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Representation for exemption of interest under section 234C for dividend income   Aug 18, 2020

Sub: Amendment in Section 234C of the Income tax Act, 1961 (‘Act’) to provide relief from unwarranted interest on shortfall in payment of advance tax in respect of dividend income

 

We wish to bring to your kind attention and consideration the genuine hardships being faced by taxpayers on account of their inability to estimate dividend income to be received during the year, and thereby consider the same for computing the advance tax liability.  The problem arises from the uncertain nature of declaration and receipt of dividend incomes and may result in resident shareholders incurring an unwarranted interest liability under Section 234C of the Income tax Act (the Act), for reasons beyond their control. 

 

With effect from Financial Year (‘FY’) 2020-21, dividends are taxable in the hands of recipients instead of being subjected to dividend distribution tax (‘DDT’) in the hands of the company distributing the dividend. Accordingly, resident shareholders will be required to estimate their dividend income and pay advance tax on the same in instalments as per provisions of the Act. However, unlike other regular income streams, given its unpredictable nature, it is difficult for the shareholders to estimate dividend income to be received during the year and consider the same for advance tax computation. 

 

Sir, the law already recognises the unpredictability in estimation of dividend income for the purposes of advance tax payment.  In view of the uncertain nature of income, the proviso to Section 234C(1) of the Act allows the taxpayer to deposit advance tax in respect of specified incomes in the remaining instalments without incurring any interest liability. The proviso covers, among other incomes, dividend taxable under Section 115BBDA of the Act.

 

It may be appreciated that the nature of income (i.e. dividend) remaining the same, will now be taxed under Section 56 of the Act in the hands of all shareholders, instead of being taxed under Section 115BBDA of the Act for super rich investors alone. Thus, the rationale which motivated amendment to proviso to Section 234C(1) of the Act to make special dispensation in respect of super rich tax on dividend income in hands of few resident shareholders will equally apply in relation to all resident shareholders from FY 2020-21. In fact, vide Finance Act, 2020, the applicability of Section 115BBDA is restricted to dividend dividends declared, distributed or paid by a company on or before the 31st March 2020. Thus, the clause (in relation to Section 115BBDA) in the proviso to Section 234C(1) of the Act will become redundant going forward and accordingly the proviso to Section 234C(1) of the Act should be amended to extend its ambit to dividend income taxable under Section 56 of the Act.   

 

A detailed note, giving the complete background of the issue and the hardships being faced by the taxpayers is given as Annexure for your kind reference.


Our request

As a logical and consequential amendment required due to transition from DDT regime to dividend taxation in the hands of the shareholders, we strongly suggest that the first proviso to Section 234C(1) of the Act should be amended to extend its ambit to dividend income taxable under Section 56 of the Act with effect from FY 2020-21. 

 

The proposed amendment will provide relief from levy of interest under Section 234C of the Act arising on account of shortfall in payment of advance tax, on the lines of the carve-out presently made in respect of tax payable under Section 115BBDA of the Act. It will also prevent unwarranted litigation on the issue where resident shareholders may seek to rely on judicial precedents to claim non-applicability of interest under Section 234C of the Act in bonafide situations.

 

Pending a legislative amendment, the CBDT may clarify the issue through a Circular to provide certainty and relief to the taxpayers.

 

We would be grateful if the suggestions are accepted and the necessary amendment is announced and carried out at the earliest.

 

 

Kindly refer to the attached for complete details  

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