FAQs The one-stop solution to the sudden rush for interim dividend Jyoti Srivastva jyoti@vinodkothari.com Saurav Malpani saurav@vinodkothari.com Corporate Law Services Division corplaw@vinodkothari.com 4 th March, 2016 (updated as on 8 th March, 2016) Check at: http://india-financing.com/staffpublications.html for more write ups. Copyright: This write up is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.
Contents Introduction... 3 Meaning of interim dividend... 3 Legal provisions for declaration of interim dividend... 4 Dividend policy... 7 Procedural aspects:... 9 Time schedule for declaration of interim dividend... 15 Taxation Aspects... 17
Introduction The companies suddenly seem to be in a rush to declare interim dividend. The driving reason behind this rush lies in the amendments inserted in the Finance Bill, 2016. Finance Bill, 2016, seems to have caught hold of the income which was getting taxed at a lower rate. As per the provisions of the Income Tax Act, 1961("IT Act"), dividend distributed by companies, are exempt in the hands of the shareholders by way of exemption under section 10(34) IT Act. Thus, companies are liable to pay distribution tax under section 115-O of the IT Act, at the rate of 17.304% (i.e. basic rate of 15% plus surcharge of 12% and cess of 3%). Through the Finance Bill 2016, a new section has been introduced (i.e. 115BBDA) to provide that, where the dividend is to be paid to resident individuals, HUFs and Firms then, there would be an additional tax at the rate of 10% in the hands of the investors. This step by the Hon'bl Finance Minister aims at taxing such portion of income which was getting escaped from the ambit of tax, in the hands of those investors, who are subjected to higher tax rate (i.e. 30%). With the provision of additional 10% tax to be imposed on the investor is on receipt dividend income, the Indian market is witnessing a rush to declare interim dividends. The above amendment would be made effective from the Assessment Year 2017-18 (i.e. previous year 2016-17). But, amidst all the rush, companies also have the host of regulatory compliance to adhere to, during the process of declaring interim dividend. Be it in terms of the Companies Act, 2013, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 or the Secretarial Standards; companies have to take due care of all the legal requirements. Hence, sensing the need of the hour, an attempt has been made to compile a comprehensive set of FAQs, discussing all the probable questions in length which may hover over one's mind while taking a decision to declare an interim dividend. The FAQs have been framed to act as "The one-stop solution to the sudden rush for interim dividend". Meaning of interim dividend 1. What is an interim dividend? Dividends which are paid by the board of directors between two annual general meetings without declaring them at an annual general meeting are called interim dividend.
2. Is interim dividend also dividend as defined in Section 2 (35) of the Act, 2013 ( Act, 2013 )? The term dividend as defined in Section 2(35) of the Act, 2013 includes any interim dividend. Hence, the definition as provided under the Act, 2013 is an inclusive definition rather than an exhaustive one. Therefore, interim dividend is also a dividend as per the provisions of the Act, 2013. 3. Is interim dividend also dividend as defined in Section 2 (22) of the Income tax Act, 1961? The definition of dividend in sec. 2 (22) is based on release of profits. Hence, interim dividends will also be included in the same. In addition, Section 115-O (1) of the Income Tax Act, 1961 provides that companies in addition to their tax liability would be required to pay distribution tax where any dividend (whether interim or otherwise) is paid, distributed or declared by the company. Thus the term dividend includes interim dividend as well. Legal provisions for declaration of interim dividend 4. What are the provisions of law pertaining to interim dividend? While declaring interim dividend the following provisions of law shall have to be taken into consideration: a) Provisions of the Act, 2013: Section 2(35), 24, 51, 70, 73, 74, 123, 126, 127, 128, 134(3)(k), the Companies (Declaration and Payment of Dividend) Rules, 2014 and Table- F; b) Provisions of the Act, 1956: 205A, 205B and 205C; and c) Articles of Association (AOA) of the company. 5. Who can declare an interim dividend? As per sec 123 (3), an interim dividend can be declared by the board of directors of a company at any time before the closure of the financial year. However, final dividend, which includes interim dividend as well, is declared by the shareholders of a company at
its annual general meeting based on the recommendation of the board of directors of the company. 6. What are the sources for declaration of interim dividend? Section 123 of the Act, 2013 states that: The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: xxx. [Emphasis Supplied] Therefore, in line with the above, it is clear that there are basically two sources for declaration of an interim dividend. They are: a) Current year s profit: Out of profits of the financial year in which such interim dividend is proposed to be declared - In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. b) Accumulated surplus lying to the credit of profit and loss account: Out of the profits of the company for any previous financial year or years remaining undistributed; 7. Can interim dividend be paid out of the free reserves? While going through the language of Section 123 (3) it seems that the board of directors has the power to declare interim dividend only either out of the surplus fund or out of current year s profit. Section 123 (3) does not permit declaration of interim dividend out of the free reserve. However, in case of inadequacy or absence of profits in any financial year, a company may declare interim dividend by transferring the amount lying in free reserves to the credit of profit and loss account, that is, a surplus account. In such a case, the compliance of Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 needs to be ensured. Once the amount is thus transferred to surplus, the surplus may be used for distribution of interim dividend.
8. Is the declaration of interim dividend by the Board a declaration or a mere advance payment? a) Properly speaking, dividend refers to distribution of profits of the company. The profits of the company are determined only when the financial statements are adopted by the company in general meeting. Therefore, the payment of the interim dividend is merely an advance payment in expectation of profits for the year. Therefore, the declaration of interim dividend is done in view of i. performance of the company for the quarters already completed; and ii. likely performance for the quarters yet to be completed. b) Should it so happen that there are losses in the quarters remaining to be completed, and therefore, the aggregate profits of the company fall short of the dividend already declared, the Board shall be responsible to ensure that the interim dividend already paid by the board is retrieved. The board remains liable to make good any losses incurred by the company on this account. c) In this sense, interim dividend is merely paid, it is not declared by the Board. This is very clear from the language of Table F that para 80 of Table F states the process for declaration of dividend, and para 81 provides for payment of interim dividend. Hence, interim dividend is only paid as an advance against dividend it attains finality only when the dividend is declared by the company in general meeting. However, Section 123 (3) of the Act, 2013 and Section 205 (1A) of the 1956 Act, post Amendment Act, 2000, used the expression declaration in respect of interim dividend which, in our view, is inappropriate. 9. Does interim dividend require declaration by the company in general meeting as well? a) In our view, declaration of dividend is the exclusive domain of the members in general meeting. The board recommends dividends; the general meeting declares the same. Therefore, even in case of interim dividend, the general meeting must declare it. b) Sometimes, there is an interim as well as a final dividend. In that case, the general meeting should declare both. Sometimes, the company may have an interim dividend, but not a final dividend; in that case, the general meeting may adopt the interim dividend as the final dividend.
10. Can the directors rescind the interim dividend once declared? While the Act, 2013 does not provide any express bar on the directors to rescind the decision of interim dividend, and in fact, the Supreme Court has ruled in case of J. Dalmia v. Commissioner of Income Tax, (1964) 53 Itr 83, that the directors have the power to rescind a dividend once declared before payment of the dividend. However, it will most inappropriate for the directors to go flip-flop on the decision already made by them. Instead, they should bear utmost care while approving the resolution of the interim dividend. This has to be understood by the directors approving the agenda in question that declaration of interim dividend has significant impact on the prices of the shares of the company. In case the declaration is reverted, the same may lead to unusual change in the price of the shares. Also allowing the dividend once and then disallowing the same thereafter would be like playing with the sentiments of an investor which may lead to public displeasure. Also this is an established fact that the law should not be only adhered in letter but also in its spirit and the spirit of the law can never be to prejudice the shareholders. Dividend policy 11. Should declaration of dividend follow a dividend policy? a) It is appropriate that companies should have a dividend policy. The dividend policy is determined keeping in mind the needs for plough back of profits by the company, needs for regular returns by shareholders, opportunity rate of return in the hands of the company and the shareholders. The subject matter of dividend policy is discussed elaborately in financial literature. b) See Vinod Kothari s article on dividend policy here: http://vinodkothari.com/wpcontent/uploads/2014/01/dividend-policy.pdf 12. What are the considerations when the board decides to distribute interim dividend? There may be multiple considerations. For example, in case of PSUs, the need for recognition of income by the government may also be a consideration. Note that governments typically do not follow accrual-based accounting, and therefore, government may want dividend to be actually distributed. There may be also be considerations for distribution from viewpoint of shareholders income.
Also before deciding to distribute interim dividend, the board shall ensure the time gap of at least thirty days between two record dates. 13. If, for a particular year, the Board decides to declare interim dividend at a rate which is an outlier that is, exceptionally high, does the Board have to give a reason for the same? a) Considerations of a particular block of shareholders cannot be overriding consideration in the minds of the board. The board has to weigh the implications of interim dividend for the company and those for the shareholders. For example, a situation arises in FY 2015-16 whereby dividends declared in the forthcoming year may suffer additional dividend distribution tax by virtue of Section 115BBDA is proposed to be inserted by Finance Bill 2016. However, for the company, paying an interim dividend has a cost, by way of pre-ponement of dividend payment by almost like 6 months (normally, a company would pay the dividends within 30 days of AGM, assuming AGM is held say in the month of August or so, dividends will be paid in Sept). However, paying them in the month of March amounts to preponement. b) Compared to this, the shareholders holding major shareholding block, if they are individuals, HUFs etc., get a tax advantage. c) Therefore, the company has to weigh the tax advantage, and the financial cost on account of accelerated distribution. 14. Whether declaration of interim dividend to directors is an RPT? Generally, a director is deemed to be interested in a matter only where the interest of a director is different from the interest of shareholders. That is, where there is a conflict of interest. Interim dividends are paid to all shareholders alike. Directors will be entitled to the extent they are the shareholders. Therefore, there is no generically clashes and the interest of the director is no way different from the interest of the shareholders, Hence, the declaration of interim dividend may not tantamount to an RPT. However, there may be a situation that typically major shareholding blocks are with the directors and the possibility of receiving dividends exceeding Rs 10 lacs is more with the promoter block than with ordinary shareholders. So, if the company s decision is swayed by the interest of promoter shareholders, there may be a question of conflict of interest.
Therefore, the board while passing the resolution must be satisfied that the decision to declare the dividends is not being influenced by any particular shareholding block, and is generically in the interest of the shareholders. Procedural aspects: 15. Can a Board meeting be called at a shorter notice for the purpose of declaring interim dividend? Yes, as per Section 173(3) of the Act, 2013 read with para 1.3.11 of Secretarial Standard 1, the meeting of the board of directors can be called at shorter notice to transact any item of business which is of urgent nature subject to the fulfillment of either of the following condition: a) At least one independent director shall be present at such meeting; or b) In case of absence of independent director from such meeting, decision taken at the meeting is circulated to all the directors and shall be final only on ratification thereof by at least one independent director. However, in case the company does not have an independent director, the decisions made shall be final only on ratification thereof by a majority of the directors of the company, unless such decisions were approved at the meeting itself by a majority of directors of the company. Also note that the fact that the meeting is being held at a shorter notice shall be stated in the notice calling board meeting. 16. Can the notes to agenda for declaration of interim dividend be given at shorter notice? Declaration of dividend is an unpublished price sensitive information as per para 1.3.7 of Secretarial Standard 1 and as per para 1.3.11 of Secretarial Standard 1 and accordingly the notes on items of business which are in the nature of Unpublished Price Sensitive Information may be given at a shorter notice with the consent of majority of the directors of the company out of which at least one shall be independent director, if any. If the company is not required to appoint an independent director then consent for sending items of agenda at shorter notice may be given by majority of directors of the company.
This is to be noted that if the general consent for sending notes on items of business at a shorter notice has been obtained in the first meeting of the board held in the financial year and/or also whenever there is any change in Directors, then the notes may be sent on shorter period. Where the company has not obtained the general consent as mentioned above, requisite consent may be obtained before the concerned item is taken up for consideration at the meeting. 17. What are the conditions to be fulfilled by a company before declaration of interim dividend? The following conditions need to be fulfilled by a company before declaration of interim dividend: a) Conditions for distribution of dividend out of current year profits and surplus: i. Depreciation: If dividend is declared out of the current year profits or from the surplus in profits and loss account, the profits must be arrived at after providing for depreciation in accordance with the provisions of Schedule II of the Act, 2013. ii. iii. Rate of dividend in case of loss in the current year: In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding 3 financial years. Set off of losses: No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year. b) Conditions for distribution of dividend out of free reserves: In case the dividend is declared from free reserves the following conditions given in Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 are required to be fulfilled:
i. Rate of Dividend: The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the 3 immediately preceding years. However, the condition shall not apply to a company, which has not declared any dividend in each of the 3 preceding financial year. ii. iii. iv. Amount: The total amount to be drawn from such accumulated profits shall not exceed 1/10th of the paid-up share capital and free reserves as per the latest audited financial statement. Set off of losses: The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared. Balance in Reserves: The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital. c) The Company declaring dividend shall be compliant of the provisions of sections 73 and 74, if applicable. 18. Can interim dividend be declared out of the surplus? What are the conditions for declaration of interim dividend during any financial year out of the surplus? The conditions for declaration of interim dividend during any financial year out of the surplus are as follows: a) Depreciation: If dividend is declared out of the surplus in profits and loss account, the profits must be arrived at after providing for depreciation in accordance with the provisions of Schedule II of the Act, 2013. b) Rate of dividend in case of loss: In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding 3 financial years. c) The Company declaring dividend shall be compliant of the provisions of sections 73 and 74, if applicable.
19. Can interim dividend be declared out of the profits of the current financial year? What are the conditions for declaration of interim dividend out of profits of the current financial year? Yes, a Company may declare dividend out of the profits of the current financial year. The conditions for declaration of interim dividend out of profits of the current financial year are discussed as follows: a) Depreciation: If dividend is declared out of the current year profits, the profits must be arrived at after providing for depreciation in accordance with the provisions of Schedule II of the Act, 2013; b) Set off of losses: No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year; c) Transfer to reserve: A company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company. It is not a mandatory requirement; and d) The Company declaring dividend shall be compliant of the provisions of sections 73 and 74, if applicable. 20. Can interim dividend be declared out of reserves? What are the compliances to be ensured for the same? Dividend can be declared out of free reserves only in case of absence or inadequacy of profits in that financial year. However, as per Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 in case there are inadequate profits or no profits in the company, the company may still declare dividends out of the surplus subject to the following conditions: a) Rate of Dividend: Rate of dividend cannot exceed the average rate of dividend as declared in the three immediately preceding years as long as the company has declared dividend in the three preceding years; b) Amount: Amount drawn from accumulated profits cannot exceed 1/10th of the paid-up share capital and free reserves as appearing in the last audited financial year;
c) Set off of losses: The amount drawn will be utilized to set off the losses before any dividend with respect to equity shares is declared; d) Balance in Reserves: Balance of the reserve after such withdrawal shall not fall below 15% of the paid-up capital. 21. Whether the interim dividend paid needs to be approved by the shareholders in the ensuing AGM? Letter No. /13/(205A)/79-CL-V, dated 18 th July, 1981 issued by Department of Company Affairs expresses the department s view that the approval of the dividend is the privilege of the General meeting and the Board can pay interim dividend if so authorised by the AOA subject to regularization of the interim dividend by the Company in General meeting. The view mentioned above ere expressed by inserting section 2(14A) in the Companies Act, 1956 by the companies (Amendment) Act, 2000, which defines dividend to include interim dividend. The definition of dividend under the Act, 2013 remains the same. Further, as per section 102(2) of the Act, 2013 ordinary business includes declaration of dividend. In view of the aforesaid, interim dividend also needs to be approved by the shareholders at the General meeting. 22. What modes are available for approving the proposal of declaration of interim dividend? The proposal for declaration of interim dividend can be resolved by any of the following modes: a) Board meeting: The dividend can be declared at the Board meeting in compliance with the provisions of Section 173 of the Act, 2013. b) Video conferencing: Rule 4 of the Companies (Meeting of Board and its Power) Rules, 2014 states the items of business that cannot be transacted through video confessing. Declaration of dividend is not restricted under the said Rule 4 and hence the proposal may also be considered vide video conferencing.
c) Resolution by circulation: Neither Section 179 of the Act, 2013 read with applicable rules, nor Section 123 of the Act, 2013 or Secretarial Standards anywhere require passing of resolution for declaration of dividend at the meeting of the board of directors. Accordingly, in our view, prima facie it seems an interim dividend can be declared by way of circular resolution. 23. How to comply with the provisions of SEBI (LODR) Regulations, 2015 in case dividend is declared through resolution by circulation? Compliances with respect to SEBI (LODR) Regulations, 2015 need to be carefully examined in case the dividend is declared by circular resolution. In our view, prior intimation u/r 29 can be given before the date on which proposal for circular resolution is sought to be given to the directors. Similarly, post intimation can be done once the majority of directors have passed the resolution. Other compliances w.r.t. fixing of record date, book closure, newspaper advertisement remain the same as in case of board meeting. 24. In case a company declares interim dividend out of current year profits or previous years profits which are not transferred to reserves, whether such company is confirming with the provisions of Act, 2013 and Secretarial Standard 3? Secretarial Standards-3 issued by The Institute of Company Secretaries of India deals with payment of dividend. Point No.1.1.5 of the Standard stipulates that Interim Dividend, if declared, is payable out of estimated profit for the period for which Interim Dividend is to be declared after taking into account depreciation for the full year and arrears of depreciation, Dividend at the contracted rate on preference shares, if any, appropriations and transfers to statutory reserves, taxation, and the provisions of the Companies (Transfer of Profits to Reserves) Rules, 1975. While Act, 2013 stipulates dividend can be paid out of current year profits as well as out of the profits of the previous financial years which has not been transferred to the reserves or both, Secretarial Standard-3 stipulates that the interim dividend is to be paid out of the estimated profit for the period for which dividend is to be declared. Section 118 (10) of the Act 2013 stipulates that Every company shall observe Secretarial Standards with respect to general and Board meetings specified by The Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 and approved as such by the Central Government. As on date,
Government of India has approved Secretarial Standards-1 & 2 which deals with Board Meetings and General Meetings. Even though the Act, 2013 provides that company can declare interim dividend out of current year profits and previous year s profits not transferred to the reserves, Secretarial Standards as a prudent policy is advising to declare Interim Dividend out of current year profits only. However, as on date, Secretarial Standards -3 which deals with dividend is not mandatory. SS-3 on declaration and payment of dividend is merely a guidance note for the purpose of declaration and payment of dividend. This guidance note is recommendatory and not mandatory in nature. Hence, abiding the provisions of SS-3 are absolutely at the sole discretion of the Company. Therefore, it may be said that in case a company declares interim dividend out of current year profits and previous years profits which are not transferred to reserves, that is to say out of the surplus in the profit and loss account, the same will said to be in compliance of the Act 2013. 25. What are the timelines for the purpose of declaring interim dividend? Time schedule for declaration of interim dividend Assuming the date of Board Meeting is March 11, 2016 Sl. Provisions Particulars Time limit No 1. Section 173(3) of CA, 13 & Para 1.3.6 of SS-1 Notice of Board Meeting to be held on shorter notice March 07, 2016 2. In terms of Code of Conduct under SEBI (PIT) Regulations, 2015 3. Regulation 29(2) of SEBI (LODR) Regulations, 2015 Closure of Trading Window Notify to Stock Exchanges regarding holding of BM to declare interim dividend and trading window closure March 07, 2016 till 48 hours after making disclosure to Stock Exchange March 08, 2016
4. Section 123(3) of CA, 13 5. Schedule III, Part A, Para 4 Holding of the Board Meeting for declaration of dividend Intimation to stock exchanges March 11, 2016 Within 30 minutes of closure of the Meeting on March 11, 2016 6. Intimation to NSDL/CDSL March 11, 2016 regarding record date 7. Regulation 42(1), Fixation of Record Date March 22, 2016 8. (2) & (3) of SEBI Prior intimation of Record Date to March 11, 2016 (LODR) Regulations, 2015 Stock Exchanges atleast 7 working days before the Record date 9. Regulation 42(3) of Closure of register of members or March 22, 2016 SEBI (LODR) transfer books for shares held in Regulations, 2015 physical mode & Rule 10 of Companies (MGT) Rules, 2014 10. Rule 10 of Companies (MGT) Rules, 2014 Publication of notice of book closure in newspapers atleast 7 days before such closure 11. Section 123(4) Deposit the amount of Dividend within five days from the declaration March 15, 2016 March 16, 2016 12. Section 124(1) CA, 13 13. Section 124(1) of CA, 13 Payment/ Claiming of dividend within 30 days of declaration Arrange transfer of unpaid or unclaimed to 'Unpaid Dividend Account' after expiry of 30 days from the date of declaration of dividend *Within 31 st March, 2016 *Within 31 st March, 2016 * Considering the proposal in the Finance Bill, 2016, the payment should also be made within FY 2015-16.
Taxation Aspects The one stop solution for the sudden rush for interim dividend 26. What are additional taxation burden imposed by Finance Bill, 2016? Sec 115BBDA proposed to be inserted by Finance Bill 2016 imposes an additional tax on the dividends in the hands of the shareholder at the rate of 10%. The trigger points for the applicability of the new tax are as follows: a) The shareholder must be a resident. b) The shareholder must be an individual, firm or HUF. Arguably though, but if there is a trust which is receiving income for a single beneficiary, and the beneficiary is an individual, the provisions may be attracted. Note that the word firm for Income-tax Act includes an LLP. c) The amount of dividend received by the shareholder during the financial year must be exceeding Rs 10 lacs. (Note: While the reference above is to total income - which means, whatever deductions are allowable for determination of total income must be allowed, specifically pertaining to dividend income, so as to ascertain whether the income is exceeding Rs 10 lacs or not, however, sec. 115BBDA (2) clearly provides that no deduction for expenditure or losses will be allowed in computation of the dividend income which means, the dividends will be taxed without any deduction. 27. How is the tax liability under sec. 115 BBDA computed? Is it based on aggregate dividend income of the shareholder, or dividends from a particular company? A plain reading of sec. 115 BBDA as proposed to be inserted makes it clear that it is dividends from a particular domestic company which is the subject matter of taxation. There does not seem to be a scope for aggregation of dividends received from all companies. 28. Is the tax applicable only on excess of dividend income over Rs 10 lacs, or on the entire dividend income, should the dividend income exceed Rs 10 lacs? While we are aware that there is a difference of view on this, our view is that a plain reading of sec. 115 BBDA suggests that the tax is applicable on the entire dividend income, should the dividend income exceed Rs 10 lacs, from a single domestic company. However, it is possible to interpret the expression such dividends as referring to the excess over Rs 10 lacs only.
29. Whether the additional tax to be levied in the hands of shareholder would be computed by grossing methodology as used for computing dividend distribution tax? Section 115-O (1B) of the Income Tax Act, 1961 provides that for the purpose of determining the dividend portion on which dividend distribution tax is to be paid grossing up is to be done. Unlike Section 115-O, nothing has been provided in the proposed section for application of grossing methodology for determining the tax to be paid by the investor. Thus amount received by the investor will be taxed at 10%. A clarification is expected in this regard by CBDT. There is a reference to gross dividends in the Explanatory Memorandum to the Bill. However, that reference seems to be to the dividend income before deduction of any expenses, rather than grossing up. The question of grossing up does not arise in case of dividends, as there is no deduction of tax at source. Distribution tax is not a case of deduction of tax at source. 30. What are the tax implications associated with interim period? Section 115-O (1) of the Income Tax Act, 1961 provides that companies in addition to their tax liability would be required to pay distribution tax where any dividend (whether interim or otherwise) is paid, distributed or declared by the company. Thus distribution tax as applicable to final dividend is applicable to interim dividend as well. 31. If interim dividend is declared and paid within 31 st March, 2016, will the shareholders be liable to pay such additional tax as proposed under Finance Bill, 2016? No. The proposed section is to become effective from assessment year 2017-18 (i.e. previous year 2016-17). Thus if the dividend is declared and paid by the company on or before 31 st March, 2016 then the tax implication as proposed by Finance Bill 2016 will not apply. 32. Will the position change in case the payment of such dividend declared prior to 31 st March is made after 31 st March, 2016? In order to escape from the proposed tax, the dividend should form part of the total income of the assessee for the financial year 2015-16. Thus, we need to check the method of accounting applied by the assessee to assess the year for which dividend will form part of his total income.
Dividend income are taxable under the head income from other sources. For the purpose of recognition of income under the head other sources for tax purposes, method of accounting as prescribed under section 145 of the Income Tax Act, 1961 is to be followed. Sub-section (1) of 145 provides that income chargeable under the head profits and gains of business profession or income from other sources shall be computed either by applying cash or mercantile system of accounting regularly employed by the assessee. Where the assessee follows cash system of accounting then the dividend will form part of his total income only if the said dividend is received by the assessee by 31 st March, 2016. Where the assessee follows mercantile system of accounting (i.e. accrual) then in such assessee would be entitled to consider the said dividend as part of his total income only when the right to receive such dividend is established. Para 8.4 of the Accounting Standard 9 on Revenue Recognition provides that dividends from investment in shares can be recognized only when the right to receive such dividend is established. In case of interim dividend, right to receive is established when the board of directors declares the interim dividend. However in case of final dividend right is established only when the dividend is approved in the annual general meeting. Thus if the assessee follows accrual system and dividend is received on or after 1 st April, 2016 then the dividend will form part of the total income of financial year 2015-16 as the board of directors have declared the dividend in 2015-16. However, in case the assessee applies cash method of accounting and the dividend is received on or after 1st April 2016, then the assessee will be subjected to additional tax of 10%. **** Read more articles on this subject at: http://www.indiafinancing.com/component/content/article/281.html Read more articles on other subjects at: http://www.india-financing.com/