Section 2(22)(d)

Section 2(22)(d) — the law in short

What the courts have decided on section 2(22)(d), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v G. Narasimhan Supreme CourtCuts both ways
  My company reduced its share capital and paid me cash and property for the reduction. Is that dividend, capital gains, or both?
  Both, in that order. The Supreme Court held that what a company distributes on a reduction of capital splits into two components. So much as can be correlated with its accumulated profits, capitalised or not, is deemed dividend under section 2(22)(d) and is taxed as income. Only the excess over accumulated profits is a capital receipt, from which the cost of acquiring the extinguished portion of the shareholding is deducted to find any capital gain. The Court also held that a loan already taxed as deemed dividend under section 2(22)(e) reduces the company's accumulated profits.
• Cognizant Technology Solutions India P Ltd v ACIT ITATHelps departmentUnder appeal
  We repurchased shares through a court-approved scheme. Can the department still call it a dividend?
  On these facts, yes. The Chennai Tribunal held the repurchase was a colourable device — in substance a reduction of capital releasing the company's assets to shareholders — taxable as deemed dividend under s.2(22)(d), alternatively s.2(22)(a), with dividend distribution tax under s.115-O payable by the company. The High Court's sanction of the scheme conferred no tax immunity.
• 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 CBDT Circulars & InstructionsCuts both ways
  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).
• Statutory position — s.2(22)(a), (b), (c) and (d): release of assets, debentures and bonus to preference shareholders, distribution on liquidation, and distribution on a reduction of capital CBDT Circulars & InstructionsCuts both ways
  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.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.