Widening of scope of Accumulated profits for the purposes of Dividend
Section 2 of the Act defines various terms used in the Act. Clause (22) of the said section defines “dividend” to include distribution of accumulated profits (whether capitalized or not) to its shareholders by a company, whether it is in the nature of,—
(a) release of all or any of its assets,
(b) issue of debentures in any form (with or without interest) or distribution of bonus to its preference shareholders,
(c) distribution of proceeds on liquidation,
(d) on the reduction of capital, or
(e) in the case of an unlisted company, any loan or advance given to a shareholder having shareholding of 10% or above, or to a concern in which such shareholder holds substantial interest (exceeding 20% of shareholding or interest) or any payment by such company on behalf of or for the individual benefit of such shareholder.
Explanation 2 to the said clause provides the definition of the term ‘accumulated profits’ for the purposes of the said clause, as all profits of the company up to the date of distribution or payment or liquidation, subject to certain conditions.
Instances have come to light whereby companies are resorting to abusive arrangements in order to escape liability of paying tax on distributed profits. Under such arrangements, companies with large accumulated profits adopt the amalgamation route to reduce capital and circumvent the provisions of sub-clause (d) of clause (22) of section 2 of the Act. With a view to preventing such abusive arrangements and similar other abusive arrangements, it is proposed to insert a new Explanation 2A in clause (22) of section 2 of the Act to widen the scope of the term ‘accumulated profits’ so as to provide that in the case of an amalgamated company, accumulated profits, whether capitalised or not, or losses as the case may be, shall be increased by the accumulated profits of the amalgamating company, whether capitalized or not, on the date of amalgamation.
This amendment will take effect from 1st April, 2018 and will accordingly apply in relation to assessment year 2018-19 and subsequent assessment years.
Extract of Clause 3 of Finance Bill 2018
Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.
Clause (22) of the said section provides the definition of the term “dividend”. Explanation 2 to the said clause clarifies the expression “accumulated profits” for the purposes of the said clause.
It is proposed to insert a new Explanation to the said clause to provide that in the case of an amalgamated company, accumulated profits or loss in the hands of the amalgamated company shall be increased by the accumulated profits of the amalgamating company, whether capitalised or not, on the date of amalgamation.
This amendment will take effect from 1st April, 2018 and will accordingly apply in relation to the assessment year 201 8-2019 and subsequent years.