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Chapter 21- Entity & Distribution

Question 1- Page 174


As per Sec. 54 (3), in case a resident entity distributes dividend out of the amount on which distribution
tax as per Sec. 54 (1) is already levied, there shall be no further distribution tax.
In the given case, Mr. Ram has received dividend from M/s Balgopal Ltd. which is a resident entity.
Assuming A One Ltd. a resident company, the dividend distributed by Balgopal Ltd. is from the profit out
of dividend received from A One Ltd. which levied dividend tax to Balgopal Ltd. while distributing the
dividend. As such, as per the principle of Sec. 54 (3), the receipt of dividend by Mr. Ram is exempted
from Tax. As per Sec. 88 (4), an agent cannot withhold tax on amounts which are exempted from tax, as
such; Balgopal Ltd. is not required to withhold tax on distribution of dividend.
In case Balgopal Ltd. is a nonresident company, as per Sec. 54 (2), the dividend received by Mr. Ram
shall be included in income.
Yes, in case Balgopal Ltd. is a Cooperative based on rural area defined by Sec. 11 (2) of the Act, there is
no need of application of withholding of tax and if not so, tax shall be withheld at normal rate.
In case the company being an industry based on agro products or forest products, so far as the entity is
resident partnership or company, tax shall be withheld at 5%.
Question 2- Page 174
As per Sec. 54 (1), the dividend distributed by a resident partnership firm is taxable in the hands of
recipient on final withholding basis.
As per Sec. 54 (3), in case a resident entity distributes dividend out of the amount on which distribution
tax as per Sec. 54 (1) is already levied, there shall be no further distribution tax. Since, in case the
partnership firms income is only out of dividend received from resident company, the resident company
has already levied dividend tax on such amount; as such, there shall be no dividend tax on re-distribution
of such profit by partnership firm to its partners.
Question 3- Page 174
The definition of distribution includes:
a. Payment of any amount in any capacity by an entity to its beneficiaries, while such payment is not
distribution in case it satisfies both the following conditions:
1. In case the payment exceeds the value of consideration received by the entity from the
beneficiary, and
2. In case the payment, exceeding the value of consideration received by the entity from the
beneficiary, does not include the following amounts:
a. Amounts included while calculating taxable income of the beneficiary, or
b. Final withholding payments, except when it is final withholding as a result of distribution
b. Capitalization of Profit
Issuance of bonus share out of share premium is not payment to the beneficiaries. As such, we need to
test whether such issue of bonus share out of share premium constitutes Capitalization of Profit.
As per the clarification Clause to Sec. 53, Capitalization of Profit includes:
a. Capitalization by way of issuing bonus shares or any other similar interest,

Chapter 21- Entity & Distribution

b. Increase in Paid up value of the interest of any entity, or


c. Capitalization of profit and premium of the entity in the capital account of the company
Since, definition (c) covers Capitalization of Premium as Capitalization of Profit, issuance of bonus share
out of share premium satisfies the test of Capitalization Profit, implying that it is distribution.
As per Sec. 53 (4), the capitalization of profit shall be treated as part of distribution of profit. Similarly,
Sec. 53 (3) requires any distribution to be treated as Capital Repayment or Distribution of Profit only
when such distribution decreases the value of asset or liability of the company.
As Sec. 53 (4) clearly states that Capitalization of Profit is part of Distribution of Profit, the contention of
tax officer is correct.
Question 4- Page 174
As per Sec. 54:
1. In case of dividend paid by a resident Entity, the tax shall be levied as follows:
a. In case a company distributes dividend to its shareholder or a partnership firm distributes
dividend to its partner, dividend tax shall be levied as per final withholding basis.
b. In case the dividend is paid by any other entity, no dividend tax is levied
2. In case of payment of dividend by Nonresident person, the dividend so received by a resident person
shall be included while calculating taxable income of such person.
3. There shall be no dividend tax while redistributing the amount received as dividend after levying
dividend tax as per (1) above.
It means, there shall be no further dividend tax while distributing the amount received as dividend after
levying dividend tax; i.e. out of Rs. 5 Laks received by Mr. Bibhu, there shall be no dividend tax on such
amount which has been distributed out of profit where dividend tax is already levied.
The amount on which dividend tax is levied= 90/100*500,000= 450,000
Dividend Tax = 5% of 450,000= Rs. 22,500
Question 5- Page 174
Similar as Question (4), in this case total dividend tax to be withheld by company is to be computed.
Total Profit of A Ltd.: Rs. 400,000 plus (200,000/0.85) = Rs. 635,294
Dividend Declared by A. Ltd.: Rs. 450,000
Amount on which dividend tax is levied: 235294/635294*450,000 = Rs. 166,667
Dividend Tax = 5% of Rs. 166,667 = Rs. 8,333.33

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