Dividend Properly so called under General Law, Paid Out of Capital Profits Under Dividend

In the realm of income tax, the treatment of dividends is of paramount importance. Dividends are a significant source of income for many individuals and can have substantial tax implications. It is, therefore, essential to understand the concept of dividends properly so called under general law, paid out of capital profits under the dividend.

What is a Dividend?

Under Indian law, a dividend is a payment made by a company to its shareholders out of its profits. It is essentially a distribution of a portion of a company's earnings to its shareholders. Dividends are usually paid in the form of cash, but they can also be paid in the form of stock or other property.

Types of Dividends

There are two main types of dividends – cash dividends and stock dividends. Cash dividends are paid in the form of cash, while stock dividends are paid in the form of additional shares of stock.

Legal Framework for Dividends under Indian Law

The payment of dividends by a company is subject to various legal requirements under Indian law. The Companies Act, 2013, governs the payment of dividends by companies in India. Section 123 of the Companies Act, 2013, sets out the provisions relating to the declaration and payment of dividends by companies.

Dividend Properly so called under General Law

Under general law, a dividend is properly so called when it is paid out of the profits of a company. This means that a company can only pay a dividend if it has made a profit in the previous financial year. The dividend must be paid out of the company's current or accumulated profits, and not out of its capital.

Paid Out of Capital Profits Under Dividend

In certain circumstances, a company may be permitted to pay a dividend out of its capital profits. Section 123(3) of the Companies Act, 2013, provides that a company may declare or pay a dividend out of its capital profits, subject to certain conditions. The conditions include authorization by the company's articles of association and the approval of the company's shareholders by special resolution.

Tax Implications of Dividends

Dividends are subject to income tax in the hands of the recipient. However, certain dividends may be exempt from tax under the Income Tax Act, 1961. Section 10(34) of the Income Tax Act, 1961, provides that dividends received by an individual from an Indian company are exempt from tax in the hands of the recipient. Similarly, Section 115-O of the Income Tax Act, 1961, imposes a tax on the distributed profits of a domestic company.

Legal Case Study: Commissioner of Income Tax vs. Sai Maa Food Products Ltd.

In the case of Commissioner of Income Tax vs. Sai Maa Food Products Ltd., the issue before the court was whether the dividend declared and paid by the company was out of the accumulated profit or out of the current profit. The Appellate Tribunal held that the dividend was paid out of the accumulated profit and, therefore, the dividend could not be exempted from tax. The High Court upheld the decision of the Appellate Tribunal. The Supreme Court, on appeal, held that the payment of dividend out of the accumulated profit was not in accordance with the provisions of the Companies Act and, therefore, the dividend could not be treated as a dividend properly so called.

Conclusion

In conclusion, dividends are an integral part of the income tax regime in India. It is crucial for companies and shareholders to understand the legal framework governing the payment of dividends, including the distinction between dividends properly so called and dividends paid out of capital profits. Compliance with the legal requirements is essential to avoid any adverse tax implications. Moreover, seeking professional legal advice is recommended to ensure compliance with the legal principles governing dividends under Indian law.