PROPOSED S.80M - FOR KIND ATTENTION OF HONORABLE FM - there seems some drafting mistake

[CA DEV KUMAR KOTHARI]

Scope of this article:

Scope of this article is limited to proposed insertion of S.80M read with Budget Speech of honourable FM. As per reading and understanding of the author there seems some mistake in drafting of proposed section (or in the budget speech). Therefore, in case of need honourable FM  and her team can take remedial action to rectify wordings of proposed  S.80M.

First let us have a look on budget speech on this aspect:

From paragraph 116 of  speech of honourable Finance Minister with highlights on relevant portion

116.  Dividend Distribution Tax

xxx

• Further, in order to remove the cascading effect, I also propose to allow deduction for the dividend received by holding company from its subsidiary. 

Unquote:

As per speech deduction is proposed to remove cascading effect and it is only in respect of dividend received by holding company from its subsidiary company. As observed later on, as per proposed S.80M, entire amount of dividend distributed within prescribed period ( to any kind of share holders) will be eligible for deduction subject to maximum limit of  income from dividend received from companies which is included in gross total income.

For example:

Gross dividend received ₹ 10 crore

Net dividend income ( gross minus expenses of account of interest claimed)  ₹ 8 crore.

Dividend distributed before prescribed date   ₹ 12 crore.

Deduction shall be allowed equal to ₹ 8 crore.

If dividend distributed before prescribed date  is say ₹ 6 crore, then deduction shall be restricted to ₹ 6 crore.

As per proposed section 80M dividend distribution is required, type of shareholders to whom dividend  is paid  not relevant, although in heading words intercorporate dividend is used.

Proposed S.80M vide clause 40  (with highlights added by author for catch words and mon points for ease of understanding)

40. After section 80LA of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2021, namely:––

  Deduction in respect of certain intercorporate dividends.

      ‘80M. (1) Where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date.  

  (2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

    Explanation.––For the purposes of this section, the expression “due date” means the date one month prior to the date for furnishing the return of income under  sub-section (1) of section 139.’.

Relevant portion from combined notes on various clauses pertaining to Dividend and incidental matters including exemptions, TDS, deduction under chapter VIA to companies etc:

(x) insert new section 80M as it existed before it removal by the Finance Act, 2003 to remove the cascading affect, with a change that set off will be allowed only for dividend distributed by the company one month prior to the due date of filing of return, in place of due date of filing return earlier.

[Clauses 7,30,40,47,48,49,50,54,55,59,60,62,74,80,81,85,86,87 & 88]

Observations of author:

On reading of proposed section 80M and relevant note there seems wider scope of deduction under proposed section. In the proposed section there is no mention about holding and subsidiary company. S.80M is said to be to remove cascading effect, as said in budget speech. However in the proposed section deduction shall be allowed equal to income by way of  dividend received by company from other company (companies) and all dividend declared within prescribed time ( 30^th September of the assessment year, if due date u/s 139.1  is 31^st October) whichever is higher.

Request to honourable FM and her team:

Author request that his  observations may be examined, if author is correct, and intention of FM  is to limit deduction  equal to dividend received from subsidiary company ( or any company ) and dividend distributed to other companies only, then suitable amendment may be made to avoid controversies in future.

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History of S.80M

 

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Statutory Provisions

Income-tax Act, 1961

¹[Deduction in respect of certain inter-corporate dividends.

80M. [****]

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Notes :-

1. Omitted by the Finance Act, 2003, w.e.f. 1-4-2004

Prior to its omission, section 80M, as inserted by the Finance Act, 2002, w.e.f. 1-4-2003, read as under :

'80M. Deduction in respect of certain inter-corporate dividends.-(1) Where the gross total income of a domestic company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends from another domestic company as does not exceed the amount of dividend distributed by the first-mentioned domestic company on or before the due date.

(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

Explanation.-For the purposes of this section, the expression "due date" means the date for furnishing the return of income under sub-section (1) of section 139.'

Earlier original section 80M was introduced in place of section 85A (inserted by the Finance Act, 1965, w.e.f. 1-4-1965) by the Finance (No. 2) Act, 1967, w.e.f. 1-4-1968. Section 80M, which had earlier undergone several amendments by the Finance Act, 1968, w.e.f. 1-4-1968, Finance Act, 1970, w.e.f. 1-4-1971, Finance (No. 2) Act, 1971, w.e.f. 1-4-1972, Finance Act, 1975, w.e.f. 1-4-1976, Finance Act, 1976, w.e.f. 1-4-1977, Finance Act, 1981, w.e.f. 1-4-1982, Finance Act, 1982, w.e.f. 1-4-1983, Finance Act, 1984, w.e.f. 1-4-1985 and Finance Act, 1986, w.e.f. 1-4-1987, was substituted by the Finance Act, 1990, w.e.f. 1-4-1991 and further amended by the Finance Act, 1993, w.e.f. 1-4-1994, and later on omitted by the Finance Act, 1997, w.e.f. 1-4-1998.