The Assessing Officer has treated a company payment as a deemed dividend but the order does not say which limb of section 2(22) he is using, and it plainly is not a loan to a shareholder. What do limbs (a) to (d) actually cover?
These four limbs have nothing to do with buy-backs and are unaffected by the 1 October 2024 changeover, which operates through sub-clause (f). Each of them turns on "accumulated profits": (a) catches any distribution of accumulated profits, whether capitalised or not, if it entails the release by the company to its shareholders of all or any part of the company's assets; (b) catches any distribution to shareholders of debentures, debenture-stock or deposit certificates in any form, with or without interest, and any distribution to PREFERENCE shareholders of shares by way of bonus, to the extent of accumulated profits whether capitalised or not; (c) catches any distribution on liquidation, to the extent attributable to accumulated profits immediately before liquidation, whether capitalised or not; and (d) catches any distribution on a reduction of capital, to the extent the company possesses accumulated profits which arose after the end of the previous year ending next before 1 April 1933, whether capitalised or not.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Section 2(22)(a) to (d) of the Income-tax Act, 1961, transcribed as a continuous run from incometaxindia.gov.in/w/section-2-65 (Year: 2024 (No. 2)); the sub-clause letters present in clause (22) were also checked on incometaxindia.gov.in/w/section-2-63 (Year: 2023); s.2(22)(c) is reproduced verbatim by the Supreme Court in Vijay Kumar Budhia v. CIT (14 September 1993). It bears on section 2(22), section 2(22)(a), section 2(22)(b), section 2(22)(c), section 2(22)(d), section 46(2), section 45, section 48 of the Income Tax Act 1961, in Capital Gains, How Tax Law Is Read and Assessment & Scrutiny matters.
Four practical points come straight off the words. First, every limb is capped by accumulated profits, so the first thing to demand of an order under any of them is the computation of accumulated profits — Explanation 2 to s.2(22) says that expression includes all profits up to the date of distribution or payment for limbs (a), (b), (d) and (e), and all profits up to the date of liquidation for limb (c). No accumulated profits, no deemed dividend, however large the payment. Second, limb (b) is asymmetric and is regularly misread: a bonus issue to EQUITY shareholders is not caught by it, because the limb reaches only a distribution "to its preference shareholders of shares by way of bonus" — what it does reach for all shareholders is debentures, debenture-stock and deposit certificates. Third, limb (a) requires the distribution to entail a RELEASE of assets. A capitalisation of profits into bonus equity shares releases nothing, which is why limb (a) does not reach it. Fourth, the 1 April 1933 date in limb (d) is real, not decorative — profits accumulated before then are outside the limb, which is why an old company's capital reduction can produce a smaller deemed dividend than its reserves suggest. The limbs also carry different consequences downstream. A limb (c) dividend is deducted from the shareholder's consideration by s.46(2) before capital gains are computed on a liquidation distribution. There is no equivalent express deduction anywhere for a limb (d) dividend on a reduction of capital, which is why the interaction of s.2(22)(d) with the capital gains computation on a reduction has to be argued rather than read off the statute.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Clause (22) of section 2, as transcribed as one continuous run from the departmental page stamped Year 2024 (No. 2), opens: "(22) 'dividend' includes— (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ; (b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ;".
Not a judgment. The statutory position is that "dividend" is defined inclusively by s.2(22) and that sub-clauses (a) to (d) deem four kinds of corporate distribution to be dividend, each capped by the company's accumulated profits: a distribution of accumulated profits entailing a release of the company's assets; a distribution of debentures, debenture-stock or deposit certificates to shareholders and of bonus shares to preference shareholders; a distribution on liquidation to the extent attributable to accumulated profits immediately before liquidation; and a distribution on a reduction of capital to the extent of accumulated profits arising after the end of the previous year ending next before 1 April 1933.
Not a judgment; no judicial reasoning is stated. On sub-clause (c) the Supreme Court recorded at paragraph 5 of Vijay Kumar Budhia v. CIT that the sub-clause "specifically includes within the meaning of dividend 'any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not.'", and that "It is this amount which is directed to be deducted by Sub-section (2) of Section 46." (The spellings "capitalized" and "Sub-section" are as printed in the report read; the departmental text of s.2(22)(c) prints "capitalised".)
(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ;
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Handle my notice → Ask a CA on WhatsAppThese four limbs have nothing to do with buy-backs and are unaffected by the 1 October 2024 changeover, which operates through sub-clause (f). Each of them turns on "accumulated profits": (a) catches any distribution of accumulated profits, whether capitalised or not, if it entails the release by the company to its shareholders of all or any part of the company's assets; (b) catches any distribution to shareholders of debentures, debenture-stock or deposit certificates in any form, with or without interest, and any distribution to PREFERENCE shareholders of shares by way of bonus, to the extent of accumulated profits whether capitalised or not; (c) catches any distribution on liquidation, to the extent attributable to accumulated profits immediately before liquidation, whether capitalised or not; and (d) catches any distribution on a reduction of capital, to the extent the company possesses accumulated profits which arose after the end of the previous year ending next before 1 April 1933, whether capitalised or not. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 2(22), section 2(22)(a), section 2(22)(b), section 2(22)(c), section 2(22)(d), section 46(2), section 45, section 48 of the Income Tax Act 1961. It is reported as Section 2(22)(a) to (d) of the Income-tax Act, 1961, transcribed as a continuous run from incometaxindia.gov.in/w/section-2-65 (Year: 2024 (No. 2)); the sub-clause letters present in clause (22) were also checked on incometaxindia.gov.in/w/section-2-63 (Year: 2023); s.2(22)(c) is reproduced verbatim by the Supreme Court in Vijay Kumar Budhia v. CIT (14 September 1993). Four practical points come straight off the words. First, every limb is capped by accumulated profits, so the first thing to demand of an order under any of them is the computation of accumulated profits — Explanation 2 to s.2(22) says that expression includes all profits up to the date of distribution or payment for limbs (a), (b), (d) and (e), and all profits up to the date of liquidation for limb (c). No accumulated profits, no deemed dividend, however large the payment. Second, limb (b) is asymmetric and is regularly misread: a bonus issue to EQUITY shareholders is not caught by it, because the limb reaches only a distribution "to its preference shareholders of shares by way of bonus" — what it does reach for all shareholders is debentures, debenture-stock and deposit certificates. Third, limb (a) requires the distribution to entail a RELEASE of assets. A capitalisation of profits into bonus equity shares releases nothing, which is why limb (a) does not reach it. Fourth, the 1 April 1933 date in limb (d) is real, not decorative — profits accumulated before then are outside the limb, which is why an old company's capital reduction can produce a smaller deemed dividend than its reserves suggest. The limbs also carry different consequences downstream. A limb (c) dividend is deducted from the shareholder's consideration by s.46(2) before capital gains are computed on a liquidation distribution. There is no equivalent express deduction anywhere for a limb (d) dividend on a reduction of capital, which is why the interaction of s.2(22)(d) with the capital gains computation on a reduction has to be argued rather than read off the statute. If it applies to you, the first step is this: Make the officer identify the limb in writing. The four limbs have different triggers, different caps and different downstream consequences, and an order that does not name one cannot be answered on the merits.
Clause (22) of section 2, as transcribed as one continuous run from the departmental page stamped Year 2024 (No. 2), opens: "(22) 'dividend' includes— (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ; (b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ;". It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that "dividend" is defined inclusively by s.2(22) and that sub-clauses (a) to (d) deem four kinds of corporate distribution to be dividend, each capped by the company's accumulated profits: a distribution of accumulated profits entailing a release of the company's assets; a distribution of debentures, debenture-stock or deposit certificates to shareholders and of bonus shares to preference shareholders; a distribution on liquidation to the extent attributable to accumulated profits immediately before liquidation; and a distribution on a reduction of capital to the extent of accumulated profits arising after the end of the previous year ending next before 1 April 1933.
Not a judgment; no judicial reasoning is stated. On sub-clause (c) the Supreme Court recorded at paragraph 5 of Vijay Kumar Budhia v. CIT that the sub-clause "specifically includes within the meaning of dividend 'any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not.'", and that "It is this amount which is directed to be deducted by Sub-section (2) of Section 46." (The spellings "capitalized" and "Sub-section" are as printed in the report read; the departmental text of s.2(22)(c) prints "capitalised".) In the words reproduced by the source cited on this page: "(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ;"
It was decided by the CBDT Circulars & Instructions and is reported as Section 2(22)(a) to (d) of the Income-tax Act, 1961, transcribed as a continuous run from incometaxindia.gov.in/w/section-2-65 (Year: 2024 (No. 2)); the sub-clause letters present in clause (22) were also checked on incometaxindia.gov.in/w/section-2-63 (Year: 2023); s.2(22)(c) is reproduced verbatim by the Supreme Court in Vijay Kumar Budhia v. CIT (14 September 1993). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 2(22), section 2(22)(a), section 2(22)(b), section 2(22)(c), section 2(22)(d), section 46(2), section 45, section 48, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that "dividend" is defined inclusively by s.2(22) and that sub-clauses (a) to (d) deem four kinds of corporate distribution to be dividend, each capped by the company's accumulated profits: a distribution of accumulated profits entailing a release of the company's assets; a distribution of debentures, debenture-stock or deposit certificates to shareholders and of bonus shares to preference shareholders; a distribution on liquidation to the extent attributable to accumulated profits immediately before liquidation; and a distribution on a reduction of capital to the extent of accumulated profits arising after the end of the previous year ending next before 1 April 1933. It arises in Capital Gains, How Tax Law Is Read and Assessment & Scrutiny matters, on section 2(22), section 2(22)(a), section 2(22)(b), section 2(22)(c), section 2(22)(d), section 46(2), section 45, section 48 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask for the accumulated profits computation as at the correct date — the date of distribution for (a), (b) and (d), the date of liquidation for (c) — and test it against Explanation 2, which brings in all profits up to that date. For limb (d), check whether any part of the reserves accumulated before the end of the previous year ending next before 1 April 1933; that part is outside the limb on the face of the words. For a bonus issue, check who received it. Bonus shares to equity shareholders are outside limb (b), which reaches bonus SHARES only when distributed to preference shareholders. For limb (a), test whether anything actually left the company. A distribution that does not entail the release of any part of the company's assets to shareholders does not answer the limb. On a liquidation, run s.2(22)(c) and s.46(2) together: the amount assessed as dividend under (c) is deducted from the shareholder's money and asset receipts before the capital gains computation, and it should not be taxed twice.
Still good law. The text is current: it is transcribed from the departmental page stamped Year 2024 (No. 2), which is the latest s.2 page located on that route, and the Year 2023 page carries the same sub-clause letters (a) to (e) for the four limbs in issue. Sub-clause (c) is reproduced in identical words by the Supreme Court in 1993, which is independent proof that the words are genuine. Validity check could not be completed on judicial treatment: I did not survey the case law on any of the four limbs beyond the two Supreme Court decisions this library already holds and the decision quoted above. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
`decided_on` is null. Sub-clauses (a) to (d) of s.2(22) were in the Income-tax Act, 1961 as enacted and neither the Year 2023 nor the Year 2024 (No. 2) departmental page carries any amendment footnote against them, so I could not establish a commencement date for any of them and have not invented one. The text is verified; only its commencement is not. The observation that there is no express statutory deduction of a s.2(22)(d) deemed dividend from the consideration on a reduction of capital is a negative I state narrowly: it means that neither s.46 nor s.46A nor s.48 as I read them contains such a deduction, and that s.55(2) as printed on the Year 2024 (No. 2) page contains no clause fixing cost on a reduction of capital. I did not search for a decision holding otherwise, and this library already holds CIT v. G. Narasimhan (Supreme Court, 14 December 1998), which is tagged to s.2(22)(d) and s.45 and should be read alongside this entry. This entry deliberately does not cover sub-clause (e), which the library already covers heavily, or sub-clause (f), which the library already holds a dedicated entry on. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that "dividend" is defined inclusively by s.2(22) and that sub-clauses (a) to (d) deem four kinds of corporate distribution to be dividend, each capped by the company's accumulated profits: a distribution of accumulated profits entailing a release of the company's assets; a distribution of debentures, debenture-stock or deposit certificates to shareholders and of bonus shares to preference shareholders; a distribution on liquidation to the extent attributable to accumulated profits immediately before liquidation; and a distribution on a reduction of capital to the extent of accumulated profits arising after the end of the previous year ending next before 1 April 1933.
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