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Section 80M of the Income Tax Act

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When a company with respect to its shareholding in another company receives dividends, such dividends are known as inter-corporate dividends. These dividends are exempt from tax if they are received from an Indian Company before April 1, 2020. Sec 80M applies to companies (domestic) that have announced dividends and are also receiving the dividend from other companies (domestic). A deduction is agreed with respect to the dividend acknowledged as long as it is distributed as a dividend one month earliest to the due date of filing returns

Re-introduction of this section

The Finance Bill 2020 proposed plethora of amendments in the Income Tax Act, 1961 on different aspects. One of the changes was to alleviate organizations from paying distribution tax on dividends (‘DDT’) and making such dividends taxable in the hands of the shareholders. Afterwards, to eliminate DDT, the Bill also proposed re-insertion of this section of the Act, which was omitted vide the Finance Act, 2003.

Purpose of this Section

Section 80M is applicable with reference to dividends provided on or after April 1, 2020 (AY 2021-22 onwards. The purpose of Sec 80M is to ensure that when a corporate has comprised dividends from a domestic company as part of its taxable income and has also distributed dividends to its shareholders, some benefit is provided to the corporate by assuming that such distribution is first made out of the dividends acknowledged and thus, allowing deduction to the corporate with respect to such distributions.

To the extent dividends are further distributed, the company is meant to be a transparent entity. The dividends reach the hands of the ultimate shareholders, where they are liable to be taxed. While it is a pre-requisite that all the businesses involved in the chain and allocating dividends must be domestic companies, there is no related qualification as far as the shareholders to whom such distribution is made. Hence, the recipient of the dividend could very well be a non-resident individual or a foreign corporate entity.

Pre-conditions of claiming deduction

The amount of dividend acknowledged shall be allowed as deduction, if such amount is distributed as dividend on or before the due date.

  • Due date means the date one month earlier to the date for filing the return of income under sec 139(1) of the Act.
  • No requisites of maintaining or fulfilling the order of receipt on further distribution.
  • The Act requires the amount to be distributed to the shareholders before the due date; only announcement on or before the due date will not allow the company to claim this deduction.

Eligibility of deduction

Actual receipt may not be necessary.

  • Dividend income will be meant to be the income of the FY in which it is announced/ distributed/ paid;
  • The interim dividend will be meant to be the income of the FY in which the amount of this dividend is unconditionally made accessible by the company to the shareholders.

The deduction with domestic companies can be summarized as follows:

  • Dividend acknowledged from domestic companies; or,
  • Amount of dividend distributed one month before the due date of filing return; whichever is lesser.

The various laws amended in this view when read together have the following effect:

  • The occurrence of the burden of taxation has been shifted from payer of dividend to receiver of dividend.
  • The scope of dual taxation of dividends has been reduced.
  • Dividend Distribution Tax was applied at a flat rate using the concept of grossing up without any regard to the marginal rates of tax. However, from now onwards, the dividend shall be charged at the marginal rates of tax.

At AJSH, we assist our clients in dealing with various income tax compliances, including income tax assessments, ITR filings, TDS returns, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about Section 80M of the Income-tax Act, kindly contact us.

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