457. Deferred dividends declared in terms of Companies (Temporary Restrictions on Dividends) Amendment Act, 1975 – Whether taxable in the year of declaration or in the year of its actual payment
1. Section 5A(2) of the Companies (Temporary Restrictions on Dividends) Amendment Act, 1975 effective from March 1, 1975 permits the companies to declare dividends in excess of the distributable profits. However, the dividends in excess of the distributable profits are to be paid after the expiry of two years in two equal annual installments together with interest due thereon at the rate of 8 per cent per annum.
2. As per section 6 of the aforesaid Act, the provisions of the Income-tax Act are applicable in relation to the whole of the dividend so declared, as they apply in relation to dividend which is declared but payment of a part of which is deferred.
3. The Board have examined the question whether the deferred dividend declared would be taxable under the Act, in the year of declaration or in the year of its actual payment.
4. The dividends which are being declared fall in the category of distribution by a company out of profits and are deemed to be income of the previous year in which they are so declared. The shareholders are being paid interest on the deferred dividend only because their right to receive the entire dividend has already accrued to them in the year in which the dividend was declared. In view of the above, the entire dividend declared will be deemed to be the income of the year in which the dividend has been declared and credit for tax deducted at source would also be given in that year.
5. Section 10 of the Companies (Temporary Restrictions on Dividends) Amendment Act, 1975 provides that the taxpayer shall not be deemed to be an assessee in default by the Income-tax Officer and interest under section 220(2) will also not be leviable in respect of outstanding income-tax attributable to the inclusion of the deferred dividend till the expiry of 35 days from the date on which such deferred dividend becomes due and payable to the assessee or the dividend warrant in respect of such installment is transferred by the assessee to any person, whichever is earlier.
Circular : No. 210 [F. No. 204/49/76-IT(A-II)], dated 25-2-1977
