Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Special Provisions relating to Tax on Distributed Profits of Domestic Companies

Special Provisions relating to Tax on Distributed Profits of Domestic Companies
Special Provisions relating to Tax on Distributed Profits of Domestic Companies

1.   [Section 115-O (1)]- Tax on Distributed Profits of Domestic Companies

Shall not be applicable w.e.f. 1.4.2020 as Dividend shall now be Taxable in the hands of the recipient.

2.   [Section 115-O (1A)]- Dividend received from Subsidiary Company to be reduced from the above Dividend to be Distributed

For the purpose of computation of tax on distributed profits, the amount of dividend distributed by the domestic company during the financial year shall be reduced by the following:

(i)            The amount of Dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and, –

(a)           where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or

(b)          where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend:

However, the same amount of dividend shall not be taken into account for reduction more
than once;

(ii)           the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in section 10(44).

3.   [Section 115-O(1B)]- Dividend and Income Distribution Tax to be Grossed Up

For the purposes of determining the tax on distributed profits payable in accordance with the section 115-0, any amount by way of dividends referred to in section 115-0 (1), as reduced by the amount referred to in section 115-0 (1A) [referred to as Net Distributed Profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in section 115-0(1), be equal to the net distributed profits.

See also  [Section 143(1)]- Processing of Return of Income

4.   [Section 115-0 (6)]- No tax on Distributed Profits by an Undertaking or Enterprise engaged in Developing Operating and Maintaining a Special Economic Zone (SEZ):

Notwithstanding anything contained in this section, 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 1.4.2005 out of its current income of the recipient.

Such dividend declared or distributed or paid out of its current income shall neither be taxable in the hands of such undertaking or enterprise nor it will be taxable in the hands of the recipient shareholders.

Section 115-0(6) has ceased to have effect from 1.6.2011. In other words, dividend distributed paid or declared by the undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone on or after 1.6.2011 shall be liable for dividend distribution tax @ 20.35765 % .

5.   [Section 115-0 (7)]- Exemption from Dividend Distribution Tax (DDT) on Distribution made by a SPY to Business Trust

No tax on distributed profits shall be chargeable under this section in respect of any amount declared, distributed or paid by the specified domestic company by way of dividends (whether interim or otherwise) to a business trust out of its current income on or after the specified date:

Provided that nothing contained in section 115-0(7) shall apply in respect of any amount declared, distributed or paid, at any time, by the specified domestic company by way of dividends (whether interim or otherwise) out of its accumulated profits and current profits up to the specified date.

6. [Section 115-0 (8)]- No Dividend Distribution Tax (DDT) in case of a company being a unit of an International Financial Services Centre (IFSC) deriving income solely in convertible foreign exchange

Section 115-0(8) has been amended to provide that any dividend paid out of accumulated income derived from operations in IFSC, after 1.4.2017 shall also not be liable for tax on distributed profits.

See also  [Section 139(4A)]- Return of Income of Charitable Trust and Institution

This will facilitate distribution of dividend by companies operating in IFSC.

7.   [Section 115-0 (3)]- Time Limit for Deposit of Additional Income-Tax:

Such additional tax will have to be paid by the principal officer of the domestic company and the company within 14 days from the date of:

(a)           Declaration of any dividend; or

(b)          Distribution of any dividend; or

(c)           Payment of any dividend.

whichever is earliest.

8.   [Section 115-0 (4)]- Tax on Distributed Profits Not Allowed as Deduction:

The company or the shareholder shall not be allowed any deduction in respect of the amount which has been charged to tax or the tax thereon under any provisions of the Income-tax Act.

9.   [Section 115P]- Interest payable for Non-payment of Tax by the Domestic Companies:

Where the principal officer of a domestic company and the company fail to pay the whole or any part of the tax on distributed profits referred to in section 115-0(1) within the time, he or it shall be liable to pay simple interest @ 1% for every month or part thereof on the 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.

10. [Section 115Q]- When Companies Deemed to be in Default:

If the principal officer of a domestic company and the company does not pay tax on distributed profits in accordance with the provisions of section 115-0, 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 for the collection and recovery of income-tax shall apply.

11. Penalty Under Section 271C:

If any person fails to pay the whole or any part of the tax as required under section 115-0(2), then such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to pay as aforesaid.

The penalty is, however, not applicable, if the assessee proves that there was reasonable cause for failure.

12. Prosecution Under Section 276B:

If a person fails to pay to the credit of the Central Government the tax payable by him under section 115-0(2), he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.

See also  ‘Residential Status’ under Income Tax Act. 1956

However, no person will be punishable if he proves that there was a reasonable cause for the default/failure.

13. [Section 10(34)]- Exemption of Dividend in the hands of Shareholders  :

In view of the income-tax now payable by the domestic company, any dividends declared, distributed or paid by such company, shall be exempt in the hands of the shareholders under section 10(34), unless the same is taxable under section 115BBDA.

Hence, section 10(34) shall not apply to any income by way of dividend received by the shareholder on or after 1.4.2020.

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