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Unit 9: Financial Management Decisions

The interpretation of this clause is that no deduction shall be allowed to the shareholder under Notes
any provision of the Income tax Act, 1961 in respect of any expenditure which he has incurred on
collection or earning of the dividend (Sec. 14A). No deduction shall be allowed to the company
under any provision of the Income tax Act, 1961 in respect of the dividend so paid or tax
thereon.

The distributed profit on which tax is paid u/s 115-O (1) shall be exempted in the hands of share

holder u/s 10(34). The tax on distributed profits shall be payable by domestic company whether

or not such profit is distributed out of current year profit or accumulated profit. Dividend received
from a foreign company is not covered by Sec.115-O and shall not be exempted in the hands of
shareholders u/s 10(34). Such dividend is taxable in the hands of shareholder at the normal tax
rates. Dividend on both preference shares and equity shares shall be considered.
Exemptions for Companies Developing, Operating or Maintaining SEZ
[Sec. 115-O (6)]

No tax on distributed profits shall be chargeable in respect of the total income of an undertaking
or enterprise engaged in developing or developing and operating or developing, operating
and maintaining a Special Economic Zone for any assessment year on any amount declared,
distributed or paid by such Developer or enterprise, by way of dividends (whether interim or
otherwise) on or after the 1st day of April, 2005 out of the current income either in the hands of the
Developer or enterprise or the person receiving such dividend. The provision of this sub-section
is done away with effect from 1-6-2011. Accordingly dividend distribution tax is chargeable on
amount declared, distributed by way of dividend by the said undertaking or enterprise after
1-6-2011.

Section 115-P: Interest Payable for Non-payment of Tax by Domestic Companies

Where the principal officer of domestic company and the company fail to pay the whole or any

part of tax on distributed profits within the time i.e. 14 days, he or it shall be liable to pay simple
interest @ 1% for every month or part thereof on amount of such tax for the period beginning on
the date immediately after the last date on which such tax was payable and ending with the date
on which the tax is actually paid.
Section 115-Q: Consequences for Non-payment of Dividend Distribution Tax

If principal officer of a domestic company and the company does not pay tax on distributed

profits in accordance with the provisions of Section 115-O, then, he or it shall be deemed to be an
assessee in default in respect of the amount of tax payable by him or it and all the provisions of
the Income Tax Act, 1961 for the collection and recovery of income tax shall apply. The assessee
who is deemed to be in default in making the payment of tax on distributed profits is liable for

penalty under section 221 of the Act.

Notes DDT is payable by a company and not by the shareholder. Any deduction from the
base which is subject to the DDT will only be advantageous to the Company and not to
the shareholder. If the intention is to provide more dividend to small shareholders (on the
presumption that the same is not subject to the DDT), then the rate of dividend payable to
this class of shareholders will be different from the rate of dividend paid to others, which
is not permissible under the Companies Act.
1. Dividend distribution tax is the tax levied by the Indian Government on companies
according to the dividend paid to a company’s investors.
Contd...

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