According to section 2(22), the following receipts are deemed to be dividend:
(a) Distribution of accumulated profits, entailing the release of company’s assets - Any distribution of accumulated profits, whether capitalized or not, by a company to its shareholders is a dividend if it entails the release of all or any part of its assets.
For example, if accumulated profits are distributed
(i) in cash, it is dividend in the hands of the shareholders.
(ii) in kind, for example by delivery of shares etc. entailing the release of the company’s assets, the market value of shares is deemed dividend in the hands of the shareholder.
(b) Distribution of debentures, deposit certificates to shareholders and bonus shares to preference shareholders - Any distribution to its shareholders by a company of debenture, debenture stock or deposit certificate in any form, whether with or without interest, and any distribution of bonus shares to preference shareholders to the extent to which the company possesses accumulated profits, whether capitalized or not, will be deemed as dividend. The market value of such bonus shares is taxable in the hands of the preference shareholder. In the case of debentures, debenture stock etc., their value is to be taken at the market rate and if there is no market rate they should be valued according to accepted principles of valuation. Note: Bonus shares given to equity shareholders are not treated as a dividend.
(c) Distribution on liquidation - 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 capitalized or not, is deemed to be dividend income. Note: Any distribution made out of the profits of the company after the date of the liquidation cannot amount to the dividend. It is a repayment towards the capital. Accumulated profits include all profits of the company up to the date of liquidation whether capitalized or not. But where liquidation is consequent to the compulsory acquisition of an undertaking by the Government or by any corporation owned or controlled by the Government, the accumulated profits do not include any profits of the company prior to the 3 successive previous years immediately preceding the previous year in which such acquisition took place subject to certain exceptions.
(d) Distribution on the reduction of capital - Any distribution to its shareholders by a company on the reduction of its capital to the extent to which the company possessed accumulated profits, whether capitalized or not, shall be deemed to be a dividend.
Dividend Includes dividend referred under section 2(22)(a) to (d) but shall not include sub-clause (e) thereof.
Advance or loan by a closely held company to its shareholder
Any payment by a company in which the public are not substantially interested of any sum by way of advance or loan to any shareholder who is the beneficial owner of 10% or more of the equity capital of the company will be deemed to be a dividend to the extent of the accumulated profits. If the loan is not covered by the accumulated profits, it is not deemed to be a dividend.
Advance or loan by a closely held company to a specified concern - Any payment by a company in which the public are not substantially interested to any concern (i.e. HUF / Firm / AOP / BOI / Company) in which a shareholder, having the beneficial ownership of at least 10% of the equity shares is a member or a partner and in which he has a substantial interest (i.e. at least 20% share of the income of the concern) will be deemed to be dividend. Also, any payments by such a closely held company on behalf of, or for the individual benefit of any such shareholder will also be deemed to be a dividend. However, in both cases, the ceiling limit of the dividend is the extent of accumulated profits.
The following payments or loan given would not be deemed as dividend:
I. If the loan is granted in the ordinary course of its business and lending of money is a substantial part of the company’s business, the loan or advance to a shareholder or to the specified concern is not deemed to be a dividend.
II. Where a loan had been treated as a dividend and subsequently the company declares and distributes a dividend to all its shareholders including the borrowing shareholder, and the dividend so paid is set off by the company against the previous borrowing, the adjusted amount will not be again treated as a dividend.
Apart from the exceptions cited above, the following also do not constitute “dividend” –
I. 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;
II. Any distribution of shares on demerger by the resulting companies to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).
Year of accrual of dividend
Section 8 provides that deemed dividend under section 2(22) declared by a company or distributed or paid by it shall be deemed to be the income of the previous year in which it is declared, distributed or paid, as the case may be. Any interim dividend shall be deemed to be the income of the previous year in which the amount is unconditionally made available to the member who is entitled to it.