ANALYSIS OF FACTORS FOR DIVIDEND

 

ANALYSIS OF FACTORS FOR DIVIDEND

Background

Dividend strategy of a company, more particularly which is widely held, should be such that the needs for funds within the company are satisfied and also the reasonable expectations of the investing public/ share capital providers are met.  Hence, a good course of action should strike a balance between the outgo on account of dividend, and, retention of funds as internal accruals of a company.       

{ I }  Types of Dividend

1.         Regular and stable Dividend.

Recent important income tax caselaws / judgements

SECTION 14A

EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME

Dividend : Provisions of section 14A would apply to a case even where tax free dividend income is earned on shares held as stock-in-trade - Deputy Commissioner of Income-tax, Circle -3(1) v. Damani Estates & Finance (P.) Ltd. (2014) 41 taxmann.com 462 (Mumbai - Trib.)     SECTION 28(i) BUSINESS LOSS/DEDUCTION - ALLOWABLE AS Bad debts : Deposits/advances given in connection with business could not be allowed as bad debt but had to be considered as business loss - Smita Conductors Ltd. v. Deputy Commissioner of Income-tax, Range -3(3), Mumbai (2014) 41 taxmann.com 514 (Mumbai - Trib.)       SECTION 68 CASH CREDIT Creditworthiness and genuineness of transaction : Identity, creditworthiness and genuineness of transaction is not established merely by filing bank account details - Gayathri Associates v. Income-tax Officer, Hyderabad (2014) 41 taxmann.com 526 (Andhra Pradesh) Shares : Where Tribunal recorded a finding that Assessing Officer had treated short-term capital gain declared by assessee from sale of shares as unexplained cash credit merely on basis of doubts and suspicion, said finding being a finding of fact, no substantial question of law arose there from - Commissioner of Income-tax v. Jitendra Dalpatbhai Shah (2014) 41 taxmann.com 523 (Gujarat) Gift : Where Assessing Officer allowed assessee's claim of gift without examining creditworthiness of donor and without considering fact that there was no relationship between assessee and donor and, therefore, there did not exist any occasion for giving a gift, impugned order passed by Assessing Officer was erroneous and same was rightly set aside by Commissioner in exercise of his revisional power - Govind Prasad Agarwal v. Commissioner of Income-tax, Aligarh (2014) 41 taxmann.com 521 (Allahabad)       SECTION 254 APPELLATE TRIBUNAL - POWERS OF Power to grant stay : Where high tax demand was raised on assessee but assessee appeared to have a good prima facie case, demand be stayed - Vodafone India Services (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle -3(3) (2014) 41 taxmann.com 554 (Mumbai - Trib.)   Source : Taxmann

Third Member, ITAT, Resolves Controversy On S. 14A + Rule 8D Disallowance For Shares Held As Stock-in-trade

D. H. Securities Pvt. Ltd vs. DCIT (ITAT Mumbai) (Third Member)

S. 14A & Rule 8D disallowance applies to tax-free securities held as stock-in-trade


The assessee claimed that as it was engaged in the business of trading in shares, its main object is to earn profit on purchase and sale of shares and not to earn dividend income from such shares. It claimed that the accrual of tax-free dividend on such shares was merely incidental to the holding of shares as stock-in-trade and that no disallowance could be made u/s 14A and Rule 8D. It also claimed that though the assessee had not incurred any direct or indirect expenditure to earn the said dividend, the AO had made the disallowance on a presumptive basis. The Division Bench referred the dispute to a Third Member in view of the difference of opinion between the Benches. Before the Third Member, the assessee relied on CCI Ltd 71 DTR (Kar) 141 , India Advantage Securities, Yatish Trading etc in which the law had been laid down that s. 14A & Rule 8D does not apply to securities held as stock-in-trade. The department relied on Godrej & Boyce Manufaturing Co 328 ITR 81 (Bom) (where it was held that Rule 8D is mandatory) and Daga Capital 117 ITD 169 (Mum) (SB) (where it was held that s. 14A applies to stock-in-trade). HELD by the Third Member:

It is accepted by both parties that the assessee is a dealer in shares and that the shares were held by it as stock-in-trade. The issue under appeal is squarely covered by the principles laid down in Godrej & Boyce, Dhanuka & Sons 339 ITR 319 (Cal), American Express Bank and Damani Estates & Finance in which the issue has been elaborately considered. The argument that the judgement of the Karnataka High Court in CCI Ltd is the solitary High Court judgement on the point and it should be followed is not correct because the issue has also been considered by the Calcutta High Court in Dhanuka & Sons. Also, while CCI Ltd has not considered the jurisdictional High Court judgement in Godrej & Boyce, Dhanuka & Sons has duly considered Godrej & Boyce in taking the view that s. 14A/ Rule 8D applies to shares held as stock-in-trade. Accordingly, disallowance u/s 14A can be made in conformity with law even where dividend income has been earned on shares held as stock-in-trade.