Dividends under Income Tax Act

Dividend in simple words, refers to the amount paid to shareholder in proportion to the shareholding in the company, out of the total sum so distributed.

Let’s look at the meaning of dividend as per Income Tax Act.          

As per Section 2(22) dividend  includes—

(a)  any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release of assets by the company to its

(b)  any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ;

(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ;

(d)  any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated, whether such accumulated profits have been capitalised or not ;

(e)  any payment by a company, not being a company in which the public are substantially interested, of any sum  by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (holding not less than ten per cent of the voting power), or to any concern in which such shareholder is a member or a partner and in which he has a substantial or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;

but "dividend" does not include—

 (i)  a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;

 (ii)  any advance or loan made to a shareholder or the said concern specified in Sec 2(22)(e) by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;

(iii)  any dividend paid by a company which is set off by the company against any sum previously paid by it and treated as a dividend within the meaning of Sec 2(22)(e), to the extent to which it is so set off;

(iv)  any payment made by a company on buy back of shares;

(v)  any distribution of shares pursuant to a demerger.

What are accumulated profits ?

For Sections 2(22) (a),(b),(d) and (e), accumulated profits shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place.

Taxation of dividends:

i. Dividends from Indian company are exempt in the hands of shareholder by virtue of Section 10(34). In such cases the company shall pay dividend tax under Section 115-O at 15% + cess.

ii. Deemed dividend under Section 2(22)(e) is taxable in  the hands of shareholder under ‘Income from Other Sources.’ In such case the company shall not pay dividend tax under Section 115-O.

iii. Dividends from foreign company are also taxable in the hands of shareholder under ‘Income from Other Sources.’

Relief from double taxation in case of foreign dividends:

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 by the Government of India or can claim relief as per Section 91 (if no such agreement exists).

Brief on Dividend Distribution Tax u/s 115 O

A domestic company shall pay in addition to Income Tax, tax on distributed profits at 15% + cess on the amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise).

But a relief is provided to holding companies declaring dividends, and receiving dividends from subsidiary companies which have already paid tax u/s 115 O in the same financial year. It is as follows:

When should dividend tax be paid ?

The principal officer of the domestic company and the company shall be liable to pay the tax on distributed profits within fourteen days from the date of—

(a)  declaration of any dividend; or

(b)  distribution of any dividend; or

(c)  payment of any dividend,

whichever is earliest.

Such dividend tax paid is not allowed as deduction while calculating taxable income.

What happens if default is made in paying dividend tax ?

Where the principal officer of a domestic company and the company fails to pay tax on distributed profits, within the time allowed, he or it shall be liable to pay simple interest at the rate of 1% for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

Moreover, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable.

Penalty and Prosecution

If a person fails to comply with Section 115 O, he shall be liable to pay as penalty a sum equal to the amount of tax which he has failed to pay u/s 271C.

He shall also be punishable with rigorous imprisonment for a term not less than 3 months but upto 7 years and fine. For reasonable causes, punishment shall be dropped.

Tax on certain dividend received from foreign companies by an Indian Company- Section 115BBD

As discussed earlier, dividend received from a foreign company is taxed in the hands of a taxpayer at the normal rates applicable to his income. Normal tax rate applicable to an Indian company is 30% 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 [except dividend u/s 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.