Discussion of amended Section 10(35), section 115-O, section 194, Section 115BBDA, section 57, section 80M as per Finance Act, 2020 in detail.
Upto AY 2020-2021, dividend income received by shareholder of domestic company shall not liable to pay tax on such dividend as per section 10(34) of the Act. However, in such case, the domestic company shall be liable to pay dividend distribution tax (DDT) on such dividend under section 115-O of the Act.
As per Finance Act, 2020, provisions of section 115-O has been amended to exempt the company to pay DDT on dividend distributed on or after 01-04-2020. Thus, after 01-04-2020, company shall not be liable to pay DDT on dividend and hence, company is exempt. Now, the burden of tax has been shifted on shareholder and they will be liable to pay tax on such dividend income.
To bring this into force, various provisions of Finance Act, 2020 has been amended, which we will be discussing further in this post.
Definition of Dividend
Dividend usually refers to the distribution of profits by a company to its shareholders. However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:
(a) Distribution of accumulated profits to shareholders entailing release of the company's assets;
(b) Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits;
(c) Distribution made to shareholders of the company on its liquidation out of accumulated profits;
(d) Distribution to shareholders out of accumulated profits on the reduction of capital by the company; and
(e) Loan or advance made by a closely held company to its shareholder out of accumulated profits
but "dividend" does not include—
(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;
(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965
(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company
(iii) 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 within the meaning of sub-clause (e), to the extent to which it is so set off;
(iv) Any payment to shareholders on buyback of shares of the company
(v) 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).
Taxability of dividend received on or after 01-04-2020
Domestic Companies obligations
1. Amendment in section 115-O
Relevant text- Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003 [but on or before the 31st day of March, 2020], whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent
* Inserted by Finance Act 2020
It means domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after 01-04-2020.
2. Amendment in Section 194
Relevant text- The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment [by any mode] in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend 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, deduct from the amount of such dividend, income-tax [at the rate of ten per cent] :
Provided that no such deduction shall be made in the case of a shareholder, being an individual, if—
(a) the dividend is paid by the company by [any mode other than cash]; and
(b) the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed [five thousand] rupees:
Provided further......................no amendment
Provided [***] - Deleted
*Amended by Finance Act 2020
It means as per the Section 194, which shall be applicable to dividend distributed, declared or paid on or after 01-04-2020, an Indian company shall deduct tax at the rate of 10% from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds Rs. 5,000.
Taxability in hands of shareholders
1. Amendment in Section 10 (34)
Relevant Text- Section 10 - In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included -
(34) any income by way of dividends referred to in section 115-O :
Provided that nothing in this clause shall apply to any income by way of dividend chargeable to tax in accordance with the provisions of section 115BBDA;
*Provided further that nothing contained in this clause shall apply to any income by way of dividend received on or after the 1st day of April, 2020 other than the dividend on which tax under section 115-O and section 115BBDA, wherever applicable, has been paid
*Inserted by Finance Act, 2020, w.e.f. 1-4-2021
It means section 10(34), which provides an exemption to the shareholders in respect of dividend income, is withdrawn from Assessment Year 2021-20. Thus, dividend received during the financial year 2020-21 and onwards shall now be taxable in the hands of the shareholders.
2. Amendment in Section 115BBDA - Tax on certain dividends received from domestic companies.
Relevant Text- Notwithstanding anything contained in this Act, where the total income of a specified assessee, resident in India, includes any income in aggregate exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company or companies [on or before the 31st day of March, 2020], the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends.
It means section 115BBDA which provides for taxability of dividend in excess of Rs. 10 lakh will not be applicable on dividends received after 31st day of March, 20 and the entire amount of dividend shall be taxable in the hands of the shareholder.
Taxability of dividends as per the nature of Income in hands of shareholders
1. A person can deal in securities either as a trader or as an investor.
The income earned by him from the trading activities is taxable under the head business income. Thus, if shares are held for trading purposes then the dividend income shall be taxable under the head business or profession.
Whereas, if shares are held as an investment then income arising in nature of dividend shall be taxable under the head other sources
2. Deductions from dividend income
Where dividend is assessable to tax as business income, the assessee can claim the deductions of all those expenditures which have been incurred to earn that dividend income such as collection charges, interest on loan etc.
Whereas if dividend is taxable under the head other sources
Amendment in Section 57
A new proviso has been inserted by Finance Act,2020-
Provided that no deduction shall be allowed from the dividend income, or income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or income in respect of units from a specified company defined in the Explanation to clause (35) of section 10, other than deduction on account of interest expense, and in any previous year such deduction shall not exceed twenty per cent of th