Provisions relating to tax on distributed income of domestic company for buy-back of shares Tax on distributed income to shareholders [section 115QA)

In addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares (not being shares listed on a recognised stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.

Provisions relating to Deemed Dividend in the event of redemption of Preference Shares

1. Section 2(22)(d) of the income tax act refers to distribution to shareholders by company on the reduction of its capital. Explanation of Section 55(3) of companies act, 2013 provides that redemption of preference shares shall not be taken as reducing the amount of its share capital. Therefore, Section 2(22)(d) does not apply to redemption of preference shares.

2. Further any payment by company, not being a company in which the public are substantial interested, of any sum by way of advance or loan to a shareholder, holding more than 10% voting power to the extent possess accumulated profits is deemed to dividend.

However since preference shareholders shall not have voting rights, hence no deemed dividend is applicable in case of preference shares under 2(22)(e) of income tax act.

Hence company can provide loan /advances to its preference shareholders without attracting any deemed dividend provisions.

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September 2021