Tax on distributed profit of domestic companies Chapter XII D [Section 115-O] under Assessment of Companies :

The amounts declared, distributed or paid on or after 1.4.2003 by a domestic company by way of dividends are charged to additional income-tax at the flat rate of 15%, in addition to normal incometax chargeable on the income of the company. Dividend received from domestic companies on or after 1.4.03 are exempt in the hands of shareholders [Sub-section (1)]

Section 115-O(1A) seeks to provide relief from double taxation of dividends by removing the cascading effect of dividend distribution tax in a multi -tier corporate structure. A holding company receiving dividend from its subsidiary company can reduce the same from dividends declared, distributed or paid by it. For this purpose, a holding company is one which holds more than 50% of the nominal value of equity shares of the subsidiary. However, there are certain conditions to be fulfilled to avail this benefit. They are –

– where such subsidiary is a domestic company, the subsidiary should have paid the dividend distribution tax, as payable on such dividend; and

– where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend.

Section 115-O(1B) provides that for the purposes of determining the tax on distributed profits payable in accordance with the section 115-O, any amount by way of dividends referred to in section 115-O(1), as reduced by the amount referred to in section 115-O(1A) [referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in section 115-O(1), be equal to the net distributed profits.

Illustration
X Ltd., a domestic company, has distributed on 1/11/2015, dividend of Rs 230 lakh to its shareholders. On 1/10/2015, X Ltd. has received dividend of ` 60 lakh from its domestic subsidiary company Y Ltd., on which Y Ltd. has paid dividend distribution tax under section 115-O. Compute the additional income-tax payable by X Ltd. under section 115-O.

Solution

Particulars	Rs in lakh
Dividend distributed by X Ltd.	230
Less: Dividend received from subsidiary Y Ltd.	60
Net distributed profits	170
Add: Increase for the purpose of grossing up of dividend  { 15/ 100-15 * 170 }	30
Gross dividend	200
Additional income-tax payable by X Ltd. u/s 115-O [15% of Rs 200 lakh]	30.00
Add: Surcharge@12%	3.60
	33.60
Add: Education cess@2% and SHEC@1%	1.01
	34.61

The NPS Trust is exempted from the applicability of dividend distribution tax in respect of dividend paid to any person for, or on behalf of, the NPS Trust. Hence, the dividend paid to any person for, or on behalf of, the NPS Trust would not be subject to dividend distribution tax. Therefore, for the purpose of calculating dividend distribution tax, a company can reduce such dividend from the dividends declared, distributed or paid by it. Even if no income tax is payable by a domestic company on its total income computed in accordance with the provisions of Income-tax Act, 1961, the tax on distributed profits shall be payable by such company [Sub-section (2)].

This tax must be paid to the credit of the Central Government within fourteen days from the date of (a) declaration of any dividend or (b) distribution of any dividend or (c) payment of any dividend, whichever is earliest [Sub-section (3)].

Section 115P provides that non-payment of dividend distribution tax within the time allowed under section 115-O(3) attracts simple interest @1% for every month or part thereof on the amount of such tax for the period beginning from the date following the date on which the tax was payable and ending with the date on which the tax is actually paid. The Principal Officer of a domestic company and the company is liable to pay interest on such non-payment or delayed payment. Section 115Q provides that the Principal Officer and the company would be deemed to be an assessee-in-default if they fail to pay the tax in accordance with the provisions of section 115-O.

The tax on distributed profits so paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends and no further credit therefore shall be claimed by the company or by any other person in respect of the amount of tax so paid [Sub-section (4)].

No deduction under any of the provisions of the Income-tax Act, 1961 shall be allowed to the shareholder in respect of the dividend income [Sub-section (5)].