Grossing up of Dividend and Income Distribution Tax

Dividend and Income Distribution Tax

Section 115-O of the Act provides that a domestic company shall be liable for payment of additional tax at the rate of 15 per cent. on any amount declared, distributed or paid by way of dividends to its shareholders. This tax on  distributed profits is final tax in respect of the amount declared, distributed or paid as dividends and no credit in respect of it can be claimed by the company
or the shareholder.
Section 115 R of the Act similarly provides for levy of additional income-tax in respect of income distributed by the mutual funds to its investors at the rates provided.

Prior to introduction of dividend distribution tax (DDT), the dividends were taxable in the hands of the shareholder. The gross amount of dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate which varied from 0 to 30%. However, after the introduction of the DDT, a lower rate of 15% is currently
applicable but this rate is being applied on the amount paid as dividend after reduction of distribution tax by the company.

Therefore, the tax is computed with reference to the net amount. Similar case is there when income is distributed by mutual funds. Due to difference in the base of the income distributed or the dividend on which the distribution tax is calculated, the effective tax rate is lower than the rate provided in the respective sections.

In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which are actually received by the unit holder of mutual fund or shareholders of the domestic company need to be grossed up for the purpose of computing the additional tax.

Therefore, it is proposed to amend section 115-O in order to provide 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 sub-section (1) of the said section, as reduced by the amount referred to in sub-section (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 sub-section (1), be equal to the net distributed profits.

Thus, where the amount of dividend paid or distributed by a company is Rs. 85, then DDT under the amended provision would be calculated as follows:
Dividend amount distributed = Rs. 85
Increase by Rs. 15 [i.e. (85*0.15)/(1-0.15)]
Increased amount = Rs. 100
DDT @ 15% of Rs. 100 = Rs. 15
Tax payable u/s 115-O is Rs. 15
Dividend distributed to shareholders = Rs. 85

Similarly, it is proposed to amend section 115R to provide that for the purposes of determining the additional income-tax payable in accordance with sub-section (2) of the said section, the amount of distributed income shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in sub-section (2), be equal to the amount of income distributed by the Mutual Fund.

These amendments will take effect from 1st October, 2014.

SECTION 35

SCIENTIFIC RESEARCH EXPENDITURE

Where assessee-company, apart from rendering technical services to its clients, did research in field of development of wind power at its own, which was used for benefit of public, scientific research expenditure was to be allowed - Assistant Commissioner of Income-tax -1(1) v. Consolidated Energy Consultants Ltd. (2014) 41 taxmann.com 379 (Indore - Trib.)     SECTION 37(1) BUSINESS EXPENDITURE - ALLOWABILITY OF Software : Where assessee-company purchased application software, expenditure incurred towards purchase of software could not be treated as revenue expenditure - Srinivasa Resorts v. Assistant Commissioner of Income-tax (2014) 41 taxmann.com 350 (Hyderabad - Trib.)       SECTION 54F CAPITAL GAINS - EXEMPTION OF, IN CASE OF INVESTMENT IN RESIDENTIAL HOUSE Construction : In terms of section 54F, when assessee invests sale consideration in purchase of a residential property within prescribed time period, he is entitled to claim deduction and, in such a case, extent of construction of residential building and facilities provided in such building are not relevant - Commissioner of Income-tax v. Dr. R. Balaji (2014) 41 taxmann.com 411 (Karnataka)     SECTION 158BG BLOCK ASSESSMENT IN SEARCH CASES Where Assessing Officer as a result of search conducted under section 132 upon assessee passed a block assessment order on him, no opportunity of hearing was required to be given to assessee by Commissioner while granting approval under section 158BG - Commissioner of Income-taxv.Dr. K.P. Singh (2014) 41 taxmann.com 406 (Allahabad)       SECTION 194C DEDUCTION OF TAX AT SOURCE - CONTRACTORS/SUB-CONTRACTORS PAYMENT TO Lounging and Catering service : Where consolidated payment was made towards lounging and catering services as a part of single arrangement, it was not permissible to artificially bifurcate payment so made towards two limbs or component services in view of two attracting differential tax and same would fall under generalized contractual category under section 194C - Assistant Commissioner of Income-tax (TDS) -2(2) v. Qantas Airways Ltd. (2014) 41 taxmann.com 383 (Mumbai - Trib.) Cargo handling charges : Where assessee was engaged in business of clearing and forwarding of cargo, etc. and it made payments towards cargo handling charges to two parties and work involved was mainly labour oriented work with help of various machineries and equipments, TDS provisions of section 194C would be applicable with respect to said payments - Commissioner of Income-tax (TDS)v.Aditya Marine Ltd. (2014) 41 taxmann.com 381 (Gujarat)       SECTION 254 APPELLATE TRIBUNAL - ORDER OF Duties of Tribunal : Whenever any decision has been relied upon and/or cited by assessee and/or any party, Tribunal is bound to consider and/or deal with same and opine whether in facts and circumstances of particular case, same will be applicable or not - Dattani And Co. v. Income Tax Officer (2014) 41 taxmann.com 360 (Gujarat)     DIRECT TAX LAWS Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income - Clarification on disallowance of expenses under section 14A in cases where corresponding exempt income has not been earned during the financial year - CIRCULAR NO.5/2014 (F.NO.225/182/2013-ITA.II), DATED 11-2-2014 Section 119, read with section 115R of the Income-tax Act, 1961 - Income-tax Authorities - Instructions to subordinate authorities - Tax on distributed income to unit holders - Clarification on scope of additional income-tax on distributed income under section 115R - CIRCULAR NO.6/2014 (F.NO.225/182/2013-ITA.II), DATED 11-2-2014       Source : Taxmann

CBDT Circular On Payment Of Dividend Distribution Tax By Mutual Funds

The CBDT has issued Circular No. 6 of 2014 dated 11.02.2014 in which the issue as to whether mutual funds/specified companies are required to pay additional income-tax under sub-section(2) to section 115R of the Act not only on income distributed by way of dividend but also on payments made at the time of redemption/repurchase of units as well as at the time of allotment of bonus units to existing investors has been considered in great detail.