Page 323 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes 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.
Basis of Charge

The Dividend Distribution Tax or DDT is in addition to income tax paid by company is:
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

Exemption to dividends out of SEZ.

!
Caution The dividend received by Assessee Company from its subsidiary shall be deducted
provided Subsidiary has paid dividend tax same amount is not taken as deduction more
than once Assessee is not a subsidiary of any other company
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 shareholding or 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.

Example: There is a company named Dividend Rich Manufacturing Company P. Ltd.
The company is a manufacturing company and money lending is not its business. Its Paid up
capital is ` 5,00,000/- (5,00,000 shares of ` 1/- each fully paid-up) Its Shareholders are: A, B, C, and
D each holding 1,25,000 shares that is each has a stake of 25% and everyone is substantially
interested. Dividend declared by the company is ` 10/- per share ` 50,00,000/-. This dividend
will have to be paid in proportion of shares held by the shareholders on the record date. In this
case as all shareholders hold equal number everyone will get equal amount of dividend that is
`12,50,000/- as dividend will be paid to each of A, B, C and D. The company is required to pay
additional tax on the sum of ` 50,00,000 distributed by way of dividend under section 115 O.
Suppose the company has accumulated a surplus of ` 10 crore. It advances a sum of ` one crore
to Mr. A as loan bearing interest @ 14% p.a. and refundable after one year. Mr. A holds 25% (that
is not less than 10% voting power) stake in the company and therefore clause (e) of subsection 22
of section 2 is applicable in his case. Any other shareholder has not taken any loan from the
company. Here lies the difference; the loan or advance is not in proportion of capital held.

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