In Finance Bill, 2020 (Bill) , one of the Biggest move of the government was abolishing the DDT charged u/s 115-O of the Income Tax Act , 1961 (the Act). However government has inserted/ amended certain sections to make the Dividend income taxable in the hands of receiver by removing Section 10(34) of the Act. I would like to explain to you by explaining in detail each section and their impact:
1. Section 115-O :Tax on distributed profits of domestic companies: The government has inserted following words in the section “but on or before the 31st day of March, 2020“, which means that Dividend distributed by domestic company will no longer be subject to DDT if dividend distributed on or after 1st April 2020. Earlier DDT was paid by company distributing dividend at the rate of 17.68%.
2. Section 115BBDA: The government has inserted following words in the section “but on or before the 31st day of March, 2020“, which means that assessee is no longer required to pay tax u/s 115BBDA where tax is to be paid at the rate of 10% on dividend exceeding Rs. 1 Lakh. However this is logical because Dividend income will now be included in total income of the assessee and assessee will anyway pay tax on this dividend income.
3. Section 10(34): Exemption of Dividend referred u/s 115-O: The government has inserted following words in the section “but on or before the 31st day of March, 2020“, which means that Dividend distributed by domestic company will no longer be exempt in the hands of recipient.
4. Section 57: Deductions under the head Income from other sources: The government has substituted following words “Dividends” in place of “dividends, other than dividends referred to in section 115-O“. Further government has inserted following proviso “Provided that no deduction shall be allowed from the dividend income, or income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or income in respect of units from a specified company defined in the Explanation to clause (35) of section 10, 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.” Which means if you have borrowed any amount to invest in shares and paid interest on same then deduction would be allowed for interest paid but restricted to 20% of Dividend income.
5. Section 80M: The government has inserted new section 80M “(1) Where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date. Deduction in respect of certain inter-corporate dividends. (2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year. Explanation.––For the purposes of this section, the expression “due date” means the date one month prior to the date for furnishing the return of income under sub-section (1) of section 139.’. Which means that if Domestic Company has received dividend from domestic company during the Previous year and also distributed dividend on or before one month prior to due date of furnishing Income tax return.
Now, lets understand the impact of above provisions on domestic company with the following example:
Company ABC, a domestic company has borrowed Rs 10 Crore from bank and invested Rs. 50 Crore in shares of company XYZ on 1st April 2020. On 18th September 2020 Company XYZ has paid dividend Rs. 5 Crore to Company ABC. Company ABC has paid interest of Rs 1.2 Crore for FY 2020-21, brokerage of Rs 10 Lakhs and on 1st July 2021 Company ABC paid dividend of Rs. 3 Crore. The Taxability for company ABC be as follows:
|Dividend Income||5 Crore|
|Less: Expenditure incurred to earn dividend|
|1. Amount paid||1.2 Crore|
|2. 20 % of Dividend income||1 Crore|
|Interest expenditure allowed u/s 57 (lower of 1 & 2)||(1 Crore)|
|Brokerage Paid (No Deduction allowed u/s 57)||Nil|
|Amount to be included in Gross Total Income||4 Crore|
|Less: Deduction u/s 80M|
|1. Dividend paid to Shareholders on or before one month prior to Due date of filinf ITR.||3 Crore|
|2. Dividend income included in Total Income||4 Crore|
|Deduction u/s 80M (lower of 1 & 2)||(3 Crore)|
|Amount to be included in Total Income||1 Crore|
If I talk in terms of litigation, previously during assessments proceedings Assessing Officer made disallowance of certain expenditure u/s 14A read with rule 8D by stating that such expenditure is incurred for earning exempt income. Because of this there were enormous litigation going, however this headache will now be gone (Deduction of expenditure is now allowed u/s 57). But wait!!! this is not the end of the story, because now we have to prove that the sum borrowed is invested in the shares of the Company, so that we can claim deduction of interest expenses u/s 57 , which again will lead to Litigation.
Dividend will now be taxable in the hands of recipient, deduction for interest expenditure will also be allowed subject to maximum 20 % of Dividend income and in case of domestic company, if they are paying dividend to shareholders then the same will allowed as deduction u/s 80M (maximum deduction dividend income included in total income).
Note: In order to keep the Article simple, I have not included certain other amendments related to dividend income in Section 115R 10(23D), 10(23FC), 10 (23FD), 10(35), 115A, 115AC, 115ACA, 115AD, 115C, 115UA (3), 194K, 194LBA, 195, 196A and 196C which I will explain in 2nd part of this article.