Page 126 - DCOM508_CORPORATE_TAX_PLANNING

Unit 5: Computation of Taxable Income of Companies

4. applicable whether the dividend is paid out of current profits or accumulated profi ts; Notes
5. 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 profi t,

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 share holding 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 ` 500000/- (500000 shares of ` 1/- each fully paid-up) Its Share holders are: A, B, C,
and D each holding 125000 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 crores. 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.

The sum of ` one crore, is not dividend for the purpose of Chapter XII D as it is expressly excluded
from the scope of dividend for the purpose of the entire chapter. Therefore, the amount of loan
granted to Mr. A, may be deemed dividend under clause (e) of sub section (22) of section 2 but
it is not dividend for the purpose of Chapter XII D. Therefore, the company will not be liable to
additional tax on this sum. The shareholder Mr. A, may be liable to tax by deeming such sum as

dividend u/s 2 (22) (e), unless, he is able to bring it in some exempted category specified in section
2 (22) or if it can be established that the shares are eligible only for a fixed rate of dividend.

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