Dividend-icing on the cake

CS Dharmesh Vankar , Last updated: 22 February 2017
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(At the tea stole)

Swami:- (addressing to his friends named A, B, C) kaise ho dosto, kya halchal!

A: Bas badhiya, teri tarah nai he

B: ohoho, babaji ki jay ho.
C: tumhe pata he, aaj muje dividend mila.
B (uneducated): wo kya hota he!!!
C: ye to ganwar hi rahega! (in teasing tone)

B: batao na yaro, me bhi kuch sikh lu.
Swami: thik he, chal me batata hu, are pappu, chai lana sabke liye, malai marke!!!

Meaning

The word "dividend" derived from the Latin word "dividendum" which means thing to be divided. Dividend pertains to an amount of the profit that a Company pays to people who own shares in the Company. Dividend is paid to shareholders (equity or preference) in proportion to the amount paid up on the share held by them. It may be noted that preference shareholders are always paid the dividend in preference to the amount paid up on the shares held by them.

The Supreme Court in C.I.T. v. Girdhardas & Co. (P) Ltd. (1967) defined the term “dividend” in the following manner:

- As applied to a company which is a going concern, it ordinarily means the portion of the profit of the company which is allocated to the holders of shares in the company.

- In the event of winding up, it means a division of the net realised assets among creditors and contributories according to their respective rights.

The companies having licence under Section 8 of the Act are prohibited by their constitution from paying any dividend to its members. They apply the profits in promoting the objects of the company.

Why some company paying dividends while some not?

A Company that is fostering speedily desires to invest in the viable projects acquire new assets or purchase other company / entity rather than paying dividends. Further, decision of not paying dividend to shareholder may be more beneficial to them from a perspective of taxation.

On the other hand, Companies which are issuing dividend at a steady rate attracts the mind of the investors to purchase the stock of the Company, which ultimately enhance the goodwill of the Company in the market.

Final dividend

Final dividend is recommended by the Board of directors and it is declared by the shareholders at the Annual General Meeting (AGM). Generally, the articles of association (AOA) of Company provide that the shareholders cannot increase the rate or amount of dividend than the one recommended by the Board. The shareholders, may, however, declare the payment of dividend on equity shares at a rate lower than the one recommended by the directors in their report.

Interim dividend

As per Section 2(35,) dividend includes any interim dividend. It is declared by the Board of directors during any financial year out of surplus in profit and loss account and out of profits of financial year in which such interim dividend is sought to be declared.

The distinction between interim and final dividend is that unlike interim dividend, a final dividend once declared by the Company in general meeting is a debt and creates and enforceable obligation. (Dalmia J v. CIT, Supra)

Ratio at which dividend is paid

If authorised by the Articles of Association, the Company should pay dividend in proportion to the amount paid up on each share. In the absence of a provision in the articles of association authorising payment of dividend in proportion to the amount paid up on each share, dividend will have to be paid only in proportion to the nominal value of shares.

One thing to be kept in mind that if any, calls paid in advance then it will not form part of paid up capital.

Further, dividend has to be paid to all the shareholders in the same ratio, irrespective of the time and amount paid by them. In the case of preference shares, dividend is always paid at a fixed rate.

- Profits* of the Company for the year for which the dividend is to be paid; or

- Profit of the previous financial year or years after providing for depreciation for previous years; or

- Money provided by the Central Government or a State Government for the payment of dividend by the Company in pursuance of a guarantee given by that Government.

Note: In case the Company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

* Profit means Profit after tax.

In the event of inadequacy or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfilment of the following conditions$, namely:-

1. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year:

Provided that this shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.

2. The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.

3. The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared

4. The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement.

No dividend shall be declared or paid by a Company from its reserves other than free reserves.

Dividend to whom?

The person entitled to dividends is prima facie the person registered as shareholders in the register of members. Many Companies provide in their articles that the Company would recognise only the claim of the person whose name appears in the register. (Scientific & Chemical Works Ltd. V. Jotiprased, 1945). The registered share holder may ask the Company to send the dividend to his banker or to any other person which the Company is bound to honour.

In the case of joint holding if the dividend is payable to a person other than the registered holder named first in the register of members, such a request shall be signed by all the joint holders.

A dividend when proposed does not become a debt but only becomes a debt when declared. (Kastur Chand Jain v. Gift-tax Officer)

Payment of Dividend

The amount of dividend should be deposited in a separate account with scheduled Bank within five days from the date of declaration of dividend. $

Any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend. (Dividend can’t be paid in kind).

$ - Not apply to Government Companies in which the entire paid up share capital is held by the Central Government, or by any Stale Government or Governments or by the Central Government and one or more State Governments. (MCA Notification dated. 05th June, 2015)

Where a dividend has been declared by a Company, it has to be paid or warrant in respect thereof has to be posted within 30 days from the date of declaration to the shareholder entitled to the same.

If a dividend warrant issued but not received by a shareholder is cashed by an unauthorised person directly or through a banker, the Company is not protected, however, bona fide the payment may have taken place, because in such case the dividend cannot be said to have been paid to the registered holder. The Consequences of loss through wrong payment will fall on the Company.

Where the dividend warrant was sent by post as authorised by articles, such a posting will not discharge the liability of Company. [Thairlwall v. Great Northern Rly. Co., (1910) 2 KB 509]

A Company which does not comply with provision relating to acceptance and repayment of deposits would be barred to declare dividend.

Consequences if dividend is not paid or claimed

Where a dividend declared by the Board or a Company, interim or final, as the case may be, has not been paid or claimed within 30 days from the date of the declaration, the Company shall transfer the unpaid or unclaimed dividend to an account opened in a scheduled bank to be called ‘Unpaid dividend account’ within 7 days from the date of expiry of the said 30 days.

The Company shall, within a period of 90 days of making any transfer of an amount to the unpaid dividend account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the Company.

If a Company makes a default in transferring the unpaid or unclaimed dividend to the unpaid dividend account of the Company in a scheduled bank the Company shall, from the date of default, pay interest at the rate of 12% on such amount of dividend as has not been transferred and the amount of interest shall accrue to the benefit of the members in proportion to the amount remaining unpaid to them.

Members, who have not encashed their dividend warrants, claim their dividend by presenting their revalidated warrants to the banks before expiry of 7 years after transfer of the unpaid dividend to the unpaid dividend account kept with the banks.

Where any money remains unpaid/unclaimed for 7 years after the date of transfer to the unpaid dividend account, the said money along with interest, if any, accrued shall be transferred to the Fund to be called Investor Education and Protection Fund (IEPF).

Transfer of shares: All shares in respect of which dividend has not been paid or claimed for 7 consecutive years or more shall be transferred by the Company in the name of IEPF along with a statement containing such details as may be prescribed. In case any dividend is paid or claimed for any year during the said period of 7 years, the share shall not be transferred to IEPF.

Taxation aspects

Dividend Distribution Tax (DDT) is the tax which is required to be paid @15% by the Company who has declared, distributed or paid any amount as dividend. The provisions of Dividend Distribution tax are governed by Section 115-O under Chapter XII-D and were introduced by the Finance Act, 1997.

Shri Arun Jaitley while announcing Finance Act 2014 has introduced certain changes in the manner in which the DDT is to be levied. Although the rate of tax, i.e. 15% remains the same as earlier, the manner of application has changed.

Earlier DDT @15% was applied on the amount paid as Dividend after reduction of DDT by the Company. Therefore, the tax was computed with respect to the net amount paid as dividend to the shareholders. As the DDT was levied on the net amount instead of the gross amount, the effective rate of tax was lower than 15%.

And therefore the Finance Act, 2014 has amended Section 115-O and with the introduction of amendment, the dividends would be required to be grossed up for the purpose of payment of DDT.

e.g. before the introduction of this amendment, if the dividend paid was Rs.100, the DDT to be paid was Rs.15. [100*15%].

However, after the introduction of this amendment, if the amount paid or distributed by a Company is Rs. 100, then the DDT under the amendment provision would be as follows:

(* Surcharge of 12% and Education cess and SHEC @3% would also be levied on this 15% DDT).

Therefore, with the introduction of this amendment, the amount to be paid as DDT has increased (Rs. 15.00 to Rs.17.65)

Due date for payment of DDT

The principal officer of the domestic company and the company shall be liable to pay the tax on distributed profits to the credit of the Central Government within fourteen days from the date of:-

declaration of any dividend; or
distribution of any dividend; or
payment of any dividend

Whichever is earliest.

Final levy

Tax on dividend paid by a domestic company shall be taken as the final tax payment (final levy) in respect of the amount declared, distributed or paid as dividend. In respect of tax so paid, no credit is available to the Company paying tax, or the recipient of dividend or any other person. By virtue of section 10(34), dividend income (in respect of which dividend tax is applicable under section 115-O) is exempt in the hands of recipient shareholders.

TAX TREATMENT OF DIVIDEND RECEIVED FROM A FOREIGN COMPANY

As per section 115BBDA (as inserted by Finance Act, 2016), in the case of resident individual/HUF/firm, dividend shall be chargeable to tax at the rate of 10% if aggregate amount of dividend received from a domestic company during the year exceeds Rs. 10,00,000. Exemption under section 10(34) is granted to dividend received from an Indian company and not to a dividend received from a foreign company. Thus, dividend from a foreign company received by an Indian resident is taxable. In this part you can gain knowledge about tax treatment of dividend received from a foreign company.

Head of taxability and applicable tax rate

Dividends are charged to tax under the head “Income from other sources” and hence dividend received from a foreign company is charged to tax under the head “Income from other sources”. Dividend received from foreign company will be included in the total income of the taxpayer and will be charged to tax at the rates applicable to the taxpayer.

Relief from double taxation

Dividend received from a foreign company is charged to tax in India as well as in the country to which the foreign company belongs. If the foreign dividend has suffered double taxation, then the taxpayer can claim double taxation relief either as per the provisions of Double Taxation Avoidance Agreement (if any) entered into with that country (if any) by the Government of India or can claim relief as per section 91 (if no such agreement exists).

To understand the tax treatment of the dividend received from a foreign company, the taxpayer should keep in mind the provisions of Income-tax Law as well as the provisions of Double Taxation Avoidance Agreement (DTAA) (if any) entered into with that country (if any).

Concessional rate of tax to dividends received from foreign specified company

As discussed earlier, dividend received from a foreign company is taxed in the hands of a resident taxpayer at the normal rates applicable to his income. Normal tax rate applicable to an Indian company is 30% (plus surcharge and cess as applicable), hence, dividend received from a foreign company is charged to tax at 30% in the hands of an Indian company. However, section 115BBD provides a concessional rate of tax in respect of dividend received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital. By virtue of section 115BBD, dividends [as defined in section 2(22) except dividend as defined in section 2(22)(e)] received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital is charged to tax at a flat rate of 15% (plus surcharge and cess as applicable). It should however be noted that, in the above case no deduction on account of any expenditure or allowance will be allowed from the amount of the dividend covered under Section 115BBD. In other words, the gross amount of dividend (without deducting any [As amended by Finance (No. 2) Act, 2016] expenditure/allowance) will be taxed at the rate of 15% (plus surcharge and cess as applicable).

Dividend tax is not deductible

The Company or the shareholders cannot claim any deduction from taxable income in respect of dividend tax levied under section 115-O. Moreover, no deduction is available from the tax on dividend under any provision.

To wrap up, Dividend is the fruit in the hands of shareholders / investors who have nourished the Company by their valuable savings.

Disclaimer: The entire content of this document is author’s own interpretation & personal view. Though utmost efforts has made to provide authentic information, it is suggested that to have better understanding kindly cross-check the relevant sections, rules, etc. under the Companies Act, 2013, Income Tax, Act, 1961.

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