-tax liability on such receipt?

Section 115BB provides that gross winnings from lotteries, crossword puzzles, races including horse races (other than income from the activity of owning and maintaining race horses), card games and other games of any sort or from gambling or betting of any nature, whatsoever, are chargeable to income-tax at a flat rate of 30 per cent (without claiming any allowance or expenditure.