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TMI Blog2016 (4) TMI 1183X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant company to UTI Bank Ltd. was payment of dividend and not allowable/deductible expenditure in the hands of the appellant-company under the Income-tax Act, 1961 ?" 3. The facts and circumstances of the case, briefly stated, are as follows : 4. The assessee issued 30,00,000 (thirty lakhs) cumulative redeemable preference shares of Rs. 10 each at par aggregating to a sum of Rs. 3 crores redeemable at par on March 31, 2000 carrying assured dividend of 12 per cent. per annum. The case of the assessee is that it was unable to pay dividend to the shareholders as agreed. The shares were, therefore, redeemed before the prescribed time. After the shares were redeemed, in order to avoid, ruinous litigation, a sum of Rs. 50,71,328 was paid by the assessee to the former shareholders by way of liquidated damages. 5. The question was, whether the aforesaid sum paid on account of the liquidated damages was a deductible expenditure. The Assessing Officer answered the question in the negative by holding as follows : "From the copy of the agreement submitted it has been observed that the company agreed to allot 30,00,000 cumulative redeemable preference shares to UTI Bank Ltd. and the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise, cannot be allowed as a business expense. Moreover, even though the preference shareholders have preference in the matter of receipt of dividend under the Companies Act, 1956, they are treated as the owners of the company and any payment made to the owners has to be shown in the appropriation column and cannot be treated as an expense for earning the revenue. In view of the above discussion, liquidated damages is being treated as dividend payment to the preference shareholder amounting to Rs. 50,71,328 and, therefore, is being added back to the total income of the assessee and has also been considered for computing the book profit of the assessee under section 115JB." 6. In an appeal preferred by the assessee, the Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer. He opined as follows : "The said amount of dividend was payable by the appellant at 12 per cent. per annum on preference shares held by the UTI Bank Ltd. as on March 31, 2001. As the appellant could not make the dividend payment to UTI Bank Ltd., the appellant company made this payment in lieu of dividend during the financial year in question. As the payment of dividend is not on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled to declare on the preference shares. In the debit note itself the UTI Bank has mentioned that the above payment of liquidated damages will extinguish the liability of the assessee relating to investment in 12 per cent. redeemable cumulative preference shares. Thus the liquidated damages were paid in lieu of the dividend which the assessee has assured to pay on 12 per cent. redeemable cumulative preference shares allotted by it to the UTI Bank. Therefore, the treatment of the liquidated damages would be similar to the dividend which the assessee was liable to pay on the preference shares. It is an admitted position that the payment of dividend is not allowable expenditure in the hands of the company declaring dividend. Accordingly, we uphold the order of the lower authorities on this point and reject the grounds Nos. 1 to 5 of the assessee's appeal." 8. Mr. Murarka, learned advocate for the assessee advanced the following submissions : (a) On the day when the liquidated damages were paid by the company to UTI Bank, the latter was no longer a shareholder because the preference shares issued had already been redeemed. (b) The payment of a sum of Rs. 50,71,328 was not on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend proceeds is received by the investor on the dividend payment date as mentioned above or earlier to such date. 6.2 The company agrees that in the event of lack of profits or losses for the purpose of declaration of dividend on preference share in any year, the company shall declare dividends out of the undistributed profits of the company for any previous financial year being held as surplus balance in profit and loss account. In the event of lack of sur plus in the profit and loss account for the purposes of declaration/payment of dividend, the company agrees that it shall declare/pay dividend from undistributed profits of the previous years transferred to reserves, in accordance with the Companies (Declaration of Dividend out of Reserves) Rules, 1975. In case, for any year, the dividend cannot be declared and paid even from the profits of the previous years and balance in reserves, the amount of dividend which could not be paid for that year shall accumulate and shall be paid in the immediate next year in which it is possible to declare and pay dividends according to the provisions of the Companies Act, 1956. Further, in case of any delay in declaration of dividend or w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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