Meaning of ‘domestic company’ and ‘prescribed arrangements for declaration and payment of dividend’–an important write up for brain storming and a rethink by honorable FM and her team during Budget 2021 exercise.

[DEV KUMAR KOTHARI]

Meaning of ‘domestic company’ and ‘prescribed arrangements for declaration and payment of dividend’–an important write up for brain storming and a rethink by honorable FM and her team  during Budget 2021 exercise.

Meaning of domestic company with  highlights added, from provision	Observations
2. In this Act, unless the context otherwise requires,-	Contextual phrase is used but there is a definite meaning, provided in a peremptory and exhaustive language which leaves no room of interpretation beyond words used in section 2.22A as discussed in this write-up.
[(22A)  "domestic company" means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income ;]	Use of word means. In respect of its income liable to tax under the IT Act. Conditions are cumulative for declaration and payment Prescribe arrangements must be for both nsmely (a)  the declaration and (b)  payment, within India of dividends. Arrangement for payment will be required only when a dividend is declared. Any definition of such arrangement has not been adopted by reference of any other provision of IT Act or IT Rules, or Companies Act or any other law. Therefore, meaning is to be found “as per requirements for declaration and payment of dividend” As per general understanding  and practical aspects recommendation of dividend by board of directors and arrangement for payment to shareholders are arrangements for the purpose of this meaning and any other purpose. Maintaining register of members who have right to vote or right to participate in profits or assets of company in some circumstances cannot be called such arrangements. Arrangements for payment require opening a separate bank account from which dividend will be paid. Unless dividend is declared, there will be no arrangements for payment. If a company does not have authority to declare dividend, as per its MOA and AOA. These conditions cannot be complied.

Similar wordings or wordings on similar lines are also used in annual finance Acts which prescribed rate of tax for domestic company.

Can it be said that a company who has not declared and / or made arrangements for payment of dividends is not a domestic company, as per the definite meaning?

A company which restricts declaration and payment of dividend is definitely a company which has not made  and cannot arrangements for declaration and payment of dividend.

And therefore, whether such company is not liable to pay tax?

Meaning for limited purposes:

Meaning for the purpose of S.194 (TDS) and 236 ( Tax concession for dividend paid out of taxed income before 1961) is provided in Rule 27 of the Income Tax Rules, 1962 .

 This meaning is specifically for purposes of S.194 and 236 only. The provision of S.236 is not active for long past. Provision of S.194 was not functional for many years when tax on dividend distributed was levied. This provision has now again been made functional by making dividend taxable in hands of shareholders.

Furthermore, a general provision provided in IT Rules cannot govern provisions of IT Act.

Therefore, we find that there is no meaning provided in the IT Actand IT Rules for the purpose of charging sections in IT Act and Finance Acts.

The Rule reads as follows:

Income-tax Rules, 1962

Chapter VI

DEDUCTION OF TAX AT SOURCE

Prescribed arrangements for declaration and payment of dividends within India.

27. The arrangements referred to in sections 194 and 236 to be made by a company for the declaration and payment of dividends (including dividends on preference shares) within India shall be as follows:

          (1)  The share-register of the company for all shareholders shall be regularly maintained at its principal place of business within India, in respect of any assessment year from a date not later than the 1st day of April of such year.

          (2)  The general meeting for passing the accounts of the previous year relevant to the assessment year and for declaring any dividends in respect thereof shall be held only at a place within India.

          (3)  The dividends declared, if any, shall be payable only within India to all shareholders.

These are situations applicable only if Board of Company recommend and or declare any dividend (interim or final).

 Unless Board of a company recommend a dividend then it cannot be said that company has made prescribed arrangements for declaration and payment of dividend.

A loss making company cannot declare dividend, in that situation there cannot be such arrangements.

Companies Act - Arrangements for the purpose of the companies Act for declaration and payment of dividend shall be required and made, only when a dividend is declared and not otherwise.

Maintaining register of members, and holding of AGM are administrative arrangement for ascertaining voting rights.

For declaration and payment of dividend there will be requirements of recommendation by Board, closure of register of members, announcing a record date, specifically for, ascertaining members entitlement to dividend as on record date according to shares held on the record date, opening separate bank account for dividend payment, fulfilment of KYC of shareholders, arrangements for payment of dividend.

Therefore, the first condition is that Board of a company recommends a dividend. Otherwise, it cannot be said that company can make or has made prescribed arrangements for declaration and payment of dividend.