Dividend under section 2(22)(a) of Income Tax Act

Section-2(22) deals with the term 'Dividend'. Sub clause (a) of section-2(22) talks about distribution of assets to shareholder of the company which shall be treated as ‘Dividend’ and Dividend Distribution Tax shall also be payable thereon. However, amendment in Section 115-O made w.e.f. A.Y. 2021-22 removing the requirement of Dividend Distribution Tax will have an effect on tax treatment of ‘Dividend’ also. We are discussing section 2(22)(a) in light of amednment so made in Section 115-O in this article.

Distribution of assets by a company [Section-2(22)(a)]
“Dividend” includes:

• any distribution by a company of accumulated profits, whether capitalized or not,
• if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company

Before analyzing the section, we first understand the meaning of ‘accumulated profits’. Accumulated profits means:-

• All profits of the company up to the date of distribution
• Which includes all profits of company either in form of current business profits, general reserves, tax free incomes, Investment Allowance Reserve etc.;
• But does not include Depreciation Reserve & Revaluation Reserve

Accumulated profits can be capitalized by way of issuing bonus shares in lieu of accumulated profits.

In Section-2(22)(a) following points are noteworthy:-

1. Any distribution of assets by a company to its shareholders shall be treated as “Dividend” to the extent of accumulated profits, whether capitalized or not.
2. Distribution of assets may be in cash or kind.
3. Any benefit to the shareholder which does not result in any changes in the assets of the company will not be treated as ‘Dividend’. For example, the company issues bonus shares to equity shareholders out of accumulated profits. In this case, the company does not sacrifice any assets rather reserves are converted into share capital. Therefore, it will not be ‘Dividend’ in terms of Section-2(22)(a).

1. Taxability in the hands of company:-

• No capital gain liability shall arise in the hands of the company as the transaction is a ‘Gift’ in the hands of the company and thus not a ‘Transfer’ under section-47 of the Act.
• For A.Y. 2020-21, the company shall be required to pay Dividend Distribution Tax on the dividend u/s 115-O. However, the Dividend Distribution Tax has been abolished w.e.f. A.Y. 2021-22.

1. Taxability in the hands of shareholder:-

• Market value of the asset on date of distribution shall be deemed to be the amount of dividend u/s 2(22)(a).
• But, till A.Y. 2020-21, such dividend shall be exempt in the hands of the shareholder u/s 10(34).
• With effect from A.Y. 2021-22, Dividend so received (market value of asset) shall be taxable in the hands of shareholders as Dividend Distribution Tax has been abolished and thus incidence of tax has been shifted upon the shareholder.
• Where in future, the shareholder sells asset so received from company as dividend, cost of acquisition shall be the cost of the asset to the company for purpose of calculating capital gain.

We will take an example to understand the section:

Balance Sheet

Liabilities

Amount

Assets

Amount

Equity Share Capital

(including bonus shares issued Rs. 2,00,000)