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A shareholder’s reward for investing in a company, dividends represent a portion of company’s profits distributed back to its owners. It’s essentially a financial return on your investment.

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The different types of Companies is as follows:

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Dividend Income from Domestic Company or Foreign Company taxable in the hands of Shareholder at Normal Tax Rate.

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In reality these payments are not Dividend but for the purpose of Income Tax they are treated as dividends. The objective is to plug the loopholes in tax provisions & to check avoidance.

Following transaction are deemed to dividends as per Income Tax.

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Section 2(22)(a): Any distribution of assets

Section 2(22)(b): Any distribution of Debentures, Deposit Certificate etc.

Section 2(22)(c): Distribution of assets on Liquidation.

Section 2(22)(d): Reduction of share capital.

Section 2(22)(e): Loans or advances by closely held companies.

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Section 2(22)(a) states that any distribution of Assets by a company to its shareholders to the extent the company possesses accumulated profits whether capitalized or not is to be treated as deemed dividen.

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NOTES:

In case of Bonus shares, there is no release of assets hence, issue of bonus shares is not deemed as dividend.

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When assets are distributed u/s 2(22)(a), the FMV of the asset on the date of distribution has to be taken for computing the dividend.

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Section 2(22)(b) states that the following are to be treated as deemed dividend.

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Section 2(22)(c) mandates that any distribution of assets by the company on liquidation to the extent to which company possesses accumulated profit whether capitalized or not.

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Section 2(22)(d) mandates that any distribution to its shareholders by the company on reduction of its capital to the extent to which company possesses accumulated profit whether capitalized or not.

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Section 2(22)(e) mandates that any payment by the company, not being a company in which the public are substantially interested of any sum/ payment:

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DIVIDEND SHALL NOT INCLUDES:

Dividend shall not include: –

Investment Fund means Category I or Category II Alternative Investment Fund and is regulated under the SEBI (Alternative Investment Fund) Regulations, 2012 or under the IFSC Authority Act, 2019.

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The tax rate and the taxability of income of Investment Fund is as follows:

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Since, the income distributed (except PGBP) is chargeable in the hand of Unit Holders, the Investment Fund is required to deduct TDS u/s 194LBB on income distributed at the rate mentioned below:

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If in any Year there is a loss under any head of Income at the Fund level then first fund will be set-off such losses and if such loss cannot be or is not wholly set-off against income under any other head of income, then such losses:

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NOTE 1: If the unit holders did not hold the units for 12 months, then such losses will not be allowed to unit holders as well as the Investment Fund.

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NOTE 2: Before 01.04.2019 all losses were carried forward by Fund only but from 01.04.2019 losses other than PGBP allowed to be carried forward to unit holders so any accumulated losses (other than PGBP) at fund level on 31.03.2019 shall be distributed to unit holders holding units on 31.03.2019 and allowed to be carried forward and set off by unit holders for remaining period.

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Securitization is a financial process that involves pooling and packaging various types of assets, which are then sold to investors with cash flow from underlying assets to make interest and principal payments to the investors. The Securitization Trust is the financial vehicle used in the process of securitization and plays a crucial role in converting various types of liquid financial assets into marketable securities.

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The tax rate and the taxability of income of Securitization Trust is as follows:

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Since, the income distributed by trust is chargeable to tax in the hand of Investors, the Securitization Trust is required to deduct TDS u/s 194LBC on income distributed at the rate mentioned below:

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NOTE:

The Securitization Trust & Investment Fund shall provide break up regarding nature and proportion of its income and other details to unit holder/ investor upto 30^th June of the F.Y. following the P.Y. and Income Tax Authority (CIT/PCIT) upto 30^th November (15^th June in case of investment fund) of the Financial Year following the Previous Year.

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Income of Minor child is taxable in hands of the parent whose income is more before clubbing minor’s income.

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Exception: In the following 3 cases minor’s income is taxable in the hands of minor only: –

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If any Individual transfers any assets to his or her spouse without consideration on for inadequate consideration the income from such asset is received by spouse but tax on such income is paid by transferor (Assessee).

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NOTES:

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If any individual transfers any asset to his/ her son’s wife without consideration or for inadequate consideration, then income from such asset is received by son’s wife but tax on such asset is paid by transferor.

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The provision of this section is applicable only if the relationship of mother/ father-in-law & daughter-in-law exists at the time of transfer of asset as well as at the time of generating the income.

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If an individual transfers any asset to any person without consideration or for inadequate consideration for the benefit of son’s wife/ spouse, then income from such asset is received by any other person (transferee) but tax on such income is paid by transferor.

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Income of spouse is taxable in hands of assessee if the following conditions are satisfied.

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(Assessee+   substantial int.  remuneration

Relative)  Concern   spouse  

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Substantial interest means 20% or more shareholding or profit-sharing ratio in a company/ firm.

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Exceptions:

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If an individual transfers any income without transfer of asset, then such income is taxable in the hand of the transferor.

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In case of revocable transfer, income is received by transferee, but tax is paid by the transferor.

However, if the transfer is revoked after the death of beneficiary or transferee then the above provision is not applicable.

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If any individual transfer any asset to his HUF without/ for inadequate consideration, the income from such asset is received by HUF but taxable in hands of transferor (member).

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After Partition of HUF, Income from such asset received by spouse shall be clubbed in hands of transferor.

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NOTES:

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This section applies where there has been an Amalgamation of: –

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NOTE: –

If all the above conditions are satisfied, then the accumulated losses and unabsorbed depreciation shall be deemed to be of the amalgamated company for the P.Y in which amalgamation was effected i.e. accumulated losses can be carry forward for fresh 8 Years.

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DEEMED INCOME: –

If any of the above conditions are not complied with, set off loss or depreciation made in any P.Y in the hands of Amalgamated Company shall be deemed to be the income of the Amalgamated Company chargeable to tax in the year in which such conditions are not complied with.

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Allowability of carry forward and set-off of accumulated loss and unabsorbed depreciation by resulting company: Where there has been a demerger of an undertaking,

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It means any undertaking which is engaged in: –

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Where a change in shareholding has taken place during the P.Y in the case of a closely held company, no loss incurred in any year prior to the P.Y shall be carried forward and set-off against the income of the P.Y, unless on the last day of the P.Y, at least 51% of equity shares were held by persons who held at least 51% of the equity shares on the last day of the year or years in which the loss was incurred.

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Provided that even if the above condition is not satisfied in case of eligible start-up (80-IAC), loss incurred in any year prior to the P.Y shall be allowed to be carried forward and set off against the income of the P.Y if all the equity shareholders of such company who held shares on the last day of the year or years in which the loss was incurred, continued to hold those shares on the last day of such P.Y and such loss has been incurred during the period of 10 years from the year in which such company is incorporated.

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Following changes in shareholding shall not be considered as a change in shareholding:

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Example 1:

Loss Incurred by Nayan Pvt. Ltd. in P.Y 2023-24 & earned income for P.Y 2024-25.

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Losses of P.Y 2023-24 can be set off against income of P.Y 2024-25 because 51% or more equity shares held by the same person on 31/03/2024 and 31/03/2025.

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Example 2:

Loss Incurred by Nayan Pvt. Ltd. in P.Y 2023-24 & earned income for P.Y 2024-25.

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Losses of P.Y 2023-24 cannot be set off against income of P.Y 2024-25 because 51% or more equity shares are not held by the same person as on 31/03/2024 and 31/03/2025. However, if Nayan Pvt. Ltd. is an eligible start-up as per section 80-IAC the losses of P.Y 2023-24 can be set off because all the shareholders on 31/03/2024 continue as shareholders on 31/03/2025. (Assume loss incurred in the first 10 Years of incorporation).

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Example 3:

Loss Incurred by Nayan Pvt. Ltd. in P.Y 2023-24 & earned income for P.Y 2024-25.

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Losses of P.Y 2023-24 cannot be set off against income of P.Y 2024-25 because 51% or more equity shares are not held by the same person as on 31/03/2024 and 31/03/2025. However, if Nayan Pvt. Ltd. is an eligible start-up as per section 80-IAC the losses of P.Y 2023-24 still cannot be set off against the income of P.Y 2024-25 because all the shareholders as on 31/03/2024 are not shareholders as on 31/03/2025.

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Where consequent to a search u/s 132 or a requisition us/ 132A or a survey u/s 133A (other than TDS/ TCS survey), the total income of any P.Y of an assessee includes any undisclosed income, set-off of any losses or unabsorbed depreciation not allowed against such undisclosed income.

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Undisclosed income means: –

Association of person: The Indian Income Tax Act, 1961, defines AOP (Association of person) as an integration of person for a mutual benefit or a common purpose. They may be individual or artificial person such as LLP or a Company. For example, two companies may join together and form an AOP for the achievement of a common objective.

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Body of individual: BOI (Body of Individuals) is similar to an AOP and is also an accumulation of individuals who have come together with an objective of earning some income. For example, two individuals may get together and do something together to earn some income.

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An Association of Persons (AOP) and a Body of Individuals (BOI) convey two different arrangements of people. The fact that both of these expressions at time are used interchangeably doesn’t justify the respective interpretation. We need to stop interchanging the usage of these words as they represent two different compositions.

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There are certain differences between an Association of Persons and Body of Individuals. A person in AOP could be a company or an individual person. The term person could include any association, body of individuals or company, irrespective of whether it is incorporated or not.

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However, in a BOI, only individuals can join with the intention of earning some income. Hence, we can say, BOI only comprises of individuals, whereas an AOP could include legal entities.

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The tax rates of AOP/ BOI are as follows:

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Example:

KJ Associates is an Association of Person (AOP) consisting of two members, J and K, Shares of the members are: 60%(K) and 40%(J). Income of the AOP for the previous year 2024-25 is Rs. 10 lakhs.

Compute the tax liability of AOP and the members in the following situations, assuming K & J do not opt to pay tax as per Section 115BAC:

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Solution:

Taxability of KJ Associates

Taxability of K & J

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Interest, salary, bonus, commission paid by AOP/ BOI to its members it shall be disallowed while computing PGBP.

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NOTE:

If any interest is received from the member to whom any interest is paid, then only the Net Interest shall be disallowed.

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Member share in AOP/ BOI can be computed as below:

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Why we need to compute member share?

AOP/ BOI is already chargeable to tax so members share should be exempt in their individual hands but if AOP/ BOI paid taxes as per slab rates then members share in income of AOP/ BOI shall be included in total income of members & members will claim rebate u/s 86. If AOP/ BOI has paid taxes @ MMR then members share shall not be included in the total income of members.

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Computation of total income & tax of member

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Summary: –

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A political party means a political party registered under Section 29A of the Representation of the People Act, 1951.

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A political party is a group of people who come together to contest elections and hold power in the government. They agree on some policies and programs for the society with a view to promote the collective good.

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Political parties are barred from taking any activity of commercial nature and thereby earning profits. Political parties are allowed to accept voluntary contributions under Representation of the People Act, 1951. Further they may also own immovable properties or deposit from which they can earn income like interest, rent etc. Political parties may also have income from sale of coupons, membership fees collected, and more.

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However, Section 13A has given 100% exemption to political parties on their income from House property, income from other sources, capital gains and voluntary contribution received from any person subject to certain conditions which have been discussed below:

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Conditions for applicability of Section 13A

Political parties are exempted from paying tax under Section 13A if they fulfil the following conditions.

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Example:

The books of accounts maintained by a National Political Party registered with Election Commission for the year ended 31.03.2024 is as follows:

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The income of the Political Party is fully exempt as per Section 13A if they fulfil the conditions mentioned therein. Since, in the given question the political party has violated the conditions like accepting cash donations of more than Rs. 2,000 and not maintaining records of persons giving donations more than Rs. 20,000 they are liable to pay tax on its total income which is computed as below:

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Yes, even though the specified income of Political Party is fully exempt as per Section 13A, it is not given any relief from furnishing of income. All Political parties are mandatorily required to file return of income on or before the due date of filing of return, if the income exceeds maximum amount not chargeable to tax (limit is considered before taking into consideration Section 13A exemption). Tax slab applicable to political parties is as Follows:

Slab rate under old scheme for Political Parties: –

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Slab rate for Political Parties under new scheme is as follows: –

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Political Parties are required to furnish their return of income in form ITR-7. ITR contains following major information to be filed by the political parties:

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Corporate donors are eligible to claim deductions on its donations to political parties under Section 80GGB and any other person (except local authority and every artificial juridical person wholly or partly funded by the government) can claim exemptions under Section 80GGC, unless such contributions are made in cash.

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A business trust is defined under Section 2(13A) of the Income Tax Act, 1961 as a trust registered as (amended by Finance Act, 2020):

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Real Estate Investment Trust (REIT) is a trust that owns and manages income generating developed properties and offers its unit to public investors. REIT’s own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels etc.

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Infrastructure Investment Trust (InvIT) make direct investment in infrastructure facilities which are yielding e.g. Toll Road, Railways, Inland waterways, Airport, Urban public transport. InvIT will allow infrastructure developers to monetize specific assets, helping them use proceeds for completing projects of their stalled for want of funds.

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Structure of InvIT is quite similar to REITs. The main difference is InvIT make investment into infrastructure facilities whereas REITs make investments in commercial real estate properties.

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The taxability in hands of business Trust is as follows:

Specified sum received by unit holder from Business Trust during the P.Y shall be taxable.

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Specified sum = A-B-C (which shall be deemed to be “0” if sum of B and C is greater than A), where –

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A= aggregate of sum distributed by the Business Trust, which is, –

B= amount at which such unit was issued by the business trust; and

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C= amount charged to tax under this clause in any earlier P.Y.

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Reasons for the amendment:

In some circumstances, Business Trust make distribution to unitholders which can be categorized into 4 different categories – (i) Interest (ii) Dividend (iii) rental income and (iv) repayment of debt. As explained above, interest, dividend and rental income have been exempted at the level of Business Trust and are taxable in the hands of Unit Holders.

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However, in respect of the distribution made by Business Trust to Unit Holders (which is shown as repayment of debt) nothing is taxable in the hands of Business Trust or Unit Holders. To remove such dual non-taxation of any distribution made by the Business Trust to Unit Holders (i.e. which is exempt in the hands of the Business Trust as well as Unit holders).

FEW IMPORTANT POINTS.

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The following are the types of assesse other than Individuals: –

The Residential Status of an HUF depends upon two factors, the location of control and management of it affairs and the residential status of its Karta.

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NOTE:

For the purpose of calculating the period of Karta’s stay in India, we shall add up the stay in India of all successive Karta’s of the Family, in case of death of First Karta.

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Example:

Head office of Arun & HUF, a Hindu undivided family is situated in Australia is managed by Mr. Arun, who is a resident in India only 2 years out of 10 years during the previous year 2024-25. Determine the residential status of HUF for A.Y 2025-26, if the affairs of the family business are (i) wholly controlled from Australia (ii) partly controlled from India.?

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In the first case since the affairs of the HUF are controlled and managed wholly outside India, HUF will be considered as Non-Resident in A.Y 2025-26.

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In the second case, the affairs of the HUF are controlled partly from India. Therefore, HUF is a resident in India in the A.Y 2025-26. However, since Mr. Arun does not satisfy both the above-mentioned conditions. The HUF will be considered as Resident but not Ordinarily Resident.

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Firms and other Association of Persons can fall under two categories only. They may either be residents or non-residents. The category of non-ordinarily residents does not apply to such assessee.

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Example:

A firm has five partners who are permanent resident in India. The firm owns a rubber estate in Malaysia. The estate is managed and controlled by the partners in India, through an agent in Malaysia. Determine the residential status of the firm.

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Even if the control and management of the firm is partly situated in India, the firm becomes resident. Here, all the partners reside in India and manage at least a part of affairs of the estate. As such, the firm is resident in India.

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Resident status of a company is explained below:

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“Place of effective management” means a place where key management and commercial decision that are necessary for the conduct of the business of an entity are in substance made.

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Example:

International Remedies is a registered company in Germany, and has a registered office in Germany, but the management and control are situated wholly in India. What will be the residential status of the company for tax purposes?

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As the company’s control and management is situated wholly in India, it will be resident in India and the location of registered office of the company is immaterial.

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If in the above question if the control and management is partially situated in India, the company is non-resident in India for tax purposes.

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The Indian chemicals limited is a registered Indian Company carrying business in India and in gulf countries. The control and management of affairs was partially situated in Riyadh during the year ending March 2025. What will be the resident status of the company for A.Y 2025-26?

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The Indian chemical limited is an Indian company, therefore it will be treated as a resident in India irrespective of the fact that its POEM is partially outside India..