Page 377 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes individual benefit of a shareholder who has a substantial interest in the company would also
constitute dividend chargeable to tax in the hands of the shareholder.

Example: If a closely held company makes payment of insurance premium on behalf of
the shareholder or lends money to the shareholder or makes any advance on his behalf, the
shareholder would be deemed to have received a dividend and be chargeable to income-tax
thereon. The expression ‘shareholder’ for this purpose should be taken to mean only the registered
shareholder and not the beneficial shareholder.
Consequently in cases where the loans are given by a closely held company to a Hindu Undivided
Family of which the registered shareholder is a member, such loans would not be taxable as
dividend since the Hindu Undivided Family is not registerable as shareholder of the company.
If, however, the loans are advanced to the registered shareholders, the loans would be taxable as
dividend even though the registered shareholder may not have any personal or beneficial
interest in the shares concerned. The liability to tax in respect of such loans, advances, other
payments made by a closely held company to its substantial shareholder, would be only to the
extent to which the company possesses accumulated profits, which may or may not have been
capitalised.

Notes The types of dividend contemplated by the first four clauses viz. (a) to (d) of Section
2(22) are exempt in the hands of the shareholders.
The last category viz. 2(22) (e) which has applicability only to the shareholders of closely-
held companies or dividend from a foreign company, be taxable in the hands of shareholders.

Self Assessment

State whether the following statements are true or false:
6. Section 10(34) exempts dividend (as defined in Section 115-O) from tax in the hands of
recipients.
7. Chapter XII-D calls upon a company declaring or distributing dividend to pay 25% plus
surcharge plus Education & Secondary and Higher Education Cess.
8. 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).
9. Any division of profit between the members who earned the same would also be treated
as dividend.

10. Bonus shares are issued out of credit balance to the Profit and Loss Account and out of
reserves and the shareholders to whom the shares are issued, have to pay nothing.

13.3 Deductions in Calculating Income from Other Sources

The income chargeable under the head “Income from other sources” is the income after making
the following deductions:
1. From interest on securities: Any reasonable sum paid by way of commission or
remuneration to a banker or any other person for the purpose of realising such interest on
behalf of the assessee. Interest on money borrowed for investment in securities can be
claimed as a deduction.

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