2005 (4) TMI 9 - AAR - Income Tax

Whether, when the applicant allots bonus redeemable preference shares to the existing equity shareholders, any income would accrue to the non resident equity shareholders being the allottees and therefore, the company is required to deduct tax at source held that no income would accrue to the nonresident equity shareholders being the allottees and therefore the company is not required to deduct tax at source at this stage

Summary

Issues involved:
1. Whether the allotment of bonus redeemable preference shares to existing equity shareholders would result in income accrual to non-resident equity shareholders and necessitate tax deduction at source.

Detailed analysis:
1. The applicant, a Pvt. Ltd. Company, sought an advance ruling on whether issuing bonus preference shares to existing shareholders would lead to income accrual for non-resident equity shareholders, requiring tax deduction at source. The company intended to allot 80000 redeemable 12% preference shares of Rs.100 each from its free reserves to existing shareholders in proportion to their shareholding. The company argued that since the assets would not be released immediately and redemption was contingent on certain conditions, it should not be considered a dividend under section 2(22) of the Income-tax Act, 1961.

2. The jurisdictional Commissioner highlighted that for an issue to be considered a dividend under Section 2(22), there must be a distribution of accumulated profits resulting in the release of assets to shareholders. Referring to legal precedents, it was noted that the conversion of profits into capital through bonus shares did not entail the release of assets until the shares were redeemed. Therefore, the mere issuance of redeemable bonus preference shares would not amount to dividend distribution unless the shares were redeemed, leading to asset release and tax obligations.

3. The ruling authority analyzed the definition of dividend under the Income-tax Act, emphasizing that the distribution of accumulated profits through bonus redeemable preference shares did not fall within the scope of section 2(22). Citing judicial decisions, including the Hon'ble Gujarat High Court and the Supreme Court, it was clarified that issuing bonus shares did not involve the release of profits to shareholders until redemption occurred. The legislative intent was interpreted to suggest that bonus preference shares should not be treated as deemed dividends until assets were released to shareholders.

4. Based on the detailed analysis and legal interpretations, the ruling concluded that when the applicant allotted bonus redeemable preference shares to existing equity shareholders, no income would accrue to non-resident equity shareholders at that stage, and therefore, the company was not required to deduct tax at source. The ruling was pronounced by the Authority on April 4th, 2005, resolving the issue raised in the application under section 245Q(1) of the Income-tax Act, 1961.

By thoroughly examining the legal provisions, precedents, and the specific circumstances of the case, the ruling authority provided a comprehensive analysis and a clear decision on the tax implications of issuing bonus redeemable preference shares to existing shareholders.