1998 (6) TMI 75 - HC - Income Tax

Summary

Issues Involved:
1. Whether a charge was created in respect of the preference dividend of Rs. 1,37,500 paid by Warner Hindustan Limited on the preference shares held by the assessee.
2. Whether the dividend paid by Warner Hindustan Limited on the preference shares belonging to the assessee was diverted at source by an overriding title and hence not assessable to tax in the hands of the assessee.
3. Whether the preference dividends were received by the assessee in its own right and thereafter used for certain purposes.

Issue-wise Detailed Analysis:

1. Charge Creation in Respect of Preference Dividend:
The Tribunal held that no charge was created in respect of the preference dividend paid by Warner Hindustan Limited to the assessee. The assessee, a non-resident company, claimed that the amount of Rs. 1,37,500 received as dividend should not be taxed in its hands because it was not made available unconditionally. However, the Tribunal found that the dividend was received by the assessee in its own right and then used for research activities of the Indian company. The Tribunal's decision was based on the fact that the Indian company had no exclusive right to the preference dividends, and it was a case of receipt first by the assessee and then application for certain purposes.

2. Diversion of Dividend at Source by Overriding Title:
The assessee contended that the dividend was diverted at source by an overriding title, thus not belonging beneficially to the assessee. This argument was based on a collaboration agreement and subsequent correspondence which indicated that the dividends would be used to finance research activities of the Indian company. However, the Tribunal and the court found that no such charge or overriding title was created. The court emphasized that the true test for diversion of income by overriding title is whether the income never reached the assessee as its income. In this case, the dividend income first reached the assessee and was then applied for research purposes, thus not qualifying as diversion by overriding title.

3. Receipt and Application of Preference Dividends:
The Tribunal held that the preference dividends were received by the assessee in its own right. The court observed that the assessee voluntarily agreed to use the dividends for financing research activities of the Indian company. This agreement and the subsequent approval from the Government of India did not create a legal charge over the dividends. The income was first received by the assessee and then applied for research activities, making it taxable in the hands of the assessee. The court distinguished this case from others where income was found to be diverted at source by an overriding title, concluding that the present case involved application of income after it reached the assessee.

Conclusion:
The court concluded that no charge was created in respect of the preference dividend, and there was no diversion of income at source by an overriding title. The preference dividends were received by the assessee in its own right and then applied for research activities, making them taxable in the hands of the assessee. All three questions were answered in the negative, against the assessee and in favor of the Revenue. The reference was disposed of with no order as to costs.