Tax on distributed profits of

domestic companies
Chapter XIID contains a special provision relating to tax on distributed profits of
domestic companies. This has only three sections, namely section 115 O, which
is a charging section and also prescribes the period, the rate of additional tax,
which is payable, and time and manner of payment etc. by company on dividend
distributed. Section 115-P provides for interest payable for non-payment or
delayed payment of additional tax by domestic companies. Section 115-Q is
about when company is deemed to be in default.

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Explaining The Dividend – Section 2(22)

(a) any distribution by a company of accumulated profits, whether capitalized 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.

(b) any distribution to its shareholders by a company 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.

(c) any distribution made to the shareholders of a company on its

liquidation, to the extent to which the distribution is attributable to the
accumulated profits of the company immediately before its liquidation,
whether capitalised or not.
Explaining The Dividend – Section 2(22)

(d) any distribution to its shareholders by a company on the reduction of its capital, to
the extent to which the company possesses accumulated profits which arose after the
end of the previous year ending next before the 1st day of April, 1933, whether such
accumulated profits have been capitalised or not.

(e) any payment by a company, not being 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) 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 a 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 (hereafter in this clause referred to as the said
concern) or any payment by any such company on behalf, or for the
individual benefit, of any such shareholder, to the extent to which the
company in either case possesses accumulated profits.
Further Explanations – Section 2(22)

 The undistributed income, when accumulated from year to

year, generates what is known as “accumulated profit” or
“retained earnings”. Accumulated profits shall include all
profits of the company till the date of distribution or
payment referred to in sub-clause (e) of section 2(22).
Section 8

For the purposes of inclusion in the total income of an

assessee

 any dividend declared by a company or distributed or paid by it within the

meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or
sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the
previous year in which it is so declared, distributed or paid, as the case may be ;
 any interim dividend shall be deemed to be the income of the previous year in
which the amount of such dividend is unconditionally made available by the
company to the member who is entitled to it.
Section 10(34)

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

 Indian company : All dividend exempt from tax in the hands of shareholders but
company is liable to pay Dividend Distribution Tax

 Foreign Company : All dividend received from foreign company is liable for tax in
the hands of shareholders
 Bonus shares
• At the time of issue of bonus shares
– No tax liability in the hands of company
– No tax liability in the hands of shareholder
• At the time of sale of bonus shares by
shareholder
– No tax liability in the hands of company
– Capital gains tax in the hands of shareholder
Dividend Distribution Tax
 Basis of charge
• DDT is in addition to income tax paid by
company
• Applicable only on domestic companies
• Charged on amount declared, distributed or
paid by a domestic company
• Applicable on interim and final dividend.
• Applicable whether the dividend is paid out of
current profits or accumulated profits
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 DDT not on 2(22)(e)
• Why
• On perusal of section 2(22) we can find that in case of other modes of distribution of profit, the
company may distributes such profit in any manner but it will be to all the shareholders in
proportion to the number of shares held by them, if all shares are equal in entitlement. In case
there are different types of shares, then dividend will be in proportion to paid-up capital thereon
and as per the terms of issue.
• Whereas in case of payments which are deemed as dividend under clause (e), the payments are not
in proportion to the share holding / paid up capital held by different members. Therefore, the
deemed dividend u/s 2(22)(e) is materially different from other types of dividend-covered u/s
2(22).
• In fact, the company does not declare a dividend of the nature contemplated in section 2(22)(e),
rather the company advances certain money with a condition that the same will be in nature of
loan or advance, it may bear interest also and it is refundable.
• However, still it is deemed to be dividend in hands of shareholder who receives such payment
because the purpose of treating such payment as dividend is to check the practice of giving away
money of company to shareholders without paying corporate tax.
• This being the factual and legal position, it appears that such deemed dividends are excluded from
the ambit of section 115 O and the company is therefore, not liable to pay additional tax on such
payments.

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 Applicability of DDT on SEZ
• Finance Act, 2011 inserted a proviso to sub-
section 6 of Section 115O by which the
provisions of Section 115O shall also be
applicable on an enterprise or undertaking
engaged in developing, operating and
maintaining a SEZ.

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 Rate of dividend tax
• Dividend Tax – 15%
• Surcharge – 1.8%
• Education cess & SHEC- 0.504%
• Total dividend Tax: 17.304%
• W.e.f 1st October, 2014 the dividend paid is required to be to
grossed up with the income distributed for computing the tax
liability on account of dividend distribution tax. With the grossing
up, the effective tax rate on dividend distribution has increased as
under:
• If surcharge and education cess is excluded then effective rate of
dividend distribution tax would be 17.647% -(100 X15/85 )+ 12%
surcharge and 3% education cess thereon which as per your
calculation is 20.357%.
• If surcharge and education cess is included then the rate would be
20.925%- (100X 17.304/82.696).

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 Time limit
• DDT to be paid within 14 days of
– Declaration
– Distribution or
– Payment of dividend
• Whichever is earliar.
• Dividend income is exempt u/s 10(34) in the
hands of recipient.
• But dividend tax is not a deductible expence in
the hands of company.

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 Non payment of tax
• Interest @1% per month or part thereof to be
paid along with DDT
• Penalty equal to amount of tax
• Rigorous imprisonment of from 3 months to
seven years with fine.

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 Mitigating the cascading effect
• Dividend received by assessee company from
its subsidiary shall be deducted provided
– Subsidiary has paid dividend tax (subsidiary
should hold more than half in nominal value of
the equity share capital of the company)
– Same amount is not taken as deduction more than
once

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 Chapter XII-DA -Section 115QA- Tax on Distributed
Income of Domestic company for Buy-Back of shares
• This section was inserted by Finance Act, 2013 to counter the tax
avoidance practice mainly adopted by Indian subsidiaries to distribute
dividend to Mauritius based Holding company under the garb of Buyback
of shares.
• Under Income Tax Act, buyback of shares is taxable u/s 46A in the hands of
shareholders. However, taking the benefit of Article 13 of India-Mauritius
DTAA, which provides for capital gain arising on transfer of shares of
Mauritius resident taxable in that country and under Mauritius tax laws
capital gain is totally exempt, entire transaction used to escape the tax
net.
• Thus to plug this loop hole in the statute, section 115QA is introduce to
provide that where shares are bought back at a price higher than the price
at which those shares were issued then, balance amount will be treated as
distribution of dividend and Tax @20% will be payable by the Company.
• Section 115QA is applicable only to domestic unlisted companies.
• Buyback as per section 77A of Companies Act,1956.
TAX ON DISTRIBUTED INCOME OF DOMESTIC COMPANY
FOR BUY-BACK OF SHARES

A new Chapter XII-DA has been inserted by the Finance Act, 2013 w.e.f. 1-6-2013 with a view to
curb the mode of tax avoidance by unlisted Companies by way of Buy-Back of shares instead of
payment of dividend to avoid dividend distribution tax, particularly where the capital gains
arising to the shareholders are either not chargeable to tax or are taxable at a lower rate due to
exemption available under sections 45 to 55 or because of operation of avoidance of double
taxation agreements.

 It is the charging section which authorises the levy of the additional tax.
 Inserted by Finance Act, 2013.
 Under this section, buy back of shares of Unlisted Domestic Company is
made taxable in the hands of company.
Section 115QA  Purpose of this section is to counter the tax avoidance practice of foreign
companies distributing dividend in the garb of buyback of shares.
Scope of Section 115QA

Tax on Distributed Income of Domestic company for Buy-Back of shares:

Applicable When: Explanation:

 A domestic Company distributes income to share holders on Buy-Back

of its shares
 For the purposes of this Section, -— Notwithstanding anything contained in any
 “buy-back” means purchase by a company of its own shares in
accordance with the provisions of section 77A of the Companies Act, other provision of this Act, in addition to the
1951 income-tax chargeable in respect of the total
 “distributed income” means the consideration paid by the company on
buy-back of share as reduced by the amount which was received by the income of a domestic company for any
company for issue of such shares. assessment year, any amount of distributed
 Such tax on distributed income shall be payable @ 20% plus surcharge
@ 12% plus education cess @ 2% plus SHES @ 1% of amount of income income by the company on buy-back of shares
so distributed. (not being shares listed on a recognized stock
 Such tax shall be remitted within 14 days from the date of payment of
consideration.
exchange) from a shareholder shall be charged
 The tax on distribution income shall be payable whether or not such to tax and such company shall be liable to pay
company is liable to pay income tax on its total income computed in
accordance with the provision of this Act.
additional income-tax at the rate of twenty per
 If the company fails to deposit the tax, the penalties are the same as cent on the distributed income.
Section 115P and 115Q but the applicable sections are Section 115QB
and 115QC
Purpose of Section 115QA

“buy-back” means purchase by a company of its own shares in accordance with the
provisions of section 77A

As per the provisions of section 77A of the Companies Act, a company may buy back its own shares
only out of three options viz:-
a) Out of its free reserves.
b) Out of securities premium account and
c) Out of proceeds of any shares or other specified securities.

 “distributed income” means the consideration paid by the company on buy-back of share as
reduced by the amount which was received by the company for issue of such shares.
 tax on distributed income shall be payable @ 20% plus surcharge @ 10% plus education cess
@ 2% plus SHES @ 1% of amount of income so distributed.
 tax shall be remitted within 14 days from the date of payment of consideration.
Section 115QB
INTEREST PAYABLE FOR NON-PAYMENT OF TAX BY COMPANY:

Where the principal officer of domestic company and the company

fail to pay the whole or any part of tax on distributed income within
the time i.e. 14 days, he or it shall be liable to pay simple interest @
1% for every month or part thereof on amount of such tax for the
period beginning on the date immediately after the last date on
which such tax was payable and ending with the date on which the
tax is actually paid.
Section 115QC

CONSEQUENCES FOR NON PAYMENT OF TAX ON DISTRIBUTED INCOME:

If principal officer of a domestic company and the company does not pay tax
on distributed income in accordance with the provisions of section 115qa,
then, he or it shall be deemed to be an assessee in default in respect of the
amount of tax payable by him or it and all the provisions of the income-tax Act,
1961 for the collection and recovery of income tax shall apply. The assessee
who is deemed to be in default in making the payment of tax on distributed
income is liable for penalty u/s 221 of the act.
Dividend Declared by Foreign
Companies
Section 115BBD

Tax on certain dividends received from foreign companies

Where the total income of an assessee, being an Indian company, includes any income by way of
dividends declared, distributed or paid by a specified foreign company, the income-tax payable
shall be the aggregate of—

(a) the amount of income-tax calculated on the income by way of such dividends, at the rate of
fifteen per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had its total
income been reduced by the aforesaid income by way of dividends
Tax to dividends received from foreign specified company

 Dividend received from a foreign company is taxed in the hands of a resident

taxpayer at the normal rates applicable to his income.

 Normal tax rate applicable to an Indian company is 30% (plus surcharge and cess
as applicable), hence, dividend received from a foreign company is charged to
tax at 30% in the hands of an Indian company.

 However, section 115BBD provides a concessional rate of tax in respect of

dividend received by an Indian company from a foreign company in which the
Indian company holds 26% or more in nominal value of the equity share capital.
Tax to dividends received from foreign specified company

 By virtue of section 115BBD, dividends [as defined in section 2(22) except dividend as
defined in section 2(22)(e)] received by an Indian company from a foreign company in
which the Indian company holds 26% or more in nominal value of the equity share capital
is charged to tax at a flat rate of 15% (plus surcharge and cess as applicable).

 It should however be noted that, in the above case no deduction on account of any
expenditure or allowance will be allowed from the amount of the dividend covered
under section 115BBD. In other words, the gross amount of dividend (without deducting
any expenditure/allowance) will be taxed at the rate of 15% (plus surcharge and cess as
applicable)
CBDT Clarification Regarding Foreign Dividends

CBDT clarifies that dividend declared and paid by a foreign company outside India would not
be taxable under the indirect transfer provisions of the Income Tax Act

The Central Board of Direct Taxes (CBDT) has issued a circular dated 26 March 2015 that deals with the controversial
question as to whether dividends paid by a foreign company would be taxable in India under Explanation 5 to section
9(1)(i) of the Income - tax Act, 1961 (the Act), if the shares of the foreign company derive their value substantially from
the assets situated in India. The CBDT has accepted that such an extended application of the provisions of the Act may
result in (an unintended) taxation of dividend income declared by a foreign company outside India.

Declaration of Dividends by a foreign company outside India does not have the effect of transfer of any underlying assets
located in India. Therefore, CBDT declared that the dividends declared and paid by a foreign company outside India in
respect of shares which derive their value substantially from assets situated in India would not be deemed to be
income accruing or arising in India by virtue of the provisions of Explanation provided by the CBDT
Our Viewpoint

The clarification issued by the CBDT is a

welcome move. It has been clarified that the
dividend declared and paid by a foreign
company outside India in respect of shares
which derive their value substantially from
assets situated in India would not be deemed
to be income accruing or arising in India.

This will also uplift the ease of operations of

the multinationals and will avoid the problems
of double taxation.
 True or False
• The provisions of dividend distribution tax are
not applicable to an undertaking or entries
engaged in developing, operating and
maintaining a Special Economic Zone (SEZ).

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 Solution
• Prior to amendment by Finance Act, 2011, as per section 115-O(6),
no tax on distributed profits shall be chargeable in respect of the
total income of an undertaking or enterprise engaged in developing
or developing and operating or developing, operating and
maintaining a Special Economic Zone for any assessment year on
any amount declared, distributed or paid by such Developer or
enterprise, by way of dividends (whether interim or otherwise) on
or after 1.4.2005 out of its current income either in the hands of
the Developer or enterprise or the person receiving such dividend.
• However, the Finance Act, 2011 has introduced a sunset clause to
remove the above exemption in respect of dividend distribution tax
for dividends declared, distributed or paid on or after 1st June,
2011. Therefore, the statement given in the question is correct in
respect of dividend declared, distributed or paid on or after 1st
June, 2011.

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 Review Questions
• A domestic company is liable to pay dividend
tax at the rate of 16.995% of dividend
declared.
• The cascading effect of dividend distribution
tax is minimised in the case of holding and
subsidiary companies.Comment
• Discuss the tax implications of dividend
declaration and issue of bonus shares.

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 Review Question
• X Ltd., a domestic company, has distributed
on 1/11/2015, dividend of Rs. 230 lakh to its
shareholders. On 1/10/2015, X Ltd. has
received dividend of Rs. 60 lakh from its
domestic subsidiary company Y Ltd., on
which Y Ltd. has paid dividend distribution
tax under section 115-O. Compute the
additional income-tax payable by X Ltd.
under section 115-O.
 Solution
Particulars Rs. In lakhs

Dividend distributed by X Ltd. 230

Less: Dividend received from subsidiary Y 60

Ltd.
Net Distributed profits 170

Add: increase for the purpose of grossing up 30

of dividend
(15X 170/100-15)
Gross Dividend 200

Additional income tax payable by X Ltd. u/s 30.00

115-O(15% of Rs. 200 lakhs)
Add: Surcharge @ 12% 3.60

33.60

Add: Education cess@ 2% and SHEC @1% 1.00

34.60
 Review Question
• Hussain Sagar, an Indian company receives following dividend income during the previous
year 2015-16:
• From Geneva Inc, a Swiss company in which it holds 23% of nominal value of equity share
capital- Rs. 72,000.
• From shares held in Michigan Inc, a US company in which it holds 51% of nominal value of
equity share capital- Rs. 2,10,000.
• From shares held in Ontario Inc, a Canadian company, in which it holds 23% of nominal value
of equity share capital- Rs.1,92,000.
• From shares held in Indian Subsidiaries, on which dividend distribution tax has been paid by
such subsidiaries- Rs. 58,000.
• Hussain Sagar has paid remuneration of Rs. 21,000 for realizing dividend, the break-up of
which is as follows-
• Rs. 7,000 (Geneva Inc.); (2) Rs. 8,000 (Michigan Inc.); (3) Rs. 6,000 (Indian subsidiaries)
• The business income of Hussain Sagar Limited computed as per the provisions of Income
Tax Act is Rs. 53 lakh. Compute the total income and tax liability of Hussain Sagar Ltd.
Ignoring MAT. Assuming that Hussain Sagar Ltd. has distributed dividend of Rs. 3,80,000 in
March, 2016 compute the additional income tax payable by it under section 115-O.
 Dividend Income taxable under-
“Income from other sources”
Particulars Rs.
From Geneva.Inc. a Swiss company-net dividend(i.e 65,000
Rs. 72,000-Rs.7000) is taxable at normal rates
From Michigan Inc, a US company- gross dividend is 2,10,000
taxable @ 15% under section 115BBD(no deduction is
allowable in respect of any expenditure as per section
115 BBD(2)]
From Ontario Inc, a Canadian Co. net dividend(i.e Rs. 1,92,000
192,000) is taxable at normal rates)]
From shares in Indian subsidiaries Rs. 58000- exempt NIL
under section 10(34) since DDT has been paid under
section 115-O( as per section 14A no deduction is
allowable in respect of expenditure incurred to earn
exempt income.
4,67,000
 Computation of total income of
Hussain sagar Ltd. for A.Y 2016-17
Particulars Rs.
Profits and gains of business or 53,00,000
profession
Income from other sources (See 4,67,000
Note below)
Total Income 57,67,000
 Computation of tax liability of
Hussain Sagar Limited for the A.Y
2016-17
Particulars Rs.
Tax @15% under section 115BBD on Rs. 2,10,000 (gross 31,500
dividend)
Tax @ 30% on balance income of Rs. 55,57,000 16,67,100
16,98,600
Add: Education cess and SHEC @ 3% 50,958
Tax Liability 17,49,558
 Computation of additional income tax payable
by Hussain Sagar Ltd. under section 115-O
Particulars Rs. Rs.

Amount distributed by way of dividend 380000

Less: Dividend received from Indian subsidiaries, on which 58,000

DDT payable under section 115-O has been paid
Less: Dividend received from foreign subsidiary, Michigan 2,10,000 268000
Inc, on which tax is payable under section 115 BBD
112,000

Add: increase for the purpose of grossing up of dividend 15* 112000/85 19765

Gross Dividend 131765

Additional income tax 19765

Surcharge @12% 2372

Education cess 664

Total additional tax 22,801

 Review Question
• Dal Ltd., a domestic company, purchases its own
unlisted shares on 17th August, 2015. The
consideration for buyback amounted to Rs. 18
lakh, which was paid on the same day. Dal Ltd.
had received Rs. 11 lakh on issue of these shares
one year back. Compute the additional income-
tax payable by Dal Ltd. Further, determine the
interest, if any, payable if such tax is paid to the
credit of the Central Government on 7th
November, 2015. Would there be any tax
implication in the hands of the shareholders?
Discuss.
 Solution
• Chapter XII-DA, comprising of sections 115QA, 115QB and 115QC, inserted with effect from
1st June, 2013, levy additional income-tax on buyback of unlisted shares by domestic
companies. As per section 115QA, the distributed income is subject to additional income-tax
@20% (plus surcharge@12% and education cess@2% and secondary and higher education
cess@1%) in the hands of the domestic company. Distributed income is the consideration
paid by the company for buyback of its own unlisted shares which is in excess of the sum
received by the company at the time of issue of such shares.
• Accordingly, Dal Ltd is liable to pay Rs. 1,61,504 as additional income-tax, which is the
amount calculated @23.072% (20% plus surcharge@12% plus cess@3%) on Rs. 7 lakh, being
its distributed income (i.e., Rs. 18 lakh – Rs. 11 lakh).
• The additional income-tax was payable on or before 31st August, 2015. However, the same
was paid only on 7th November, 2015. Interest under section 115QB is attracted@1% for
every month or part of the month on the amount of tax not paid or short paid for the period
beginning from the date immediately after the last date on which such tax was payable and
ending with the date on which the tax is actually paid.
• In this case, the period for which interest@1% per month or part of a month is leviable is
calculated as under –
• Interest = Rs. (1,61,504 X 1/100 X 3) = Rs.4,845.12
• The income arising to the shareholders in respect of such buyback of unlisted shares by Dal
Ltd. would be exempt under section 10(34A) in their hands.
 Review Question
• Yaman Limited is a company in which 60% of the
shares are held by Piloo Limited. Yaman Limited
declared a dividend amounting to Rs. 35 lacs to
its shareholders for the financial year 2014-15 in
its Annual General Meeting held on 10th July,
2015. Dividend distribution tax was paid by
Yaman Limited on 21st July, 2015. Piloo Limited
declared an interim dividend amounting to Rs. 50
lacs on 15th October, 2015
• Compute the amount of tax on dividend payable
by Piloo Limited.
 Solution
• As per section 115-O, dividend distribution tax at the rate of 17.304% (i.e., 15% plus
surcharge @12%, education cess@2% and secondary and higher education cess@1%) is
leviable on dividend declared, distributed or paid by a domestic company. As per section 115-
O(1A), a holding company receiving dividend from its domestic subsidiary company can
reduce the same from dividend declared, distributed or paid by it. The dividend from its
domestic subsidiary company should be received in the same financial year in which the
holding company declares, distributes or pays the dividend. Further, the dividend shall not be
considered for reduction more than once.
• The conditions to be fulfilled for this purpose are as follows:
(1) The domestic subsidiary company should have paid the dividend distribution tax which is
payable on such dividend;
(2) The recipient holding company should be a domestic company;
• For this purpose, a holding company is a company which holds more than 50% of the nominal
value of equity shares of another company.
• Section 115-O (1B) provides that for the purposes of determining the tax on distributed
profits payable in accordance with section 115-O, any amount by way of dividends referred to
in section 115-O(1), as reduced by the amount referred to in section 115-O(1A) [referred to
as net distributed profits], shall be increased to such amount as would, after reduction of the
tax on such increased amount at the rate specified in section 115-O(1), be equal to the net
distributed profits.
Computation of dividend distribution
tax payable by Piloo Limited
 Review Question
• X Co Ltd., a domestic company, holds 51% of the share
capital of Y Co Ltd. which is another domestic company.
Y Co Ltd. paid total dividend of Rs. 50 Lacs for the year
ended on 31-03-2015 in the F.Y. 2015-16. Out of the
dividend received from Y Co Ltd., X Co Ltd. distributed
dividend of Rs. 15 Lacs in the financial year 2015-16.
• Explain with reasons the amount of dividend
chargeable to tax and dividend distribution tax payable
by X Co Ltd. Would your answer be different if X Co Ltd.
had distributed dividend of Rs. 60 Lacs?
 Solution
• The dividend received by X Co Ltd. from Y Co Ltd. is
exempt from tax under section 10(34) if such dividend
is covered by section 115-O.
• X Co Ltd., while paying dividend distribution tax under
section 115-O, is eligible to reduce the dividend
received from its subsidiary company from the
dividend paid / declared by it in the same financial
year. Since, the dividend of Rs. 15 lacs paid by X Co Ltd.
is less than the dividend of Rs. 25.5 lacs received from
its subsidiary, i.e., Y Co Ltd., the tax liability under
section 115-O would be Nil.
 In case X Co. Ltd. had distributed dividend of Rs. 60
Lacs, the dividend distribution tax to be paid by X Co.
Ltd. shall be computed as follows:
• Note: As per new sub-section (1B) of section 115-O, for the
purpose of grossing up, the rate specified in sub-section
(1) has to be considered. The rate specified in sub-section
(1) is 15%. Further, in the example given in the
Explanatory Memorandum to the Finance (No.2) Bill,
2014, grossing up has been done at the rate of 15%.
• However, it is also possible to take a view that grossing up
should be done at the rate of 17.304% (that is, 15% plus
surcharge@12% plus education cess and SHEC@3%), which
is the effective rate of dividend distribution tax.
 Review Question
• Xtra Ltd. gives the following information for the year ended
31.3.2015:
– Net Profit as per Profit and Loss Account for the financial year 2013-14
Rs. 33,00,000 was included in General Reserve.
– On 1.8.2014, the company redeemed its redeemable bonus shares for
Rs. 9,09,000.
– A shareholder holding 10% equity shares of the company borrowed
Rs.3,00,000 from the company @ 18% per annum on 31.8.2014.
– The company declared dividend of Rs. 14,00,000 at its annual general
meeting held on 30.9.2014. But the dividend remained unpaid up to
31.3.2015.
• Compute the tax liability of the company under section 115-O (tax
on distributed profits).
• Also give reasons for treatment of each item.
Solution
 Solution Contd..
• Notes :
• (1) It is assumed that the bonus shares are in the form of redeemable preference shares, since only then such
redemption is possible. If such bonus shares are issued to equity shareholders, it does not amount to distribution
of dividend at the time of issue of bonus shares, as there is no release of assets. However, when bonus shares are
redeemed, there will be release of assets and in that event it would constitute dividend under section 2(22)(a).
• (2) Borrowing by a shareholder holding 10% equity shares of the company is deemed dividend under section
2(22)(e), taxable in the hands of shareholder. Therefore, the company is not liable to pay any tax on it.
• (3) The tax on distributed profits shall be paid within 14 days from the date of declaration or distribution or
payment of any dividend, whichever is earliest. Therefore, in this case, the dividend distribution tax is payable
within 14 days of the declaration though dividend is not actually paid up to end of the previous year.
• (4) New sub-section (1B) has been inserted in section 115-O with effect from 1st October 2014, to provide that for
the purposes of determining the tax on distributed profits payable in accordance with the section 115-O, any
amount by way of dividends referred to in section 115-O(1), as reduced by the amount referred to in section 115-
O(1A) , if any, shall be increased to such amount as would, after reduction of the tax on such increased amount at
the rate specified in section 115-O(1), be equal to the net distributed profits.
• Note - As per new sub-section (1B) of section 115-O, for the purpose of grossing up, the rate specified in sub-
section (1) has to be considered. The rate specified in sub-section (1) is 15%. Further, in the example given in the
Explanatory Memorandum to the Finance (No.2) Bill, 2014, grossing up has been done at the rate of 15%.
• However, it is also possible to take the view that grossing up should be done at the rate of 16.995% (that is, 15%
plus surcharge@10% plus education cess and SHEC@3%), which is the effective rate of dividend distribution tax.
Section 115R
TAX ON DISTRIBUTED INCOME TO UNIT HOLDERS: When domestic company distributes
profit by way of dividend, the company has to pay additional tax via dividend distribution
tax. This provision is applicable to mutual fund companies too.

• No DDT on
Equity oriented
Mutual Fund.
•Rates are after
grossing up.
•Rate of
surcharge
applicable for
A.Y 2016-17
would be 12%
Section 115S

Where the person responsible for making payments of the income distributed
by the specified company or a Mutual Fund and the specified company or a
Mutual Fund, as the case may be, fails to pay the whole or any part of the tax
as is referred to in section 115R, within the 14 days mentioned above, he or it
shall be liable to pay simple interest at the rate of 1% for every month or part
thereof on the amount of such tax for the period beginning on the date
immediately after the last date on which such tax was payable and ending with
the date on which the tax is actually paid.
Section 115T
CONSEQUENCES FOR NON PAYMENT OF ADDITIONAL INCOME TAX ON INCOME
DISTRIBUTED TO UNIT HOLDERS:

Where any person responsible for making payment of income

distributed defaults to pay tax on distributed profits in accordance
with the provisions of Section 115-R, then, he or it shall be deemed to
be an assessee in default in respect of the amount of tax payable by
him or it and all the provisions of the Income-tax Act, 1961 as
applicable for the collection and recovery of taxes thereon shall apply
accordingly.
Section 115BBB

Tax on income from units of an open-ended equity oriented fund of the Unit
Trust of India or of Mutual Funds

Where the total income of an assessee includes any income from units of an open-ended equity
oriented fund of the Unit Trust of India or of a Mutual Fund, the income-tax payable shall be
the aggregate of—
(a) the amount of income-tax calculated on income from units of an open-ended equity
oriented fund of the Unit Trust of India or of a Mutual Fund, at the rate of ten per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had his
total income been reduced by the amount of income referred to in clause (a).
Tax on distributed income to investors
Section 115TA

Notwithstanding anything contained in any other provisions of the Act, any amount of income
distributed by the securitization trust to its investors shall be chargeable to tax and such
securitization trust shall be liable to pay additional income-tax on such distributed income at
the rate of—
(i) twenty-five per cent on income distributed to any person being an individual or a Hindu
undivided family;
(ii) thirty per cent on income distributed to any other person

Section 94

Dividend Stripping
Where the owner of any securities sells or transfers those securities, and buys back or reacquires the
securities, then, if the result of the transaction is that any interest becoming payable in respect of the
securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it
would or would not have been chargeable to income-tax apart from the provisions of this sub-section, be
deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any
other person
Section 94 Continued
Where—
a) any person buys or acquires any securities or unit within a period of three months prior to the record
date;
b) such person sells or transfers—
i. such securities within a period of three months after such date; or
ii. such unit within a period of nine months after such date;

c) the dividend or income on such securities or unit received or receivable by such person is exempt,
then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the
extent such loss does not exceed the amount of dividend or income received or receivable on such
securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.
Capital gains on distribution of assets by companies in
liquidation

Section 46

1. Notwithstanding anything contained in section 45, where the assets of a company are distributed to its
shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the
purposes of section 45.

2. Where a shareholder on the liquidation of a company receives any money or other assets from the company, he
shall be chargeable to income-tax under the head "Capital gains", in respect of the money so received or the market
value of the other assets on the date of distribution, as reduced by the amount assessed as dividend within the
meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value
of the consideration for the purposes of section 48

Capital gains on purchase by company of its own shares or other specified securities Section 46A

Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase
of its own shares or other specified securities held by such shareholder or holder of other specified securities, then,
subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration
received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the
capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in
which such shares or other specified securities were purchased by the company.
Section 115AD
Where the total income of a Foreign Institutional Investor includes—
(a) income other than income by way of dividends referred to in section 115-O received in respect of
securities

(b) income by way of short-term or long-term capital gains arising from the transfer of such securities,

the income-tax payable shall be the aggregate of—

(i) the amount of income-tax calculated on the income in respect of securities referred to in clause (a) at
the rate of twenty per cent :
(ii) the amount of income-tax calculated on the income by way of short-term capital gains referred to in
clause (b) at the rate of thirty per cent
(iii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in
clause (b) at the rate of ten per cent; and
(iv) the amount of income-tax with which the Foreign Institutional Investor would have been chargeable
had its total income been reduced by the amount of income referred to in clause (a) and clause (b)