Section 115-O (1A) - Reduction in Dividend distribution Tax

Section 115-O of the Income Tax Act relates to tax on distributed profits of domestic companies. Dividend received by the shareholders referred to in section 115-O is exempt in the hands of shareholders [Section 10(34]. Section 115-O (1) of the Income Tax Act provides that every domestic company is required to pay dividend distribution tax (CDT) in addition to the Income tax on any amount declared, distributed or paid by way of dividends (whether interim or otherwise), whether out of current profits or accumulated profits @15% plus surcharge@ 5% plus education cess@ 3%.

Important Points:

1.     CDT shall be paid within 14 days from the date of

·         Distribution ; or

·         Declaration ; or

·         Payment

of any dividend whichever is the earliest.

2.       CDT is payable even if no income tax is payable.

3.       CDT is not an allowable deduction under Income Tax Act.

4.       Foreign company is not liable to pay CDT.

5.       Credit of CDT is not available to shareholder or company.

6.       As per Finance Act, 2011 the companies engaged in developing or developing, operating and maintaining or operating and maintaining Special economic Zones are liable to pay CDT if dividend is declared on or after 1^st june, 2011.

 Section 115-O (1A)

Case 1: With a view to remove the cascading effect of DDT in multi-tier corporate structure, it is proposed to amend section 115-O to provide that in case any company receives, during the year, any divided from any subsidiary and such subsidiary has paid DDT as payable on such dividend, then, dividend distributed by the holding company in the same year, to that extent, shall not be subject to Dividend Distribution Tax under section 115-O of the Act.

Amendment by Finance Act, 2012

Finance Act, 2012 has amended this section. Prior to amendment, the holding company should not be a subsidiary of any other company i.e. benefit under Section 115-O(1A) was available only to ultimate holding company. However as per amendment made by Finance Act, 2012 any holding company can claim the benefit under this section in respect of dividend received from subsidiary company.

Section 115-O (1A) as amended by Finance Act, 2012 (Case 1)

-If any holding company

-receives dividend from its subsidiary

-on which the subsidiary company has paid the CDT payable on such dividend,

-then, the amount of dividend declared, distributed or paid by the holding company

-by way of dividends, whether interim or otherwise

-shall be reduced by the amount of dividend, if any,

-received from the subsidiary company during the financial year.

-Provided that the same amount of dividend shall not be taken into account for reduction more than once.

Case 2: Dividend paid to New Pension System (NPS) trust is not liable to Dividend Distribution Tax.

Eg: NPS trust invest in shares of ABC Co. and ABC Co. declares a dividend of Rs. 100 crores out of which Rs. 7 crores is payable to NPS trust then ABC Co. will pay CDT on Rs. 93 crores. Dividend received by NPS trust is exempt in its hands.

Section 115-O (1A) as amended by Finance Act, 2012 (Case 2)

-The amount of dividend

- to any person for, or on behalf of, the New Pension System Trust

- shall be reduced from the dividend referred to in section 115O (1).

Important Points:

 ·   Subsidiary company means only that subsidiary company in which parent company hold more than 50% in nominal value of equity share capital. Dividend received from other type of subsidiaries i.e., subsidiaries having Controlling Composition of Board, sub-subsidiaries, joint ventures, etc. shall qualify for availing benefit under section 115-O (1A).

·   Benefit of reduction of dividend is available on year on year basis, i.e., Dividend paid for one Financial Year can be claimed in the same Financial Year only. Carry forward of benefit is not allowed. Further, benefit can be availed irrespective of the fact that the dividend is paid for different financial year.
·    Deemed dividend u/s 2(22)(a)/(b)/(c)/(d) is also considered for taking the benefit under section 115-O.
·   Dividend on both preference shares and equity shares shall be considered.
·    Carry forward benefit is also not allowed.

This Article has been Shared by Student of ICAI Palak Aggarwal. She can be reached at aggarwal.palak2809@gmail.com