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Income Tax Laws – I

Notes 3. The entire income of winnings, without any expenditure or allowance or deductions
under Sections 80C to 80U, will be ………………………..
4. If the income by way of interest on securities is not chargeable to income-tax under the
head …………………….than it is charged under income from other sources.
5. Where any sum of money, the aggregate value of which exceeds ……………………………,
is received without consideration is taken as income from other sources.

13.2 Tax Treatment for Dividends

Section 10(34) exempts dividend (as defined in Section 115-O) from tax in the hands of recipients
thereof. Section 115-O, the main operative provision in the newly introduced Chapter XII-D,
however, calls upon a company declaring or distributing dividend to pay 15% plus surcharge
plus Education & Secondary and Higher Education Cess by way of tax on distributed profits in
addition to what it is liable by way of tax on its income in the normal course. This tax on
distribution paid by a company is not available for deduction under any provision of the Act.

Dividend for the purpose of Section 115-O and by extension for the purpose of Section 10(33) is
the same as defined in Section 2(22) except that clause (e) thereof shall not be treated as dividend
for both these purposes.

Notes The scheme of taxation of dividend can be summarized as under:
(a) Dividends or any other income distributed by UTI or a foreign company, are
chargeable to tax under this head.
(b) In respect of dividend under clause (e) of Section 2(22) the status quo continues i.e.
the specified persons receiving loans and advances from a closely-held company
will continue to pay tax as earlier on these receipts and the company giving such
loans and advances will not be liable to tax like it was earlier. It may be pointed out
that tax liability under clause (e) of Section 2(22) would be extremely unlikely now
that there is no need for the dominant shareholders of closely-held companies to
combine dividend with the character of loan or advance to avoid tax liability because
dividend is no longer taxable in the hands of shareholders. Against this backdrop,
the discussion hereunder may be studied.

13.2.1 Meaning of the Term ‘Dividend’ [Section 2(22)]

The term ‘dividend’ is ordinarily used to refer to any distribution made by a company to its
shareholders out of its profits in proportion to the number of shares held by the shareholder
concerned in the company. Apart from the distribution made by the company, any division of
profit between the members who earned the same would also be treated as dividend under the
general meaning of expression. For purposes of income-tax, the definition of dividend is given
in Section 2(22) of the Income-tax Act.

The definition, although not exhaustive and comprehensive, is having the effect of over-riding
anything else to the contrary contained in any other law for the time being in force. The definition
given in the Income-tax Act is enumerative and inclusive in nature and does not precisely
specify as to what exactly is meant by the term dividend. Consequently, any money received by
a shareholder which may not fall within the various items specified in the Income-tax Act may
still be considered and taxable as dividend except in cases where a different interpretation or
inference could be had in the circumstances of the case.

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