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DIVIDEND DISTRIBUTION TAX- AN ANALYSIS

SYNOPSIS
Introduction
Chapter XII-D, consisting of section 115-O to 115-Q, under the category Special Provisions
Relating to Tax on Distributed Profits of Domestic Companies, inserted by the Finance Act,
1997 with effect from June 1,1997, has brought about a radical change in the system of taxation
of dividends. This scheme of taxation was often criticized on the ground that it amounted to
double taxation, once in the hands of the company and again in the hands of the shareholders.
The tax on distributed profits is an additional tax over and above the income tax payable on
chargeable profits of the company and would be payable even in cases where a company does
not have to pay tax on the income as computed in accordance with the provisions of the Act. The
additional tax under section 115-O is to be paid by the domestic company within 14 days from
the date of the:
a. Declaration of dividend
b. Distribution of dividend
c. Payment of dividend, whichever is earlier
The additional tax will be treated as final payment of the tax in respect of the profits distributed
and no further credit of tax shall be allowed either to a company or its shareholder in respect of
the amount on which the tax has been charged. Failure to pay the additional tax will attract penal
interest at the rate of 1.25 per cent, and the company or its principal officer shall be deemed to be
an assesse in default.
Section 115-0 which levies an additional tax on the distributed profits of a company, is valid. The
Union has the competence to levy income-tax upon companies, and similarly has the power to
impose additional tax too. The tax levied by section 115-O is a tax on the company and not on
the shareholder, and is intended to tax companies on profits which they do not plough back into
the business but distribute to their shareholders.
DDT was abolished in the year 2002 and the budget for the financial year 2002-2003 proposed
the removal of DDT by bringing back the regime of dividends being taxed in the hands of the

shareholder/recipients. However, in the line with the view that it is easier to collect tax at a single
point i.e. from the company rather than individual shareholders, the Finance Act, 2003 reintroduced section 115-O of the Act and taxed the amounts so declared, distributed or paid by
way of dividend in the hands of the company. Consequently, deduction under section 80-L
(available to individuals) was discontinued. Also, dividend liable to DDT under section 115-O of
the Act was exempted from tax in the hands of the shareholders pursuant to section 10(34) of the
Act.
Research Objective
The researcher intends to completely understand the concept of Dividend Distribution tax and
how it has been enumerated in the Income tax act through section 115-O, and also look into the
different major amendments which has come upon in the years. The reasoning behind such a tax
will be also be analyzed and a critical approach will be taken by the researcher.
Research Questions

What is the constitutional validity and purpose behind enacting this provision?
What are the different important elements, in section 115-O with regard to this taxing

subject?
What are the important amendments that has updated this provision in the previous
years?

Literature Review
Arvind P Datar, Kanga & Palkhivalas The Law and Practice of Income Tax, (10th
Edition,2014) LexisNexis
A monumental work and obviously a comprehensive text book on Indian Law and practice,
which gives brief commentary on every section of the Income Tax Act.
Chaturvedi & Pithisarias, Income Tax Law, Volume 5,(6th Edition,2014),LexisNexis
This is a much more extensive work on income taxation covering the section, from the
legislative history to an exhaustive commentary is given.
Dr. Girish Ahuja & Dr. Ravi Gupta, A compendium of issues on Income Tax and Wealth
Tax, Volume 2, (7th Edition,2015), Wolters Kluwer

This is a perfect book to understand the relevant issue persisting with each section and
thereby understand in a question and answer form.