Blank Company Profile Business Presentation in Blue Navy Modular Style (1)

TAXATION ON DIVIDEND & DEEMED DIVIDEND

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TAXATION ON DIVIDEND & DEEMED DIVIDEND

1.What do you mean by Dividend?

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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2.What are the different types of Companies?

The different types of Companies is as follows:

TYPE

DEFINITION

·      Indian Company

A Company formed and registered under the Companies Act, 2013 or any law of the state.

·      Domestic Company

Indian Company or any other company (foreign company) who made prescribed arrangement for the declaration and a payment of dividend within India. Thus, all Indian Co. are treated as domestic company, but all domestic company are not treated as Indian Company.

 

If a foreign company makes prescribed arrangements for payment of dividends in India, it shall be treated as Domestic Company.

·      Foreign Company

Company which is not a domestic company.

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3.Taxability of Dividend

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

TYPE OF DIVIDEND

TAXABILITY

·      Final Dividend

It is Taxable in the year in which it is declared at the AGM by company

·      Deemed Dividend

It is Taxable in the year in which it is distributed/ paid by the company.

·      Interim Dividend

It is Taxable in the year in which it is received by shareholder.

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4.What do you mean by Deemed Dividend?

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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5.What is Section 2(22)(a)?

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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6.What is Section 2(22)(b)?

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

S.NO

DEEMED DIVIDEND

1.     

Any distribution to its shareholders by the company of debentures, debentures stock or deposit certificates to the extent which company possesses accumulated profit whether capitalized or not and

2.     

Any distribution to its preference shareholders of shares by way of bonus to the extent which company possesses accumulated profit whether capitalized or not.

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7.What is Section 2(22)(c)?

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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8.What is Section 2(22)(d)?

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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9.What is Section 2(22)(e)?

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:

a)By way of advance or loan to a shareholder, who is the beneficial owner of shares holding not less than 10% of the voting power, to the extent to which the company possesses accumulated profits.
b)To any concern in which such shareholder is a member or a partner and in which he has substantial interest, to the extent to which the company possesses accumulated profits.
c)By such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company possesses accumulated profits.

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NOTES:

1.Concern means HUF, Firm, Company, AOP/ BOI.
2.Substantial interest means 20% or more voting power/ Profit sharing ratio at any time during the P.Y.
3.If loan is repaid or Company charges market rate of interest, then also loan is treated as deemed dividend.
4.Accumulated profit means profit as per Companies Act (means accounting profit).
5.Section 2(22)(e) is not applicable in case of trade advances means advance which is in the nature of commercial transactions.
6.If loan and advances given to concern then it is treated as deemed dividend in the hands of the concern but as per some court judgments its taxable in the hands of the shareholders.

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DIVIDEND SHALL NOT INCLUDES:

Dividend shall not include: –

1.Any advance or loans given by Company in the Ordinary course of its business of money lending, where money lending is “substantial part” of the business. Substantial part of the business has to be understood on case-to-case basis. The relevant factors can be turnover, profits, manpower, capital employed etc.
2.Any dividend paid by a company, which is set off against the loan which has been deemed as dividend u/s 2(22)(e).
3.Shares allotted to shareholder of demerged Company by resulting company under Demerger.
4.Any distribution made u/s 2(22)(c)/2(22)(d) in respect of preference shares.

Difference between 2(22)(a)/(b)/(c)/(d) & 2(22)(e)

S.NO

2(22)(a)(b)(c)(d)

2(22)(e)
1.

Treated as deemed dividend to the extent accumulated profits whether capitalized or not

Treated as deemed dividend to the extent of accumulated profit.
1.

Applicable to all the companies whether closely held or not.

Applicable to only closely held companies.

NOTES

Distributed treated as deemed dividend to the extent of accumulated profits. In case of accumulated losses, the above provision shall not apply. Accumulated profit means profit/ reserves created through P&L A/c.

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Capitalized means issue of bonus shares, transfers to capital reserves etc. shall also be included in accumulated profits.

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