Dividend distributed Tax (DDT): Dividend paid by companies is a payment and expenditure. The tax on dividend payouts is not tax on income (of company).  The levy of additional tax on companies under Section 115-O seems to be ultra vires the Constitution of India.

CA Dev Kumar Kothari

Dividend paid by companies to share holders:

A company may pay dividend to its shareholders. Dividend shall be paid at rate at which dividend has been declared. Usually payment of dividend is on prorata basis that is in proportion to paid-up capital and duration of paid-up capital on shares, in case period of capital paid is different.

Dividend is a payment:

Dividend paid is an amount paid by company to its shareholders. Once dividend is declared, it goes out of pocket of company. Dividend is usually paid by issue of cheque or draft. Once dividend is declared, usually in case a company has many shareholders, a separate account is opened in which amount of dividend payable is deposited and cheques popularly called dividend warrants are issued to shareholders. In larger companies where shareholders have given mandate, the dividend is paid from dividend account by ECS. Thus money goes out of pocket of company for payment to shareholders.

Dividend  declared / paid is a consideration and is an expenditure:

Dividend payment can be considered as a reward on capital invested by shareholder. Dividend payment  may or may not be compulsory, but as and when dividend is paid it is in nature of consideration for capital deployed and is a reward to capital providers. It is payment in hands of company and receipt in hands of share holders.

Dividend declared is an expenditure of company. Once dividend is recommended by the Board of Directors and approved by company in the general meeting, it becomes ultimate expenditure of company as the money payable as dividend, has to be paid by company.

Therefore, we find that dividend is a payment and expenditure in hands of company, though it may be regarded as a distribution or sharing of profit.

Commercial expediency in payment of dividend:

Dividend payment is out of commercial expediency for the reasons that payment of dividend provide satisfaction to share holders, it improves goodwill of company. A regularly dividend paying company has more potential to raise further share capital in comparison to a company which is not regular in payment of dividend.

Commercial expediency in payment of dividend is well recognized under law also.  We find  recognition of ‘commercial expediency’ and nature of ‘expenditure’ Involved in payment of dividend by companies to its shareholders from the following provisions:

a) Dividend is paid only on recommendation of the Board of Directors to the shareholders, while recommending dividend requirement of funds of the company and commercial expediency in paying dividend to maintain reputation and goodwill are also considered besides other factors.

b) Under companies act, 2013, the payment of dividend is to be made out of profits after providing depreciation.  However, in certain circumstances the Central Government may, if it thinks necessary so to do in the public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or any previous financial year or years without providing depreciation. – Section 123 of companies act 2013.

c) In some circumstances, company may pay interest on share capital where share capital is raised to defray long gestation projects or assets which cannot be made profitable before a long time.  By nature, and circumstances such interest is in lieu of dividend.  This also shows that interest to share holders or dividend is a payment out of commercial expediency.

d) Unpaid dividend has to be kept in separate accounts from where only shareholder can claim and ultimately unclaimed amount will be transferred to investor education and protection fund – section 124 of companies act 2013.

e) Penalty -If dividend is not distributed within specified time then penalty can be levied u/s 127  of companies act 2013.

f) In case of nonpayment of dividend the shareholder can bring action against company.

The above provisions of Companies Act clearly show that dividend is paid out of commercial expediency and once dividend is paid the money goes out of pocket of company for ever. In case of other expenses, in some situations a company or any other person may get some refund or credit against payment made by him or liability incurred by him earlier. However, in case of dividend there in no such chance that company may get a refund or waiver.

Please Read:

Dividend Under Companies Act, 2013

Provisions related to Declaration and Payment of Dividend

Declaration & Payment of Dividend under Companies Act, 2013

Appropriation / below the line or application of income:

As per standard forms of profit and loss account dividend declared, amount contributed to any fund or reserves etc. are shown below the line but that should really not make a difference.  Many  reserves like investment allowance reserve, development allowance reserve, molasses reserve, statutory reserves   etc. are shown below the line still  deduction in respect of the same is allowed.  The company and shareholder are different persons and dividend is paid out of discretion of the Board of Directors (and not by the shareholder).  Therefore, dividend is expenditure and not an application of income.  Even if dividend is considered as application of income, it is for purpose of business- maintaining and improving goodwill, servicing capital, maintaining and improving share price and price earnings ratio, etc. therefore,   it will be expenditure for business purpose, however , it is not allowed in view of specific provision to that effect in section 115O (4). In absence of such provision, or where such provision is not applicable dividend may be allowed as a business expenditure.

Dividend declared is a liability:

Once dividend is declared, the amount of dividend payable becomes a liability of company. It is to be discharged by payment. The provisions of the Companies Act also govern payment of dividend declared as to time and manner of payment. In case any dividend remain unclaimed it has to be kept in separate account and after prescribed period, the  amount which remain undistributed due to no claim has to be deposited into Investors Protection Fund from where the shareholder can only claim payment.

Therefore, dividend declared, being a liability cannot be considered income of company in any manner. In this regard we can fruitfully refer to the following definition of ‘debt’in the Constitution of India:

Article  366. Definition In this Constitution, unless the context otherwise requires, the following expressions have, the meanings hereby respectively assigned to them, that is to say:


 (8) “debt” includes any liability in respect of any obligation to repay capital sums by way of annuities and any liability under any guarantee, and “debt charges” shall be construed accordingly;

Thus dividend payable being a liability is also in nature of a  debt within the meaning of debt, as per the Constitution of India. A debt cannot be income.

 Nature of dividend as generally understood:

Now-a-days to find out what is general  understanding on any subject, we can fruitfully refer to writings on websites. Such writings include meaning as per dictionaries as well as general understanding of people. Some noting from websites, including dictionary meanigns are given below:


A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it can either re-invest it in the business (called retained earnings), or it can distribute it to shareholders. A corporation may retain a portion of its earnings and pay the remainder as a dividend. Distribution to shareholders can be in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase.

A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company’s balance sheet – the same as its issued share capital. Public companies usually pay dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends. Cooperatives, on the other hand, allocate dividends according to members’ activity, so their dividends are often considered to be a pre-tax expense.

The word “dividend” comes from the Latin word “dividendum” (“thing to be divided”).

Dividend declared or paid by company is not its income of company:

As discussed earlier, dividend declared or paid by company is a payment and expenditure of company. It cannot, by any stretch of imagination be regarded as income of company.

Some relevant meanings of ‘income’ are as follows:



1. The amount of money or its equivalent received during a period of time in exchange for labor or services, from the sale of goods or property, or as profit from financial investments.

2. (Economics) the amount of monetary or other returns, either earned or unearned, accruing over a given period of time

3. (Business / Commerce) receipts; revenue

4. Rare an inflow or influx

Collins English Dictionary – Complete and Unabridged

1. the monetary payment received for goods or services, or from other sources, such as rents or investments; revenue; receipts:.


World English Dictionary

1.  the amount of monetary or other returns, either earned or unearned, accruing over a given period of time

2. receipts; revenue

Collins English Dictionary –

Income – Meaning “money made through business or labor”

Cultural Dictionary income definition

The amount of money received during a period of time in exchange for labor or services, from the sale of goods or property, or as a profit from financial investments.


1. The flow of cash or cash-equivalents received from work (wage or salary), capital (interest or profit), or land (rent).

2. Accounting: (1) An excess of revenue over expenses for an accounting period. Also called earnings or gross profit. (2) An amount by which total assets increase in an accounting period.

3. Economics: Consumption that, at the end of a period, will leave an individual with the same amount of goods (and the expectations of future goods) as at the beginning of that period. Therefore, income means the maximum amount an individual can spend during a period without being any worse off. Income (and not the GDP) is the engine that drives an economy because only it can create demand.

4. Law: Money or other forms of payment (received periodically or regularly) from commerce, employment, endowment, investment, royalties, etc.



1. For corporations, revenues minus cost of sales, operating expenses, and taxes, over a given period of time. Income is the reason corporations exist, and are often the single most important determinant of a stock’s price. Income is important to investors because they give an indication of the company’s expected future dividends and its potential for growth and capital appreciation. That does not necessarily mean that low or negative earnings always indicate a bad stock; for example, many young companies report negative income as they attempt to grow quickly enough to capture a new market, at which point they’ll be even more profitable than they otherwise might have been. also called earnings.

2. For individuals, money earned through employment and investments.


Income – general definition

Income is any money you or your partner get from any source, taxable or non-taxable. This could include, but is not limited to, wages, salary, termination payment, bonus pay, holiday pay, child support, maintenance payments, paid parental leave, interest from savings and investments, dividends from shares, income from a family trust, farm or business, income from boarders or rent, superannuation, overseas benefits and pensions, weekly accident insurance payments, some scholarships, any indirect monetary benefits you get such as free board or shares in a business, and any other income that you have or may deprive yourself of.

From above definitions of ‘income’ we can clearly find that dividend received by a person can only be regarded as  income of that person- shareholder. By no stretch of imagination dividend paid  by company can be regarded as income of company who pays dividend to its share holders.

Provisions of The Constitution of India (COI):

As per COI , tax on income can be levied by the UOI.

As discussed above amount paid by company as dividend to its share holders is a payment and is in nature of expenditure in hands of company.

Even if we consider  dividend as ‘income shared’ or  ‘income distributed’, a tax cannot be imposed because ‘income distributed’ or ‘income shared’  is not ‘income’, or ‘excess profit’ of company.

By very nature tax on income is a tax to be imposed on income of person who has earned income and not a person who has paid any sum which may include some income earned by the receiver. This is because the person who pays has incurred and expenditure or a debt and he has not earned any income.

If tax on income can be imposed on the person who  incur expenditure and / or pays as expenditure,  then we should not be shocked if at some time tax is imposed in hands of employer who pay or distributes income by way of salary to his employees.

Therefore, the moot question for consideration is whether the levy of additional tax on company vide section 115 O is a levy of tax on income and is valid or ultra virse the Constitution of India (COI).

The Central Government or UOI is authorized levy tax on income and corporation tax the relevant entries are as follows:

List I – Union List

82. Taxes on income other than agricultural income

85. Corporation tax.

Definitions in COI:

The meaning of ‘agricultural income’ and other related words are found in the Article 366 of the COI. Related definitions are reproduced below:

Article 366 in The Constitution Of India 1949

366. Definition In this Constitution, unless the context otherwise requires, the following expressions have, the meanings hereby respectively assigned to them, that is to say

(1) agricultural income means agricultural income as defined for the purposes of the enactments relating to Indian income tax;

(6) “corporation tax” means any tax on income, so far as that tax is payable by companies and is a tax in the case of which the following conditions are fulfilled:—

(a)     that it is not chargeable in respect of agricultural income;

(b) that no deduction in respect of the tax paid by companies is, by any enactments which may apply to the tax, authorised to be made from dividends payable by the companies to individuals;

(c) that no provision exists for taking the tax so paid into account in computing for the purposes of Indian income-tax the total income of individuals receiving such dividends, or in computing the Indian income-tax payable by, or refundable to, such individuals;

(8) “debt” includes any liability in respect of any obligation to repay capital sums by way of annuities and any liability under any guarantee, and “debt charges” shall be construed accordingly;

 (28) taxation includes the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly;

(29) tax on income includes a tax in the nature of an excess profits tax;

The Central Government or the UOI is empowered to levy tax on income other than agricultural income.

Therefore, ‘tax’ in nature of tax on income can be either a tax or an impost on the following type of incomes:

  1. tax or impost on ‘agricultural income’ , which can be levied by a State Government only,
  2. tax or impost on ‘income’ , which can be levied by the central Government,
  3. tax or impost on ‘excess profits’ , which can be levied by the central Government,
  4. tax or impost on income of companies as ‘corporations tax’ as defined in Article 366 (6).

As discussed earlier amount paid by company on paid-up capital of shares issued by company, to its shareholders  is not even a receipt by company therefore dividend declared or paid:

 is  not income of company,

is not  ‘excess profits’ of company,

is not income of company even in context of ‘corporation tax’

Dividend declared /  paid in not a receipt, is not a revenue, is  not even in nature of any entitlement benefit or privilege obtained by company on declaration of dividend on its share capital. On declaration of dividend,  a liability or debt is incurred which has to be discharged by payment of dividend declared.

Therefore, levy of additional  tax as per section 115 O is not within the authority or power provided in the Constitution of India and in considered view of the author the levy of additional tax u/s 115 O is ultravirse the COI and it can be challenged by way of Writ Petition in any High Court in India on the basis of above contentions.

Read Other Articles from CA Dev Kumar Kothari

(Republished With Amendments)

More Under Income Tax



    The article has started healthy discussion on the subject and I hope it will add more to brain storming.

    Some readers have disuceed DDT as “corporation tax”. However, corporation tax can be a tax on income of companies and not on a payment or expenditure by way of dividend paid to share holders.
    Some readers have said that governmetn may levy tax under entry 97 in the Union List. The said entry readsa as follows:
    97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.

    As tax on income is seperately mentioned in Union List, and dividend is undoubtdely income of shareholder, therefore, it cannot be said that dividend distritution tax (DDT) falls unde entry 97.This is for the reason that a specific entry in list must apply first.

  2. Vinay Joshi says:

    Dear Mr. K.E.B Rangarajan,

    My aspects are presumably to simply views on DDT.

    In plain reading of COI 366, corporation tax 366[6] means the tax corporation has to pay.
    In addition the constitution amendments pertaining to other direct taxes & law has nothing in respect of 366[b],[c].

    It has to pay tax on what? It has to pay on its income earned, PROFIT as per the relevant provisions of IT as amended. Further,

    366[6][a] excludes agricultural income. IT MEANS EVEN SUCH PROFITS NOT TAXABLE.

    366[6][b], plain reading — corporation pays taxes on its income – IT’s TAXABLE INCOME,

    Hence all corporations pay tax / liable to pay on its declared net profit.


    To further elucidate – the taxes paid on profits / losses of the corporation are not meant to be included “IN SUCH” computation of the individual stakeholder or even for promoter stakeholders! ON RECEIVING SUCH “DIVIDEND”.

    Hence the corporation WHICH has paid taxes HAS PAID ON ITS NET PROFIT AS ASSESSED.

    366[6][c] is very explicit. The dividends are declared after paying all the taxes OUT OF THE RESIDUAL PROFIT! [it can even declare from its reserves in spite of losses, aspect is declaration of dividend.]

    Hence DDT is no case under 366[6][c], it amounts to DOUBLE TAXATION, minority stakeholders short changed. If assesses have non taxable income, majority derived from dividends they are loosers.

    OK! Prior to DDT assesses could compute income including dividends!? In DDT even if not taxable income the assesses lose on otherwise –possibly- higher dividend & no tax benefit.

    As a matter of fact DDT was got to curb hefty declaration of dividends by closely held co’s, but now with the mandatory equity dilution things should straightened out & the co’s will not resort to other means.



  3. Vinay Joshi says:

    To nullify DDT as is the want, let recipient shareholders pay tax!
    They will pay as per their slab rate.
    It is beneficial to them! They will have min 33% more in their hands!
    A very pertinent point & there should be representation for reversal of DDT.


  4. B C Jain says:

    kindly advise whether any case has been filed in any of the Hon’ble High Courts are Hon’ble Supreme court to declare the sec as ULTRA VIRES ? If yes , what is the fate of such case ? kindly advise citation , if available for such case .

    regards / thanks

  5. K E B RANGARAJAN says:

    Dear Sir,
    Pl note Cl (6)(c) of Article 366 in The Constitution Of India 1949(6) “corporation tax” means any tax on income, so far as that tax is payable by companies and is a tax in the case of which the following conditions are fulfilled:—

    (c) that no provision exists for taking the tax so paid into account in computing for the purposes of Indian income-tax the total income of individuals receiving such dividends, or in computing the Indian income-tax payable by, or refundable to, such individuals;

    This requires some elucidation. On a formal reading it seems to treat Dividend distributed tax as Corporate Tax, since there is no provision to treat the amount of tax paid on such dividends as an income in the total income of the recipient nor credit of such tax can be given in the tax computation of thatrecipient and thereby adujust it against tax payable otherwise by that receipient or for granting refund to that person.

    If it is not, shall pleased to know what exactly this provision means otherwise.


  6. Prakash gupta says:

    I am in agreement with you.you have missed one point under DTAA on NRI get set of DDT paid in india while their ITR in forigien country as taxation laws of foriegn treat this amount as tax paid by the company.cover this point in article

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