How is "accumulated profits" measured for a deemed dividend, what falls outside the definition of dividend altogether, and what happened to the clause that used to keep buy-back payments out of it?
One of these exclusions is the hinge of the 1 October 2024 buy-back changeover: exclusion clause (iv), which had kept a company's payment on purchase of its own shares outside the definition of "dividend" since 1 April 2000, was OMITTED by Act No. 15 of 2024 with effect from 1 October 2024, at the same moment sub-clause (f) was inserted to bring such a payment IN — so a buy-back before 1 October 2024 is not a dividend and a buy-back on or after that date is. The surviving exclusions are: (i) a distribution under (c) or (d) on a share issued for full cash consideration where the holder is not entitled on liquidation to participate in the surplus assets; (ia) a distribution under (c) or (d) attributable to capitalised profits representing bonus shares allotted to equity shareholders after 31 March 1964 and before 1 April 1965; (ii) an advance or loan to a shareholder or concern by a company in the ordinary course of its business where lending money is a substantial part of that business; (iii) a dividend set off against a sum previously treated as a dividend within sub-clause (e); and (v) a distribution of shares by the resulting company to the shareholders of the demerged company pursuant to a demerger, whether or not there is a reduction of capital in the demerged company. "Accumulated profits" is then fixed by Explanation 1 (certain capital gains excluded), Explanation 2 (all profits up to the date of distribution or payment, or up to liquidation for sub-clause (c), with a carve-out for compulsory acquisition) and Explanation 2A (an amalgamated company's accumulated profits are increased by those of the amalgamating company on the date of amalgamation).
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2024-10-01, reported as The exclusions in section 2(22)(i) to (v) and Explanations 1, 2 and 2A of the Income-tax Act, 1961, as amended up to 2024. It bears on section 2(22), section 2(22)(c), section 2(22)(d), section 2(22)(e), section 2(22)(f), section 46(2), section 2(19AA) of the Income Tax Act 1961, in Capital Gains, How Tax Law Is Read and Assessment & Scrutiny matters.
The omission of clause (iv) is the cleanest proof available of what Parliament did on 1 October 2024, and it is worth showing an officer or an appellate authority in preference to any summary of the new regime. Before that date the Act said in terms that "dividend" does NOT include "any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956"; from that date the exclusion is gone and sub-clause (f) says "dividend" INCLUDES "any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013". The switch is a single dated pair of amendments in one clause, and both carry the same footnote. Beyond that, the Explanations decide the quantum in most deemed dividend disputes. Explanation 2 is the reason an officer can go past the last audited balance sheet: accumulated profits include all profits UP TO the date of distribution or payment, so current-year profits earned before the payment come in. Its carve-out is narrow and specific — where liquidation is consequent on compulsory acquisition of the undertaking by the Government or a Government corporation, profits of years earlier than the three previous years immediately preceding the year of acquisition are left out. Explanation 2A matters on every post-amalgamation deemed dividend, because it aggregates the amalgamating company's accumulated profits into the amalgamated company's. Exclusion (ii) is the one most often available in practice: a company whose substantial business is lending is outside the deemed dividend net for advances made in the ordinary course of that business. Exclusion (v) protects a demerger from being recharacterised as a distribution on a reduction of capital under sub-clause (d), and says so expressly.
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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As transcribed as one continuous run from the departmental page stamped Year 2024 (No. 2), clause (22) continues after sub-clause (f): "but 'dividend' does not include— (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ; (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; (iv) [***] (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company)." Then: "Explanation 1.—The expression 'accumulated profits', wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.—The expression 'accumulated profits' in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. Explanation 2A.—In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation." Sub-clause (f) itself reads: "(f) any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 (18 of 2013);".
Not a judgment. The statutory position is that five exclusions survive in s.2(22) — clauses (i), (ia), (ii), (iii) and (v) — while clause (iv), which had excluded a company's payment on purchase of its own shares, was omitted with effect from 1 October 2024 by the same Act that inserted sub-clause (f) bringing such a payment into the definition; and that "accumulated profits" is defined for the whole clause by Explanation 1 (exclusion of certain capital gains), Explanation 2 (all profits up to the date of distribution or payment, or up to liquidation under sub-clause (c), with a carve-out for a liquidation consequent on compulsory acquisition by the Government) and Explanation 2A (aggregation of the amalgamating company's accumulated profits into the amalgamated company's).
Not a judgment; no judicial reasoning is stated. The legislative mechanism is visible in the two footnotes on the page itself, which show a single amending Act simultaneously deleting the exclusion for buy-back payments and inserting the sub-clause that includes them, both with effect from 1 October 2024.
Omtt. by the Act No. 15 of 2024, w.e.f. 1-10-2024. Prior to its omission, clause (iv), as ins. by the Act No. 27 of 1999, w.e.f. 1-4-2000, read as under : "(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);"
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Handle my notice → Ask a CA on WhatsAppOne of these exclusions is the hinge of the 1 October 2024 buy-back changeover: exclusion clause (iv), which had kept a company's payment on purchase of its own shares outside the definition of "dividend" since 1 April 2000, was OMITTED by Act No. 15 of 2024 with effect from 1 October 2024, at the same moment sub-clause (f) was inserted to bring such a payment IN — so a buy-back before 1 October 2024 is not a dividend and a buy-back on or after that date is. The surviving exclusions are: (i) a distribution under (c) or (d) on a share issued for full cash consideration where the holder is not entitled on liquidation to participate in the surplus assets; (ia) a distribution under (c) or (d) attributable to capitalised profits representing bonus shares allotted to equity shareholders after 31 March 1964 and before 1 April 1965; (ii) an advance or loan to a shareholder or concern by a company in the ordinary course of its business where lending money is a substantial part of that business; (iii) a dividend set off against a sum previously treated as a dividend within sub-clause (e); and (v) a distribution of shares by the resulting company to the shareholders of the demerged company pursuant to a demerger, whether or not there is a reduction of capital in the demerged company. "Accumulated profits" is then fixed by Explanation 1 (certain capital gains excluded), Explanation 2 (all profits up to the date of distribution or payment, or up to liquidation for sub-clause (c), with a carve-out for compulsory acquisition) and Explanation 2A (an amalgamated company's accumulated profits are increased by those of the amalgamating company on the date of amalgamation). This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 2(22), section 2(22)(c), section 2(22)(d), section 2(22)(e), section 2(22)(f), section 46(2), section 2(19AA) of the Income Tax Act 1961. It is reported as The exclusions in section 2(22)(i) to (v) and Explanations 1, 2 and 2A of the Income-tax Act, 1961, as amended up to 2024. The omission of clause (iv) is the cleanest proof available of what Parliament did on 1 October 2024, and it is worth showing an officer or an appellate authority in preference to any summary of the new regime. Before that date the Act said in terms that "dividend" does NOT include "any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956"; from that date the exclusion is gone and sub-clause (f) says "dividend" INCLUDES "any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013". The switch is a single dated pair of amendments in one clause, and both carry the same footnote. Beyond that, the Explanations decide the quantum in most deemed dividend disputes. Explanation 2 is the reason an officer can go past the last audited balance sheet: accumulated profits include all profits UP TO the date of distribution or payment, so current-year profits earned before the payment come in. Its carve-out is narrow and specific — where liquidation is consequent on compulsory acquisition of the undertaking by the Government or a Government corporation, profits of years earlier than the three previous years immediately preceding the year of acquisition are left out. Explanation 2A matters on every post-amalgamation deemed dividend, because it aggregates the amalgamating company's accumulated profits into the amalgamated company's. Exclusion (ii) is the one most often available in practice: a company whose substantial business is lending is outside the deemed dividend net for advances made in the ordinary course of that business. Exclusion (v) protects a demerger from being recharacterised as a distribution on a reduction of capital under sub-clause (d), and says so expressly. If it applies to you, the first step is this: For any buy-back dispute, put the pair of 2024 amendments in front of the officer: the omission of exclusion clause (iv) and the insertion of sub-clause (f), both with effect from 1 October 2024. They settle which side of the line the transaction is on without argument.
As transcribed as one continuous run from the departmental page stamped Year 2024 (No. 2), clause (22) continues after sub-clause (f): "but 'dividend' does not include— (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ; (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; (iv) [***] (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company)." Then: "Explanation 1.—The expression 'accumulated profits', wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.—The expression 'accumulated profits' in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. Explanation 2A.—In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation." Sub-clause (f) itself reads: "(f) any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 (18 of 2013);". The matter was decided on 2024-10-01 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 five exclusions survive in s.2(22) — clauses (i), (ia), (ii), (iii) and (v) — while clause (iv), which had excluded a company's payment on purchase of its own shares, was omitted with effect from 1 October 2024 by the same Act that inserted sub-clause (f) bringing such a payment into the definition; and that "accumulated profits" is defined for the whole clause by Explanation 1 (exclusion of certain capital gains), Explanation 2 (all profits up to the date of distribution or payment, or up to liquidation under sub-clause (c), with a carve-out for a liquidation consequent on compulsory acquisition by the Government) and Explanation 2A (aggregation of the amalgamating company's accumulated profits into the amalgamated company's).
Not a judgment; no judicial reasoning is stated. The legislative mechanism is visible in the two footnotes on the page itself, which show a single amending Act simultaneously deleting the exclusion for buy-back payments and inserting the sub-clause that includes them, both with effect from 1 October 2024. In the words reproduced by the source cited on this page: "Omtt. by the Act No. 15 of 2024, w.e.f. 1-10-2024. Prior to its omission, clause (iv), as ins. by the Act No. 27 of 1999, w.e.f. 1-4-2000, read as under : "(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);""
It was decided by the CBDT Circulars & Instructions on 2024-10-01 and is reported as The exclusions in section 2(22)(i) to (v) and Explanations 1, 2 and 2A of the Income-tax Act, 1961, as amended up to 2024. 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)(c), section 2(22)(d), section 2(22)(e), section 2(22)(f), section 46(2), section 2(19AA), 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 five exclusions survive in s.2(22) — clauses (i), (ia), (ii), (iii) and (v) — while clause (iv), which had excluded a company's payment on purchase of its own shares, was omitted with effect from 1 October 2024 by the same Act that inserted sub-clause (f) bringing such a payment into the definition; and that "accumulated profits" is defined for the whole clause by Explanation 1 (exclusion of certain capital gains), Explanation 2 (all profits up to the date of distribution or payment, or up to liquidation under sub-clause (c), with a carve-out for a liquidation consequent on compulsory acquisition by the Government) and Explanation 2A (aggregation of the amalgamating company's accumulated profits into the amalgamated company's). It arises in Capital Gains, How Tax Law Is Read and Assessment & Scrutiny matters, on section 2(22), section 2(22)(c), section 2(22)(d), section 2(22)(e), section 2(22)(f), section 46(2), section 2(19AA) 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. Demand the accumulated profits computation and test it against Explanation 2 — all profits up to the date of distribution or payment — rather than against the last audited balance sheet. Where the company is in liquidation following a compulsory acquisition by the Government or a Government corporation, apply the Explanation 2 carve-out and exclude profits earlier than the three previous years immediately preceding the year of acquisition. After an amalgamation, add the amalgamating company's accumulated profits as at the date of amalgamation under Explanation 2A before arguing about quantum; leaving them out understates the cap and invites a correction on appeal. If the company advancing the money is a lender, plead exclusion (ii) squarely: an advance or loan made in the ordinary course of business where lending money is a substantial part of the business is outside the definition altogether. On a demerger, cite exclusion (v) if the officer treats the resulting company's share issue as a distribution on a reduction of capital — the exclusion applies whether or not there is a reduction of capital in the demerged company.
Still good law. The text is current. The clause-letter listings on two departmental pages carrying different "Year:" stamps corroborate the amendment independently of the footnotes: the Year 2023 page lists sub-clauses a, b, c, d, e followed by exclusions i, ia, ii, iii, iv, v and no (f); the Year 2024 (No. 2) page lists a, b, c, d, e, f followed by i, ia, ii, iii, iv [shown as omitted] and v. Validity check could not be completed on judicial treatment: I did not survey the case law on the Explanations, and this entry states no holding on any of them. The pre-omission text of clause (iv) is taken from the footnote and is legislative history — it governs buy-backs up to 30 September 2024 and no later. 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 1 October 2024 — the commencement of the two amendments this entry is built around, taken from the footnotes printed on the page itself: footnote 3, against sub-clause (f), "Ins. by the Act No. 15 of 2024, w.e.f. 1-10-2024"; footnote 4, against clause (iv), "Omtt. by the Act No. 15 of 2024, w.e.f. 1-10-2024. Prior to its omission, clause (iv), as ins. by the Act No. 27 of 1999, w.e.f. 1-4-2000, read as under : '(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);'". It is NOT the vintage of the page, which is stamped Year 2024 (No. 2). Act No. 15 of 2024 and Act No. 27 of 1999 are commonly the Finance (No. 2) Act, 2024 and the Finance Act, 1999; the footnotes give only Act numbers and I have not verified the short titles. The exclusions and Explanations other than clause (iv) carry no amendment footnote on this page, so their own commencements are not established. Explanation 3 is reproduced only in part in this entry — I transcribed clauses (a) and (b) of it, which are the "concern" and substantial-interest definitions relevant to sub-clause (e), and that sub-clause is deliberately outside this entry's scope. 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 five exclusions survive in s.2(22) — clauses (i), (ia), (ii), (iii) and (v) — while clause (iv), which had excluded a company's payment on purchase of its own shares, was omitted with effect from 1 October 2024 by the same Act that inserted sub-clause (f) bringing such a payment into the definition; and that "accumulated profits" is defined for the whole clause by Explanation 1 (exclusion of certain capital gains), Explanation 2 (all profits up to the date of distribution or payment, or up to liquidation under sub-clause (c), with a carve-out for a liquidation consequent on compulsory acquisition by the Government) and Explanation 2A (aggregation of the amalgamating company's accumulated profits into the amalgamated company's).
TaxSphere, “Statutory position — the exclusions in s.2(22)(i) to (v) and Explanations 1, 2 and 2A: what "accumulated profits" means, and the exclusion clause (iv) for buy-backs that was DELETED with effect from 1 October 2024”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-2-22-exclusions-and-explanations-accumulated-profits-and-the-clause-iv-that-was-deleted-on-1-october-2024/ (validity last checked 2026-09-09)
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