2015 (4) TMI 786 - AT - Income Tax

Addition on account of unpaid dividends - Cessation of of liability - Additions u/s 41 - Unclaimed dividend transferred to General Reserve - Department treating it as extinguishment of liability - Treatment of amortization of premium paid for acquisition of securities, Held till maturity - Held that - We have carefully considered the rival stands and find no merit in the stand of the Revenue. Quite clearly, the dividend is paid by the bank out of tax paid profits. Dividends are declared out of such profits and is to be understood as an apportionment of income. If for any reason, the dividend so declared is not actually disbursed and were to be added back to the taxable income, it would mean a double taxation. Therefore, there is no justification for taxing unclaimed dividend as a cessation of liability. No doubt, cessation of liability may be a taxable event but only in situations where such liability has entered the computation of taxable income on an earlier occasion. Quite clearly, the declaration of dividend does not enter the computation of taxable income as the dividend is declared out of the profits remaining after taxation. It cannot be anybody s position that the unclaimed dividend is a receipt by the assessee in the course of its trading transactions. In-fact, the unclaimed dividend amount, does not reflect any receipt at all. Therefore, in our view, the reliance placed by the CIT(A) on the decision of the Hon ble Supreme Court in the case of TVS Sundaram Iyengar and Sons Ltd. 1996 (9) TMI 1 - SUPREME Court is erroneous. - Decided in favour of assessee. The issue arising in the present appeal is identical to the issue decided by the Pune Bench of the Tribunal in the case of Pune District Central Co. Operative Bank Ltd. 2015 (4) TMI 662 - ITAT PUNE and also the Hon ble Bombay High Court in the case of HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT ,and following the same parity of reasoning, we hold that the assessee is entitled to the deduction of ₹ 11,38,000/- being the premium on Amortization of Securities. Accordingly, we hereby affirm the action of CIT(A) in deleting the disallowance of ₹ 11,38,000/- representing amortization of premium paid on Government Securities under the HTM category. Thus on this aspect, Revenue fails. - Decided against the revenue.

Summary

Issues Involved:
1. Taxability of unclaimed dividends.
2. Deductibility of amortization of premium paid for acquisition of securities categorized as Held to Maturity (HTM).

Detailed Analysis:

1. Taxability of Unclaimed Dividends:
The primary issue in the assessee's appeal was the addition of Rs. 6,71,662/- on account of unpaid dividends. The Assessing Officer (AO) noted that this amount, credited to the General Reserve Account, represented unclaimed dividends. The AO viewed this as a cessation of liability, making it taxable. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, relying on the Supreme Court judgment in CIT vs. TVS Sundaram Iyengar and Sons Ltd., which dealt with unclaimed deposits being taxed as income.

However, the Tribunal found no merit in the Revenue's stance. It was noted that dividends are paid out of tax-paid profits and are an apportionment of income. Adding unclaimed dividends back to taxable income would result in double taxation. The Tribunal emphasized that cessation of liability is a taxable event only if the liability was part of the taxable income computation earlier. Since dividends are declared from post-tax profits, they do not enter the taxable income computation. The Tribunal also found the reliance on the TVS Sundaram Iyengar case misplaced, as it dealt with unclaimed deposits, not dividends. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition of Rs. 6,71,662/-. The appeal of the assessee was allowed.

2. Deductibility of Amortization of Premium Paid for Acquisition of Securities Categorized as HTM:
In the Revenue's cross-appeal, the issue was the disallowance of Rs. 11,38,000/- for amortization of premium paid on HTM securities, which the AO considered capital in nature. The CIT(A) deleted this addition, following a decision by the Pune Tribunal in a similar case. The Tribunal upheld the CIT(A)'s decision, referencing the Pune Bench's ruling in Pune District Central Co. Operative Bank Ltd. vs. Addl.CIT, which allowed such deductions based on RBI guidelines and CBDT instructions.

The Tribunal noted that the Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd. had upheld the deduction for amortization of premium on HTM securities, citing RBI guidelines. The Tribunal found that the amortization of premium expenditure for HTM securities is allowable as business expenditure. Consequently, the Tribunal affirmed the CIT(A)'s action in deleting the disallowance of Rs. 11,38,000/-. The appeal of the Revenue was dismissed.

Conclusion:
- The appeal of the assessee regarding the taxability of unclaimed dividends was allowed, with the Tribunal directing the deletion of the addition of Rs. 6,71,662/-.
- The appeal of the Revenue regarding the disallowance of amortization of premium on HTM securities was dismissed, affirming the CIT(A)'s deletion of the disallowance of Rs. 11,38,000/-.

Order pronounced on 20th February, 2015.