Taxability of Dividend

7/29/2019 Taxability of Dividend

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According to Sec 2(22) of the I.T act 1961,

dividends includes the following disbursements by

the company to the shareholders, to the extent of

accumulated profits.

(a) Any distribution by a company to the extent of

accumulated profits involving the release of theassets of the company [sec 2(22)(a)]


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The company should posses accumulated

profits.

A.P are distributed in cash or kind. Where the

distribution is in kind, the market value of the

asset shall be the deemed income in the handsof the shareholders.


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3 types of dividends:

(a) Dividend declared by a domesticcompany.

(b) Dividends or any other income

distributed by UTI. (c) Dividends declared by a foreign

company.


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W.E.F 2004-2005, dividend by a domestic

company refer to section 115-O or after

1.4.2003 not to be included in computingthe previous year total income of any

person.

Deemed dividend in sec10(34) is exemptbut deemed dividend under sec2(22)(e) i.e

loan & advance by closely held company to

a specified shareholder.


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Liability of tax has been shifted to thedomestic company who shall pay an

additional tax i.e DDT @ 15% + 5%surcharge + 2% plus secondary and higherE.C @ 1%. For 2011-2012 surcharge was

7.5%.

Dividend received from a foreign companyis liable to tax under the head of incomefrom other sources under sec2(22)(e).


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Clause(23D), income from specified

undertakings or any specified

company or a M.Fund is exempt.

Shall not apply to the transfer of the

units of the above specified.


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Ques) ABC has AP of Rs 3 L excluding

capitalized profit of 1L. The company distributed

assets of Rs 2.5 L. Compute the tax to be paid ifthe market value of the asset on the date of

distribution is:

(a) Rs 2 L (b) Rs 3.5 L (c) Rs 4.5 L


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Tax to be paid from the side of the company as it

is exempt from shareholders side.

It is to be paid as 16.223% on the amount paid as

dividend.

So in the previous question amount that can be

distributed as dividend shall be:

(a) 2 L (b) 3.5 L (c) 4 L

As it cannot go beyond maximum A.P including

capitalized profits as well.


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Any distribution to its shareholders by a

company of deb., deb. Stock, or deposit

certificate in any form, whether with or

without interest to the extent of AP,

whether capitalized or not, and

Any distribution to its preference

shareholders of shares by way of bonus,to the extent to which the company

possesses A.P, whether capitalized or not.


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(d) Distribution of reduction of share capital [Sec. 2(22)(d)]: Any

distribution to its share holders by a company on the reduction of its

capital, to the extent to which the company possesses accumulated profits,

whether such accumulated profits have been capitalised or not;For this purpose, profits of the company, up to the date of resolution

permitting the reduction of share capital, shall form part of the

accumulated profits.

The supreme court held that amount distributed by the company onthe reduction of its share capital has two components, namely:

(a) Distribution of accumulated profits, and

(b) Distribution of capital.

The amount received as reduction of capital, to the extent it can be

attributed to accumulated profits , shall be deemed dividend under section

2(22)(d) and the balance amount received shall be on account of reduction

of capital which will be subject to capital gain, if any.


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Example 1: A company has accumulated profits of Rs. 3,00,000.

(a)X, a shareholder who holds 25% shares, receive Rs. 50,000

from company on reduction of its capital.(b)X, a shareholder who holds 25% shares, receive Rs. 75,000

from company on reduction of its capital.

(c)X, a shareholder who holds 25% shares, receive Rs. 2,40,000

from company on reduction of its capital.

Solution

Case(a) : 50,000 x 100/25 =Rs. 2,00,000 which is less than

accumulated profits of Rs. 3,00,000 shall be deemed dividendon which company shall have to pay DDT @ 16.223. Rs.

50,000 received by X shall be exempt in his hand as per

Sec.10(34).


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Case(b) : 75,000 x 100/25 =Rs. 3,00,000 which is equal to

accumulated profits of Rs. 3,00,000 shall be deemed dividend

on which company shall have pay DDT @ 16.223. Rs. 75,000

received by X shall be exempt in his hand as per Sec.10(34).

Case (c) Liability in the hands of company

On accumulated profit of Rs. 3,00,000, the company shall

pay DDT @16.223%

Rs. 3,00,000 x 25% =Rs. 75,000 will be exempt in the hands

of share holders under section 10(34).

Further, while computing the consideration price for

computing the capital gain in the hands of X, the deemeddividend of Rs. 75,000 shall be deducted for the total amount

of Rs. 2,40,000 received by X. Hence, the consideration price

shall be Rs. 1,65,000 (Rs. 2,40,000 Rs.75,000).

.


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(e) Loans/advances to certain shareholders/concerns

[section 2(22)(e)]: Any payment by a company, of any sum by way of

advance or loan, to the extent of accumulated profits to:-

(i) A equity shareholder, who is beneficial owner of shares holding

not less than 10% of the voting power; or

(ii) Any concern in which shareholder is a member or a partner and in

which he has substantial interest; or

(iii) Any person, on behalf, or for the individual benefit, of any suchshareholder. Such shareholder here means a shareholder who is

beneficial owner of share holding not less than 10% voting power.

Example: R(P) Ltd., gives a loan of Rs. 3,00,000 to G, who is not a

shareholder. G gives this amount as loan to S who is shareholder in

R Pvt. Ltd., holding 12% shares. In this case Rs. 3,00,000 shall be

deemed dividend in the hands of S because the loan has given by

the company to G for the benefit of S.


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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 profitson the date of loan, etc.

Dividends not to include the following:

(i) Loan advanced in the ordinary course of business by the money lending

company.(ii) Dividend paid if set off against loan already treated as deemed dividend.

(iii) Distribution in respect of non- participating shares issued for full cash

consideration.

(iv) Buy back of shares as per section 77A of Companies Act.

(v) Distribution of shares to the shareholders of demerged company.


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Following expenses can be claimed as deductions from grossdividend

income:

1. Collection charges- any reasonable sum paid by way ofcommission or remuneration to a banker or any other for the

purpose of realising the dividend.2. Interest on loan- interest on money borrowed for

purchasing the shares can be claimed as deduction. Theinterest can be claimed even if no income is earned by wayof dividend on such shares.

It has been held by the Supreme Court that if theexpenditure has been laid out for the purpose of earning thedividend income then whether income is actually earned ornot is immaterial and deduction on account of interest canbe claimed.


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3. Any other expenditure- any other expenditure, not being aexpenditure of a capital nature, expended wholly &exclusively for the purpose of making or earning suchincome, can be claimed as deduction.

Gross dividend minus the above deductions is the income

from dividend taxable under the head Income From OtherSources.


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: under sec 2(22)(a) merecapitalization by issue of bonus shares to equityshareholders does not entail the release of assets of thecompany and hence shall not be deemed to be dividend.Therefore, when an equity shareholder receives bonus shares

it is not treated as a dividend and neither the shareholdernor the company incurs any tax liability on the issue of suchshares.

Treatment on sale of bonus share- as per sec55(2)(aa)(iiia), the cost of acquisition in relation to the

financial assets(i.e. share or any other security) allotted tothe assessee on or after 1-4-1981 without any payment andon the basis of holding of any financial asset, shall not betaken to be nil. Therefore, the cost of bonus shares shall betaken to be nil and the entire sale consideration received onthe transfer of the bonus share shall be treated as capitalgains.


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However, in case bonus shares have been allotted to the

assessee before1-4-1981, although the cost of such bonus shares is nil

but the assessee may opt for market value as on 1-4-1981 asthe cost of acquisition of such bonus shares. Therefore, incase of bonus shares issued on or after 1-4-1981, the

entire sale consideration shall be the capital gain. However, ifthe bonus shares are sold after a period of one year i.e. whenthey become long-term capital assets then there will be nocapital gains tax because the long term capital gain on sharesin exempt from tax if these are sold through a recognized

stock exchange and the securities transaction tax has beenpaid.


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- If the company does not declarethe dividends out of its income then the profits are availableto the company for being ploughed back into the business.This internal source of capital is a cost effective method ofraising capital for expansion purposes or for setting up of

new projects. In case the company distributes its income byway of dividends then the company shall have to look foralternative sources of raising capital for the growth of itsbusiness. The normal cost of raising capital in the market isabout 12 to 14%. Where the company uses in the internalaccruals, its saves on this cost.

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Taxability of Dividend