Taxation of Dividend Income is a complicated issue. There are many variables involved to tax a dividend Income. Section 115BBDA provides rationalisation for taxation of Dividend Income. Under the existing provisions of clause (34) of section 10 of the Act, dividend which suffer dividend distribution tax (DDT) under section 115-O is exempt in the hands of the shareholder. Under section 115-O dividends are taxed only at the rate of fifteen percent at the time of distribution in the hands of company declaring dividends.
This creates vertical inequity amongst the tax payers as those who have high dividend income are subjected to tax only at the rate of 15% whereas such income in their hands would have been chargeable to tax at the rate of 30%.
With a view to rationalise the tax treatment provided to income by way of dividend, it is provided by amending the section of the Income-tax Act that any income by way of dividend in aggregate exceeding Rs. 10 lakh shall be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a firm who is resident in India, at the rate of 10% (+SC+EC+SHEC).
The taxation of dividend income in aggregate exceding ten lakh rupees shall be on gross basis. However, this rule is not applicable in case of deemed dividend under section 2(22)(e) (w.e.f. 1 st April, 2016).
Meaning of the term ‘Dividend’ [Section 2(22)] & Section 115BBDA
The term ‘dividend’ is ordinarily used to refer to any distribution made by a company to its shareholders out of its profits in proportion to the number of shares held by the shareholder concerned in the company. Apart from the distribution made by the company, any division of profit between the members who earned the same would also be treated as dividend under the general meaning of expression.
For purposes of income-tax, the definition of dividend is given in : Section 2(22) of the Income-tax Act. The definition, although not exhaustive and comprehensive, is having the effect of over-riding anything else to the contrary contained in any other law for the time being in force. The definition given in the Income-tax Act is enumerative and inclusive in nature and does not precisely specify as to what exactly is meant by the term dividend.
Consequently, any money received by a shareholder which may not fall within the various items specified in the Income-tax Act may still be considered and taxable as dividend except in cases where a different interpretation or inference could be had in the circumstances of the case.
What includes Dividend
According to the definition in the Income-tax Act, ‘Dividend’ includes the following items:
Accumulated Profits : Section 2(22) & Section 115BBDA
Any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; Current profit would be part of accumulated profits but subsidy on Captal Account cannot be treated as accumulated profts. – CIT v. Rajasthan Wires (P) Ltd. (2003) 130 Taxman 93 DP (Mag.).
Bonus : Section 2(22) & Section 115BBDA
Any distribution, by a company to its shareholders, 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;
Liquidation : Section 2(22) & Section 115BBDA
Any distribution made to the shareholders of a company on its liquidation, to the extent to which such distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not;
Share Capital Reduction : Section 2(22) & Section 115BBDA
Any distribution to its shareholders by a company on the reduction of its share capital, to the extent to which the company possesses accumulated profits, whether capitalised or not;
Substantial Interest : Section 2(22) & Section 115BBDA
Any payment made by a company, in which the public are not substantially interested of any sum whether representing a part of the assets of the company or otherwise made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without right to participate in profits), 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 interest (hereinafter in this clause referred to as the said concern), or any payment by any such company on behalf of or for the benefit of the shareholder having substantial interest in the company to the extent to which the company possesses accumulated profits.
But, Sub-section (22) to Section 2 specifically excludes the following:
- Any distribution made by a company in accordance with (c) or (d) above in respect of any share issued for full cash consideration in cases where the shareholder is not entitled, in the event of liquidation, to participate in the surplus assets of the company;
- Any distribution made in accordance with items (c) and (d) above in so far the distribution is attributable to the capitalised profits of the company representing bonus shares alloted to its equity shareholders after 31.3.1964 and before 1.4.1965;
- Any advance or loan made by a company to its shareholder the said concern, i.e, a HUF firm, an AOP or, BOI or a company in the ordinary course of its business in cases where lending of money is a substantial part of the business of the company;
- Any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend under item (e) above to the extent to which it is so set off;
- Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of Section 77A of the Companies Act, 1956;
- Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).
The enumeration given above represents various payments which are notionally or by fiction of law, treated as dividend and which, in the absence of specific provision may not be chargeable to tax as dividend income in the hands of shareholders. The distributions or payments constituting dividend referred to above apply only to payments or distributions made by a company as defined in Section 2(17) of the Income-tax Act.
Since the meaning and scope of the term ‘dividend’ used in the income-tax Act is much wider than what is commonly understood, it covers not only payments as dividends made by a company in accordance with the provisions of company law but also various other payments which may not amount to dividend under company law.
In order to be chargeable to tax as dividend, it is not essential that the dividend must be paid only in cash although the provisions of Company Law require that a dividend must always be paid in cash or by cheque. In all cases where a dividend is paid in any form other than cash, say in the form of goods, securities or shares, even of another company, the amount of dividend which is liable to income-tax must be taken to be the market value of the thing received as dividend.
Example : Section 115BBDA
For instance, if ‘A’ company distributes dividends to its shareholders in the form of shares of its wholly owned subsidiary company ‘B’ at the face value of Rs.100 each while the market value is Rs.150 per share, the liability to tax on the part of the company would be on the basis of the market value of the share.
For this purpose, it is immaterial if the shares are such that a part of the shares cannot be divided for being utilized towards tax deductible at source. The company’s liabiltiy to pay distribution tax is not in any way affected or reduced by the fact that the dividend in question is paid in kind or is calculated on a basis different from what the income-tax law provides.
Company Law Provisions & Section 115BBDA
It is likely that the company may not comply with some of the provisions of Company Law in the matter of declaration and payment of dividends. Even in such cases, non-observance of the various formalities or the provisions of Company Law by the company concerned would not in any way affect the taxability of the amount as dividend in the hands of the Company.
Consequently, if a company, in violation of law, distributes dividends out of its share premium account, the Company would still be taxable regardless of the fact that the payment in question does not come out of the revenue profits of the declaring company
Any distribution made by a company out of its accumulated profits would constitute dividend if the distribution is made on the reduction of share capital of the company.
This reduction may take place even in cases where bonus shares are issued by capitalising the accumulated profits and reserves of the company and later on paying off the bonus shares. This may also take place in cases where the accumulated profits are applied first towards making the partly-paid shares into fully-paid ones and later, the amount of the fully-paid shares is reduced on reduction of share capital.
Even in the case of liquidation of a company, any distribution made by the liquidator (less than the capital subscribed) would constitute income from dividend to the extent to which the distribution could be attributable to the accumulated profits of the company which may or may not have been capitalised during the existence of the company