Page 17 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes Any consideration received for issue of shares as exceeds the fair market value of
shares referred to in section 56(2)(viib).
(4) Dividend [Section 2(22)]: The term ‘dividend’ as used in the Act has a wider scope and
meaning than under the general law. According to section 2(22) of the Act, the following
receipts are deemed to be dividend:
(a) Distribution of accumulated profits, entailing the release of company’s assets: Any

distribution of accumulated profits, whether capitalised or not, by a company to its

shareholders is dividend if it entails the release of all or any part of its assets. For

example, if accumulated profits are distributed in cash it is dividend in the hands of

the shareholders. Where accumulated profits are distributed in kind, for example by
delivery of shares etc. entailing the release of company’s assets, the market value of
such shares on the date of such distribution is deemed dividend in the hands of the
shareholder [section 2(22)(a)].
(b) Distribution of debentures, deposit certificates and bonus shares to preference shareholders:

Any distribution to its shareholders by a company of debenture stock or deposit

certificate in any form, whether with or without interest, and any distribution of
bonus shares to preference shareholders to the extent to which the company possesses
accumu lated profits, whether capitalised or not, will be deemed as dividend.

The market value of such bonus shares is taxable in the hands of the preference
shareholder. In the case of debentures, debenture stock etc., their value is to be taken
at the market rate and if there is no market rate they should be valued according to
accepted principles of valuation [section 2(22)(b)].

!
Caution Bonus shares given to equity shareholders are not treated as dividend.
(c) Distribution on liquidation: Any distribution made to the shareholders of a company
on its liquidation, to the extent to which the distribution is attributable to the
accumulated profits of the company immediately before its liquidation, whether

capitalised or not, is deemed to be dividend income [section 2(22)(c)].

Notes Any distribution made out of the profi ts of the company after the date of the liqui-
dation cannot amount to dividend. It is a repayment towards capital

Accumulated profits include all profits of the company up to the date of liquidation

whether capitalised or not. But where liquidation is consequent to the compulsory
acquisition of an undertaking by the Government or by any corporation owned or

controlled by the Government, the accumulated profits do not include any profi ts
of the company prior to the 3 successive previous years immediately preceding the
previous year in which such acquisition took place subject to certain exceptions.
!

Caution The dividend does not include a distribution made in accordance with sub-clause
(c) in respect of any share issued for full cash consideration, where the holder of the share
is not entitled in the event of liquidation to participate in the surplus assets.
(d) Distribution on reduction of capital: Any distribution to its shareholders by a company
on the reduction of its capital to the extent to which the company possessed

accumulated profits, whether capitalised or not, shall be deemed to be dividend
[section 2(22)(d)].

12 LOVELY PROFESSIONAL UNIVERSITY