Definition of Dividend :
Dividend [Section 2(22)] : The term ‘dividend‘ as used in the Act has a wider scope and meaning than under the general law. According to section 2(22), the following receipts are deemed to be dividend:
(a) Distribution of accumulated profits, entailing the release of company’s assets – Any distribution of accumulated profits, whether capitalised or not, by a company to its shareholders is dividend if it entails the release of all or any part of its assets. For example, if accumulated profits are distributed in cash it is dividend in the hands of the shareholders. Where accumulated profits are distributed in kind, for example by delivery of shares etc. entailing the release of company‘s assets, the market value of such shares on the date of such distribution is deemed dividend in the hands of the shareholder.
(b) Distribution of debentures, deposit certificates and bonus shares to preference shareholders – Any distribution to its shareholders by a company of debenture stock or deposit certificate in any form, whether with or without interest, and any distribution of bonus shares to preference shareholders to the extent to which the company possesses accumulated profits, whether capitalised or not, will be deemed as dividend. The market value of such bonus shares is taxable in the hands of the preference shareholder. In the case of debentures, debenture stock etc ., their value is to be taken at the market rate and if there is no market rate they should be valued according to accepted principles of valuation.
Note: Bonus shares given to equity shareholders are not treated as dividend.
(c) Distribution on liquidation – 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, is deemed to be dividend income.
Note: Any distribution made out of the profits of the company after the date of the liquidation cannot amount to dividend. It is a repayment towards capital. Accumulated profits include all profits of the company up to the date of liquidation whether capitalised or not. But where liquidation is consequent to the compulsory acquisition of an undertaking by the Government or by any corporation owned or controlled by the Government, the accumulated profits do not include any profits of the company prior to the 3 successive previous years immediately preceding the previous year in which such acquisition took place subject to certain exceptions.
(d) Distribution on reduction of capital – Any distribution to its shareholders by a company on the reduction of its capital to the extent to which the company possessed accumulated profits, whether capitalised or not, shall be deemed to be dividend.
Exception – The same exceptions as given in case (c) above shall also apply in this case.
(e) Advance or loan by a closely held company to its shareholder – Any payment by a company in which the public are not substantially interested of any sum by way of advance or loan to any shareholder who is the beneficial owner of 10% or more of the equity capital of the company will be deemed to be dividend to the extent of the accumulated profits. If the loan is not covered by the accumulated profits, it is not deemed to be dividend.
There are two exceptions to this rule:
(i) If the loan is granted in the ordinary course of its business and lending of money is a substantial part of the company‘s business, the loan or advance to a shareholder is not deemed to be dividend.
(ii) Where a loan had been treated as dividend and subsequently the company declares and distributes dividend to all its shareholders including the borrowing shareholder, and the dividend so paid is set off by the company against the previous borrowing, the adjusted amount will not be again be treated as a dividend. Advance or loan by a closely held company to a specified concern – Any payment by a company in which the public are not substantially interested to any concern (i.e. HUF / Firm / AOP / BOI / Company) in which a shareholder, having the beneficial ownership of atleast 10% of the equity shares is a member or a partner and in which he has a substantial interest (i.e. atleast 20% share of the income of the concern). The dividend income shall be taxable in the hands of the concern. Also, any payments by such a closely held company on behalf of, or for the individual benefit of any such shareholder will also deemed to be dividend. However, in both cases the ceiling limit of dividend is the extent of accumulated profits.
Illustration : Suppose Mr. X is a shareholder in a Company A as well as Company B. He has 10% shareholding in Company A and 20% shareholding in Company B. The ac cumulated profits of Company A = Rs 10 lakh. A loan of Rs 12 lakh is given by Company A to Company B. This loan up to the extent of accumulated profits of ` 10 lakh is treated as dividend and is taxable in the hands of Company B.
Other exceptions
Apart from the exceptions cited above, the following also do not constitute ―dividend –
(i) 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;
(ii) any distribution of shares on demerger by the resulting companies to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).
Basis of charge of dividend: Any income by way of dividends, referred to under section 115- O, is excluded from the total income of the shareholder [Section 10(34)]. Under section 115 -O, any dividend declared, distributed or paid by a domestic company, whether out of current or accumulated profits, shall be charged to additional income-tax at a flat rate of 15% in addition to normal income-tax chargeable on the income of the company. This is known as corporate dividend tax. Corporate dividend tax is not leviable on deemed dividend under section 2(22)(e). Hence, the same will be taxed in the hands of the shareholder. Dividends received from a company, other than a domestic company, is still liable to tax in the hands of the shareholder. For example, dividend received from a foreign company is liable to
tax in the hands of the shareholder. Year of accrual of dividend : Section 8 provides that deemed dividend under section 2(22) declared by a company or distributed or paid by it shall be deemed to be the income of the previous year in which it is 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 is unconditionally made available to the member who is entitled to it.