As highlighted in Budget 2020, it proposes to allow deduction of interest expenses to the extent of 20% of dividend income. Author in this article is focusing on significant aspect which is whether 20% deduction is on net taxable dividend (after deduction u/s 80M) or on gross dividend income.
Proposal for sec 57 in Finance Bill 2020
“Provided that no deduction shall be allowed from dividend u/s 57 other than deduction on account of interest expense, and in any previous year such deduction shall not exceed twenty per cent of the dividend income, or income in respect of such units, included in the total income for that year, without deduction under this section”
Therefore if we refer to net dividend income included in total income, Impact of deduction being 20% of net income or gross income is tabulated below:
| Sr. No | Particulars of say Co. A | Alternative 1
(Net dividend) |
Alternative 2
(Gross dividend) |
| (a) | Dividend Received | 1000 | 1000 |
| (b) | Interest expenses u/s 57 (new section) | 100 | 200 |
| [(a)-(d)]*20% | (a)*20% | ||
| ( c) | Gross total Income | 900 | 800 |
| (d) | Deduction u/s 80M** | 500 | 500 |
| (e) | Total Income | 400 | 300 |
**Dividend paid is 500 which is eligible for 80M deduction
Remarks
Let us now take a situation where Co A receives Rs. 1000 as dividend and same is distributed to its shareholder Co B, and Co A incurs related interest expense of Rs. 250. As per Alternative 1 no deduction will be allowed to Co A in spite of incurrence of expense and whole income will be taxable to shareholder Co B which puts investor in adverse position as on one side deduction is restricted to 20% and on other side on net dividend.
Disclaimer: The above article is based on the authors’ private view. The author shall not be responsible for any extracts or references made
(Author : CA.Darshak shah partner – S N & Co. & Co- Author : Nemish Shah – S N & Co. Author Can be reached at Tel No : 91-22-28910968 / 24100643 / 49711550 & Email Add: admin@snco.in)
