TAXATION OF DIVIDENDS UNDER INCOME TAX ACT, 1961

Exempting Section - (Section 10(34)

 Any income by way of dividends referred to in section 115-0 shall be exempt from income tax

1. Indian Company

All Dividend exempt from tax in the hands of the shareholders but the company is liable to pay Dividend Distribution tax, except in case of dividend referred to in clause 2(22)(e).

2. Foreign Company

All Dividend received from foreign company are liable to tax in the hands of the shareholders

SECTION 115-0(1): TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES

1. In addition to the income-tax on total income of a domestic company for any assessment year :-

•   Any amount declared, distributed or paid by such company

•   By way of dividends (whether interim or otherwise).

•   Whether out of current or accumulated profits

shall be charged to dividend distribution tax @ 15% (plus applicable surcharge and ecess).

Payable even if no income tax is payable by a domestic company on its total income

2. DDT should be paid 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 earlier.

3. No deduction shall be allowed to the company or a shareholder for DDT or any expense on dividend income “Dividends" for Section 115 O are as referred in of section 2 (22) except sub - clause (e) thereof.

4. No DDT on SEZ company - developing, developing & operating, developing, operating & maintaining

SECTION 115-0 (IA) - Credit for dividend received from subsidiary

To mitigate cascading effect of DDT, relief is provided that dividend received by a company which is

liable to DDT shall be reduced by dividend (for same FY) which satisfies the following conditions :-

1. Received from its subsidiary.
2. Subsidiary has paid DDT on such dividend

 Company shall be subsidiary for reduction where another company holds more than half in nominal value of the equity share capital of the company. Further, same amount of dividend shall be taken into account for reduction only once.

Interest payable for non- payment of tax by domestic companies

Simple interest @ 1% for every month or part thereof where the entire DDT payable is not paid within prescribed time from period beginning on the date immediately ,after the last date on which such tax was payable and ending with the date on which tax ax is actually paid.

Company is deemed to be in default

Principal Officer and company deemed to be an assesses in default for nonpayment of DDT as per the provision of this Section.

Section 271 (c): penalty                :-If any person fails to pay the whole or any part of the tax as required under

section 115-0, then such person shall be liable to pay a penalty of a sumequivalent to the amount of tax he has failed to pay.

Section276B prosecution: - If any person fails to pay the whole or any part of the tax as required under

section 115-0, then such person shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months, but which may extend to 7 years and with fine.

Types of Dividend  

Section 2(22) (a)

Distribution of Accumulated profits  to Shareholders entailing release of            assets of the company is treated as dividend  (Section 2(22)(a))

• Treated as dividend to the extent to which the company possesses accumulated profits , whether capitalized or not
• Cost of acquisition in hands of shareholders  is cost of assets in the hands shareholders of the company hands.
• Dividend amount is calculated based on MV of the asset on date of distribution.

Section 2(22)(b))

 Distribution by a company of debentures, debenture-stock etc. deemed as dividend - (Section 2(22)(b))

• Distribution by a company
• Of Debentures, debenture-stock, or deposit certificates in any form, whether with or without interest.
• To shareholders.

Or

• Of Bonus Shares
• To Preference shareholders

Treated as dividend to the extent to which the company possesses accumulated profits, whether capitalized or not

SECTION 2(22)(c) and (d)

 SECTION 2(22)(c) and (d) : DISTRIBUTION OF ASSETS ON LIQUIDATION/REDUCTION OF CAPITAL

Situation 1

• Distribution by a company in liquidation
• Assets are paid

Situation 2

• Distribution by a company on reduction of capital
• Distribution in any form

Treated as dividend to the extent to which the company possesses accumulated profits, - In case of company in liquidation, profits immediately before its liquidation, whether capitalized or not

Deemed dividend - Section 2(22) (e)

 Loans & advances (other than in ordinary course of business) by closely  held company deemed  as dividend

• Payment by a company not being a company in which public are substantially interested.
• Of any sum by way of loan or advances.

• To beneficial shareholder of  not less than 10% of voting power.
• To any concern in which such a shareholder is a member or a partner and in which he has a substantial interest
• To any person on behalf of or for the individual benefit of such a shareholder.

Treated as dividend to the extent to which the company possesses accumulated profits

Meaning of Accumulated profits

 All profits upto the date of distribution or payment. Except for 2(22)(c) wherein all profits upto the date of liquidation.

Exceptions - Dividend shall not include

• Advance or loan made by money lending company  in the ordinary course of business.
• Dividend offset against loan which is deemed dividend under section 2(22)(e).
• Buy back of shares in accordance with the provisions of section 77A of the Companies Act,
• Distribution under clause (c) or clause (d) of section 2(22) in respect of preference shares who are not entitled to participate in the surplus assets in the event of liquidation.
• Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company

Regards

CA Manish Malu