457. Deferred dividends declared in terms of Companies (Temporary Restrictions on Dividends) Amendment Act, 1975 - Whether taxable in the year of declaration or in the year of its actual payment
Circular No. 210 was issued by the Central Board of Direct Taxes on 25 February 1977. Its subject is 457. Deferred dividends declared in terms of Companies (Temporary Restrictions on Dividends) Amendment Act, 1975 - Whether taxable in the year of declaration or in the year of its actual payment.
Fixes the year in which a deferred dividend is taxed. Section 5A(2) of the Companies (Temporary Restrictions on Dividends) Amendment Act, 1975, effective from 1st March, 1975, let companies declare dividends beyond their distributable profits, the excess being payable after two years in two equal annual instalments with interest at 8 per cent, and section 6 of that Act applies the Income-tax Act to the whole of the dividend so declared. The Board holds that the entire dividend, deferred part included, is income of the previous year in which it is declared, and credit for tax deducted at source is likewise given in that year; the very fact that shareholders are paid interest on the deferred part shows that their right to the whole dividend accrued on declaration. Section 10 of that Act protects the shareholder in the meantime: he is not to be treated as an assessee in default, and no interest under section 220(2) is leviable, on the tax attributable to the deferred dividend until thirty-five days from the date the instalment becomes due and payable or the date he transfers the dividend warrant, whichever is earlier.
The Board examined whether the deferred dividend was taxable in the year of declaration or in the year it was actually paid.
457. Deferred dividends declared in terms of Companies (Temporary Restrictions on Dividends) Amendment Act, 1975 - Whether taxable in the year of declaration or in the year of its actual payment
1. Section 5A(2) of the Companies (Temporary Restrictions on Dividends) Amendment Act, 1975 effective from March 1, 1975 permits the companies to declare dividends in excess of the distributable profits. However, the dividends in excess of the distributable profits are to be paid after the expiry of two years in two equal annual instalments together with interest due thereon at the rate of 8 per cent per annum.2. As per section 6 of the aforesaid Act, the provisions of the Income-tax Act are applicable in relation to the whole of the dividend so declared, as they apply in relation to dividend which is declared but payment of a part of which is deferred.
3. The Board have examined the question whether the deferred dividend declared would be taxable under the Act, in the year of declaration or in the year of its actual payment.
4. The dividends which are being declared fall in the category of distribution by a company out of profits and are deemed to be income of the previous year in which they are so declared. The shareholders are being paid interest on the deferred dividend only because their right to receive the entire dividend has already accrued to them in the year in which the dividend was declared. In view of the above, the entire dividend declared will be deemed to be the income of the year in which the dividend has been declared and credit for tax deducted at source would also be given in that year.
5. Section 10 of the Companies (Temporary Restrictions on Dividends) Amendment Act, 1975 provides that the taxpayer shall not be deemed to be an assessee in default by the Income-tax Officer and interest under section 220(2) will also not be leviable in respect of outstanding income-tax attributable to the inclusion of the deferred dividend till the expiry of 35 days from the date on which such deferred dividend becomes due and payable to the assessee or the dividend warrant in respect of such instalment is transferred by the assessee to any person, whichever is earlier.
Circular : No. 210 [F. No. 204/49/76-IT(A-II)], dated 25-2-1977.
In an assessment of a shareholder for the year of declaration, and in a demand for interest under section 220(2) on the tax on the deferred part.
Source: the Income Tax Department’s own published text — its page for this instrument.