- What is Dividend
- Accumulated Profits for Distribution of Dividend
- Disbursements by the Company to the Shareholders, to the extent of Accumulated Profits.
- Deductions for Expenses from Dividend Income [Section 57(i) and 57(iii)]
- Tax on certain Dividends received from Domestic Companies [Section 115BBDA]
- Tax Treatment of Dividend in the hands of Shareholders
1. What is Dividend Income
Dividend in its ordinary connotation means the amount paid to or received by a shareholder in proportion to his shareholding in a company out of the total sum so distributed.
Dividends can be of three types:
- Dividends declared by a domestic company.
- Dividends or any other income distributed by Unit Trust of India.
- Dividends declared by a foreign company.
w.e.f. assessment year 2017-18, any income by way of dividends chargeable to tax in accordance with the provisions of section 115BBDA shall not be exempt under section 10(34) even if the tax has been paid on that dividends by the domestic companies under section 115-O.
Dividend which is exempt under section 10(34) includes deemed dividend but shall not include deemed dividend mentioned in section 2(22)(e), i.e., loan/advance given by a closely held company to a specified shareholder/concern.
Since dividends other than chargeable to tax under section 115BBDA received from a domestic company shall be exempt, no deduction of any expense shall be allowed from such dividends.
Dividend from a foreign company or deemed dividend, mentioned under section 2(22)(e) shall, however, be taxable under the head “Income from Other Sources”.
Since dividend is exempt in the hands of the recipient, the domestic company shall be liable to pay additional income-tax on the amount declared, distributed or paid by such company by way of dividends, whether interim or otherwise, whether out of current or accumulated profits.
Exemption of income from Units [Section 10(35)]:
Like in case of dividend, section 10(35) provides that any income received in respect of—
- units from the Administrator of the specified undertaking, or
- the specified company, or
- a Mutual Fund specified under clause (23D)
shall be exempt.
2. Accumulated Profits for Distribution of Dividend
Under section 2(22), the following payments or distribution by a company to its shareholders are deemed as dividend to the extent of accumulated profits of the company (it may be noted that these payments may not be “dividend” under the Companies Act):
- any distribution entailing the release of company’s assets ;
- any distribution of debentures, debenture-stock, deposit certificates and bonus to preference shareholders ;
- distribution on liquidation of company ;
- distribution on reduction of capital ; and
- any payment by way of loan or advance by a closely-held company to a shareholder, holding substantial interest, provided the loan should not have been made in the ordinary course of business and money-lending should not be substantial part of the company’s business
It is, therefore, essential to discuss meaning and scope of the expression “accumulated profits”.
(A) Does ‘Accumulated Profits’ include Current Profit –
- Accumulated profit means profit available to the company, on the date of distribution, after deducting all expenses including income-tax expenses.
- In case of a company, which is not in liquidation, it includes all profits of the company up to the date of distribution or payment.
- In the case of a company in liquidation, it includes all profits of the company up to the date of liquidation. Where, however, the liquidation is consequent on the compulsory acquisition of a company’s undertaking by the Government or a Government company, accumulated profits do not include any profits of the company prior to the three successive years immediately preceding the previous year in which such acquisition took place. For instance, if accounting year of a company is financial year and compulsory acquisition takes place on March 13, 2018, accumulated profits will exclude profits accumulated up to March 31, 2014.
(B) What is basis of computing Accumulated Profit –
Accumulated profits are computed on the basis of commercial profits and not on the basis of assessed income.
(C) Depreciation Deduction for Computing Accumulated Profit-
While calculating “accumulated profits” an allowance for depreciation at the rates provided by the Income-tax Act itself has to be made by way of deduction.
(D) Balancing Charge for Computing Accumulated Profit –
Balancing charge assessable under section 41(2) does not form part of accumulated profits as it is not commercial profit but it is withdrawal of depreciation when the asset is sold for a price higher than the written down value.
(E) Tax-Free Income for Computing Accumulated Profit-
Accumulated profits include tax-free income, e.g., agricultural income. However, receipts of capital nature are included in accumulated profits only if such receipts are chargeable to tax under the head “Capital gains” in the hands of recipient company.
(F) General Reserves for Computing Accumulated Profit-
Accumulated profits include general reserve.
(G) Provisions for Computing Accumulated Profit-
Provisions for taxation and dividends do not form part of accumulated reserve.
(H) Addition made by Assessing Officer for Computing Accumulated Profit-
Addition made by the Assessing Officer on account of concealed income forms part of accumulated profit.
(I) Accumulated Profits of Amalgamating Company –
In the case of an amalgamated company, accumulated profits or loss in the hands of the amalgamated company shall be increased by the accumulated profits of the amalgamating company (whether capitalised or not) on the date of amalgamation.
3. Disbursements by the Company to the Shareholders, to the extent of Accumulated Profits.
(A) Distribution of Accumulated Profits Entailing Release of Company’s Assets [Section 2(22)(a)]
Under sub-clause (a) of section 2(22), any distribution by a company of its accumulated profits (whether capitalised or not) is dividend, if it entails the release of company’s assets.
In other words, there are two conditions prescribed by this clause —
- first distribution should be from accumulated profits (not from capital) and
- secondly, such distribution must result in the release of the assets by the company.
When a company distributes bonus shares to equity shareholders by capitalising its profits, then there is no release of assets and consequently, bonus shares are not treated as dividend.
(B). Distribution of Accumulated Profits in the form of Debentures, Debenture Stock [Section 2(22)(b)]
Under this clause, the following two distributions are treated as dividend to the extent of accumulated profits (whether capitalised or not) of the company:
- distribution by a company to its shareholders (whether equity shareholder or preference shareholder) of debentures, debenture stock, or deposit certificates in any form, whether with or without interest; and
- distribution by a company to its preference shareholders of bonus share.
It is worthwhile to note that under the aforesaid circumstances, distribution amounts to dividend even if there is no release of assets at the time of distribution.
(C). Distribution of Accumulated Profits at the time of Liquidation [Section 2(22)(c)]
Under sub-clause (c), any distribution made by a company to its shareholders on its liquidation is treated as dividend to the extent to which such distribution is attributable to the accumulated profits (whether capitalised or not) of the company immediately before its liquidation.
Under sub-clause (c), the following are, however, not treated as dividend:
- any distribution in respect of preference shares issued for full cash consideration; and
- any distribution insofar as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders during 1964-65.
(D). Distribution of Accumulated Profits on the Reduction of its Share Capital [Section 2(22)(d)]
Any distribution by a company to its shareholders on the reduction of capital is treated as dividend to the extent the company possesses accumulated profits (whether capitalised or not).
For this purpose, profits of the company, upto the date of resolution permitting the reduction of share capital, shall form part of the accumulated profits.
However, the following are not treated as dividend under this clause:
- any distribution out of accumulated profits which arose up to the previous year 1932-33;
- any distribution in respect of preference shares issued for full cash consideration; and
- any distribution in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders during 1964-65.
(E). Distribution of Accumulated Profits by way of Advances or Loans to certain Shareholders / Concerns [Section 2(22)(e)]
Any payment by a company, (other than a company in which the public are substantially interested), of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan, to the extent of accumulated profits (excluding capitalised profits) to:—
- an equity shareholder, who is beneficial owner of shares holding not less than 10% of the voting power; or
- any concern in which such shareholder (holding not less than 10% voting power) is a member or a partner and in which he has a substantial interest i.e. holding 20% voting power or 20% shares in the concern; or
- any person, on behalf, or for the individual benefit, of any such shareholder. Such shareholder here means a shareholder who is beneficial owner of share holding not less than 10% voting power.
This provision is applicable only to companies in which the public is not substantially interested i.e. closely held companies. Further, such loan and advance given to such person shall be deemed to be dividend only to the extent to which it is shown that the company possesses accumulated profits on the date of loan, etc. (exclusive of capitalised profits).
- “Concern” means a HUF, a firm, an AOP or BOI or a company.
- Whether loan or advance is given on interest or not, does not effect the applicability of section 2(22)(e).
4. Deductions for Expenses from Dividend Income [Section 57(i) and 57(iii)]:
The following expenses can be claimed as deductions from gross dividend income other than the dividends referred to in section 115-O:
- Collection charges:
- Interest on loan:
- Any other expenditure:Any other expenditure, not being a expenditure of a capital nature, expended wholly and exclusively for the purpose of making or earning such income, can be claimed as a deduction.
|Since dividends referred to in section 115-O (i.e. dividends covered under section 2(22)(a), (b), (c) and (d) are exempt in the hands of the shareholders, no deduction of any expense referred to in section 57 shall be allowed.|
5. Tax on certain Dividends received from Domestic Companies [Section 115BBDA]
(1) Dividend in aggregate exceeding Rs.10,00,000 received by certain persons to be taxed at the special rate of 10% [Section 115BBDA(1)]:
Notwithstanding anything contained in this Act, where the total income of a specified assessee, resident in India, includes any income in aggregate exceeding Rs. 10,00,000, by way of dividends declared, distributed or paid by a domestic company, the income-tax payable shall be the aggregate of—
- the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding Rs.10,00,000, @ 10%; and
- the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends.
(2) No Deduction to be allowed from Dividend Taxable at Special Rate under Section 115BBDA(1) [Section 115BBDA(2)]:
No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in section 115BBDA(1)(a).
(3) Meaning of specified assessee [Clause (a) to Explanation under section 115BBDA]:
“Specified assessee” means a person other than,—
- a domestic company; or
- a fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or
- a trust or institution registered under section 12A or section 12AA.
In other words, all assesses other than a domestic company or a charitable trust approved under section 10(23C) or registered under section 12A or section 12AA shall be liable to pay tax @ 10% on the dividend income received by them in excess of Rs. 10,00,000.
6. Tax Treatment of Dividend in the hands of Shareholders : –
Status of the company which
Taxability in the hands of shareholders
Dividend distribution tax payable by company which declares dividend
A : Non-domestic company
It is taxable in the hands of a shareholder (if it is received in India or if the shareholder is resident and ordinarily resident in India)
No dividend distribution tax
B: Domestic company (not being dividend under
General rule – In the hands of shareholder, such dividend is exempt under section 10(34). Exception – From the assessment year 2017-18, dividend income is taxable in the hands of shareholders under section IISBBDA, if a few conditions are satisfied (provisions of
The company (which declares dividend) is required to pay dividend distribution tax under section 115-0. It is applicable even if the share- holder is subject to tax under section
|C: Domestic company [being loan or advance deemed as dividend under section 2(22)(e)]|
Taxable in the hands of recipient under sec- tion 56 under the head “Income from other sources”
No dividend distribution tax under section 115-0
||Not taxable in the hands of recipient by virtue of exemption given by section 10(34)||The company (which distributes deemed dividend as loan or advance) is liable for dividend distribution tax under section 115-0 at the rate of 30 per cent (+ SC + HEC, effective rate is 34.944 per cent).|