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The term “tax deduction” is used when in context when an individual pays the required tax amount to the government under the prescribed format. When an individual pays the tax as per the different slabs mentioned under the Income Tax Act, then certain deductions were made in order to lower down the burden on the taxpayer. These deductions are those which a taxpayer earns throughout the whole year and the amount for the same get deducted from the gross income earned by the taxpayer in order to come to the conclusion regarding the total amount of tax that has to be paid by the taxpayer. These deductions are made by the government in order to motivate the taxpayer to work for the benefit of the society. The taxpayer can avail the benefits of different deductions made by the central as well as the state government by contributing towards such activities which will benefit the society at large. There is various type of deductions available under Section 80 of the Income Tax Act which can be availed by the taxpayer.
Statutory definition of Dividend
Section 2(22) of Income Tax Act, 1961 defines the term “dividend”. As per the clause dividend can be defined as follows:
- any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company;
- any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not;
- any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not;
- any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April 1933, whether such accumulated profits have been capitalised or not;
- any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ;
but “dividend” does not include—
- a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;
- a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March 1964, and before the 1st day of April 1965;
- any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;
- any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;
- any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
- any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).
Explanation 1.—The expression “accumulated profits”, wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April 1946, or after the 31st day of March 1948, and before the 1st day of April 1956.
Explanation 2.—The expression “accumulated profits” in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place.
Explanation 2A.—In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation.
Explanation 3. —For the purposes of this clause, —
(a) “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company;
(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;”
“Deemed Dividend”, in simple terms, can be understood as those dividends which are not originally paid as dividends but are considered as dividend so that the same can be deducted as per the provisions laid down in Income Tax Act. However, it does not include the following:
- Where the company has given money in the ordinary course of business to its shareholders when the money lending is the substantial part of the company’s business.
- Any Dividend paid by the company which is set off against the whole or part of the loan which has been deemed as dividend u/s 2(22)(e).
- Any distribution made in accordance with clause (c) or clause (d) of Sec 2(22) in respect of preference shares.
- Payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of Sec 77A of the Companies Act, 1956.
- Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company.
Section 80M of Income Tax Act 1961
Section 80M of the Act was removed by the Parliament after passing of the Finance Bill in the year 2003. Later amendments were made to the Act and by way of introducing the Finance Bill in 2020 the section was re-introduced in the Act so that the corporate entities can be relived while paying off the dividends. As per the new provision, the section applies to deductions in case of inter corporate dividends. This was the same provision which was omitted earlier by way of amendment and later on re introduced.
Section 80M – Deduction in respect of certain inter-corporate dividends
(1) Where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company or a foreign company or a business trust, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company or foreign company or business trust as does not exceed the amount of dividend distributed by it on or before the due date.
(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.
Explanation.—For the purposes of this section, the expression “due date” means the date one month prior to the date for furnishing the return of income under sub-section (1) of section 139.
By virtue of the section, it can be interpreted that the section applicable to the domestic companies. The only condition that is mentioned under the section regarding the deduction of the dividend is that the gross total income of such companies should also include those incomes which were received in previous year and are occurred by way of dividend from any other domestic companies. Hence, it can be concluded that those incomes which are raised through the dividend received from other domestic companies should also be included in the gross total income of the company while making deductions under this provision of Income Tax Act.
The section further states that in case of deduction of inter corporate dividend the due date will be considered as the date which is one-month prior with respect to the return as furnished under the provision as laid down in section 139(1) of the Act. The clause (1) of section 139 states as follows:
Every person whether a company or firm or person other than company and firm shall have to furnish the return in the prescribed manner and format and within the stipulated time period if the total income or the total income of such person for whom he is assessable under the provisions of the Act during the previous year has exceeded the maximum amount of which is not chargeable under the provisions of the Act.
Hence, it can be interpreted from the above clause in relation to section 80M of the Act, that if the amount exceeded the maximum limit given for the relaxation under the Act, then in such cases the due date for inter corporate will be one-month prior from the date when such returns will be furnished.
Types of deduction
Further, to avail the deduction under the required provision there are two types of deduction mentioned:
- Dividends that are received from any other domestic company.
- Dividends that are distributed by the domestic company on or before the due date.
Hence, it can be concluded that the provision also includes the deemed dividends. However, the only condition kept is that such dividends should be received from the domestic company.
Bar of double deduction
The section further bars the provision for getting the benefit of double deduction. It states that when the deduction is already availed during the previous year then in such case the person under the provision will be debarred from getting the deduction for the same in another year. Hence this provision bars the enjoyment of getting double benefit of deduction.
The cause of the section was to make sure that the corporate entity has covered all the dividends from the domestic company as a part of his taxable income and also paid the dividends to the shareholders of the company. The benefits given to the company is given by assuming that the distribution regarding the payment of the dividends to the shareholder are paid from the dividends received from the other domestic companies. This thereby allows to avail the benefit of deduction under the Act.
Relation of Section 80M and Section 115-O(1A)
When section 80M was earlier omitted by virtue of the amendment made by introducing Finance Bill 2003. Section 115-O (1A) was inserted which provided the similar benefit to the company with respect to the payment of dividend.
However, there are various difference between both the sections which can be listed as follows:
- Under Section 80M the dividends should be received from the other domestic companies. Whereas, in case of section 115-O (1A) to avail the benefit under the section the company can get deduction even when the dividend is received from the subsidiaries of such company.
- To avail the benefit under section 80M, the gross total income of the company should not be in negative and also should be eligible to avail the deduction by fulfilling the conditions laid down in various provisions of the Act. Whereas, in case of Section 115-O (1A) the benefit can be availed even when the gross total income of the company is in negative.
- The benefits under section 80M can be availed only when the dividend is received from the domestic company, however, the benefit under section 115-O (1A) can be availed even when the dividend is received from foreign subsidiaries of the company. In other words, only domestic companies are included under section 80 M and both foreign as well as domestic subsidiaries are included under the ambit of section 115-O (1A) of the Act.
The deductions under section 80M the deductions are allowed only on the net dividends received by the company. These net dividends include both the actual received dividends and deemed dividends but only condition is that both types of dividends should be received from the domestic companies and not from any foreign subsidiary company or foreign company. The due date is also mentioned under the Act. The net dividend income can be computed by deducting the amount of deduction availed from gross total income of the company.
 Supra Note 1