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Article by Megha Kapoor and Sanjana Bakshi*

In simple terms, distributed profits are those earnings which are shared with shareholders as
dividend. Section 115-O of the Income Tax, 1961 refers to dividend ditribution tax as an additional
income tax. Such tax is not in the nature of withholding tax. It is a levy on the post tax profits of the
company out of which the dividend is declared or distributed.
Thus, it is clear that the dividend distribution tax is an income tax on the distributable profits of the
domestic company.

Pre-Amendment
Section 115-O: - Tax On Distributed Profits of Domestic Companies
The Domestic Company shall, in addition to the income tax chargeable in respect of its total income,
be liable to pay additional income tax on any amount declared, distributed or paid by such company
by way of dividend (whether interim or otherwise), whether out of current or accumulated profits and
shall be charged to additional income-tax at the rate of 15%. This is also referred as tax on
distributed profits.
The amount referred under Section 115-O(1) i.e. dividend to be distributed shall be reduced by 1
a) the amount of dividend, if any, received by the domestic company during the financial year, if i. such dividend is received from its subsidiary;
ii. the subsidiary has paid tax under this section on such dividend; and
iii. the domestic company is not a subsidiary of any other company.
However, the same amount of dividend shall not be taken into account for reduction more than once.
b) The amount of dividend paid to any person for, or on behalf of, the New Pension System Trust
established on the 27th day of February, 2008 under the provisions of the Indian Trusts Act, 1882.
The benefit u/s 115-O (1A) is available only to the ultimate holding company. But ultimate holding
company can claim the benefit on dividend received from multiple subsidiary companies.
No income tax shall be paid by the Domestic Company on its total income which is computed in
accordance with this Act, the tax on distributed profits payable by such company.
The principal officer of the domestic company and the company shall be liable to pay the tax on the
dividend distribution profit within 14 days from

the date of declaration or

distribution or

payment of any dividend,

Whichever is earlier
Further, the tax on dividend distribution profit shall be treated as the final payment of the tax in
respect of the amount declared, distributed or paid as dividends and no further credit shall be
claimed by the company or by any other person in respect of the amount so paid.
The company or the shareholder shall not be allowed any deduction in respect of the amount which
has been charged to tax or the tax thereon under Sec. 115-O(1). The interpretation of this clause is
that no deduction shall be allowed to the shareholder under any provision of the Income tax Act,
1961 in respect of any expenditure which he has incurred on collection or earning of the dividend. 2
No tax on distributed profits shall be chargeable in respect of the total income of an undertaking or
enterprise engaged in developing or developing and operating or developing, operating and
maintaining a Special Economic Zone for any assessment year on any amount declared, distributed
or paid by such Developer or enterprise, by way of dividends (whether interim or otherwise) on or
after the 1st day of April, 2005 out of the current income either in the hands of the Developer or
enterprise or the person receiving such dividend.
Accordingly dividend distribution tax is chargeable on amount declared, distributed by way of
dividend by the said undertaking or enterprise after 1-6-2011.

Post-Amendment
The Government had been trying to make the tax laws simpler every year; however, there are
numerous amendments required in the tax laws. The union budget for the Financial Year 2013-14
was presented before the Parliament on 28th February 2013 and the finance minister has made
many changes in the Income Tax Act.
The Amendment in relation to "tax on distributed profits of the domestic companies" by Financial Bill
of 2013 is as follows:The Clause 27 of the Bill amended Section 115-O of the Income-tax Act relating to tax on distributed
profits of domestic companies.
Under the existing provisions contained in sub-section (1A) of section 115-O, the amount of
dividends referred to in sub-section (1) shall be reduced by the amount of dividend, if any, received
by the domestic company during the financial year, if a. such amount of dividend is received from its subsidiary ; and
b. the subsidiary has paid tax payable under this section on such dividend.
The said sub-section also provides that the same amount of dividend shall not be reduced more than
once.
It is proposed to amend clause (a) of the aforesaid subsection (1A) so as to provide that in case a
domestic company receives any dividend from any of its subsidiary during the financial year and
where such subsidiary a. is a domestic company, the subsidiary has paid tax, if any payable, on such dividend ; or

b. is a foreign company, the tax is payable by the domestic company under section 115BBD, on such
dividend, the dividend received from such subsidiary during the financial year shall be reduced.

Tax on Distributed Profit


Tax on distributed profit can arise in three different circumstances:
1. Tax on distributed profits of domestic company
2. Tax on distributed income of domestic company for buy back of shares
3. Tax on distributed income to unit holder

Tax on distributed profit of domestic Company


The following points should be taken care of while charging tax on the distributed profit

The rate of tax


Dividend received from subsidiary company to be reduced from the dividend
distributed
Dividend and Income Distribution tax to be grossed up
No tax on distributed by an undertaking or enterprise engaged in developing,
operating and maintaining a special economic zone
Time limit for deposit of additional income tax
Tax on distributed profits not allowed as deduction
Interest for non- payment of tax
Deemed to be default
Penalty under section 271 C
Prosecution
Exemption of dividend in the hands of shareholders

Tax on distributed income of domestic company for buy back of


shares

Tax on the distributed income to the share holders ( Rate of tax)


Additional income tax on buy back of the shares
Additional tax is payable even if the total income of domestic company is
exempted
Time limit for deposit of additional income tax
additional income tax to be treated as final payment
Income charged to tax not allowed as deduction to the company or the
shareholder
Interest paid on the delayed payment of tax
When the company is deemed to be the assesse in default
Exemption of the share holder on account of buy back of the shares

Tax on distributed income to unit holder

Tax on income distributed to unit holders by the specified company or a mutual


fund
Income distribution tax to be grossed up
Distributed income on which the provisions are not applicable
Time limit for deposit of additional income tax
Income charged to tax not allowed as deduction
Interest payable for non- payment of tax
Situation in which specified company or mutual fund shall be deemed to be
assessee
Exemption of income in the hands of unit holder

Tax on the Income received from venture capital companies/ venture


capital funds