Exemption under section 10(34) not to apply to dividend chargeable to tax in accordance with section 115BBDA :

Effective from: A.Y.2017-18

(i) Section 10(34) exempts dividend received by a shareholder of a domestic company, since the same is subject to dividend distribution tax (DDT) under section 115-O.

(ii) Under section 115-O, dividends distributed by a domestic company are subject to tax@ 15% at the time of distribution in the hands of company declaring dividend. This may result in vertical inequity amongst the tax payers since dividend distributed to those shareholders (who receive high dividend) are subject to tax only at the rate of 15% whereas had such income been taxable in their hands directly, the same would have been subject to tax at the rate of 30%.

(iii) In order to remove this vertical inequity, section 115BBDA has been inserted to provide that any income by way of aggregate dividend in excess of ` 10 lakh shall be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a firm who is resident in India, at the rate of 10%.

(iv) Further, the taxation of dividend income in excess ` 10 lakh shall be on gross basis i.e., no deduction in respect of any expenditure or allowance or set-off of loss shall be allowed to the assessee in computing the income by way of dividends.

(v) Accordingly, a proviso has been inserted in section 10(34) to provide that the exemption available thereunder in respect of dividend received by a shareholder from a domestic company would not apply to income by way of dividend chargeable to tax under section 115BBDA.

Example

A Ltd., a domestic company, declared dividend of ` 170 lakh for the year F.Y.2015-16 and distributed the same on 10.7.2016. Mr. X, holding 10% shares in A Ltd., receives dividend of ` 17 lakh in July, 2016. Mr. Y, holding 5% shares in A Ltd., receives dividend of ` 8.50 lakh. Discuss the tax implications in the hands of A Ltd., Mr.X and Mr.Y, assuming that Mr.X and Mr.Y have not received dividend from any other domestic company during the year.

Solution

(i) The dividend of ` 170 lakh declared and distributed in the P.Y.2016-17 is subject to dividend distribution tax under section 115-O in the hands of A Ltd. First of all, the dividend received has to be grossed up by applying the rate of 15%. The gross dividend is ` 200 lakh [` 170 lakh × 100/85]. Dividend distribution tax @17.304% is
` 34.608 lakh.

(ii) In the hands of Mr. X, dividend received upto ` 10 lakh would be exempt under section 10(34). ` 7 lakh, being dividend received in excess of ` 10 lakh, would be taxable@10% as per section 115BBDA. Such dividend would not be exempt under section 10(34). Therefore, tax payable by Mr. X on dividend of ` 7 lakh under section 115BBDA would be ` 72,100 [i.e., 10% of ` 7 lakh + cess@3%].

(iii) In the hands of Mr. Y, the entire dividend of ` 8.50 lakh received would be exempt under section 10(34), since only dividend received in excess of ` 10 lakh would be taxable under section 115BBDA.