Deduction in respect of certain inter-corporate dividends

148(1)

If the gross total income of a domestic company in any tax year includes any income by way of dividends from––

• (a) any other domestic company; or
• (b) a foreign company; or
• (c) a business trust, such domestic company shall, be allowed a deduction of an amount equal to so much of the income by way of dividends received from the person mentioned in clause (a) or (b) or (c) as does not exceed the amount of dividend distributed by it by the date one month before the due date for filing the return of income under section 263(1).

148(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 tax year, no deduction shall be allowed in respect of such amount in any other tax year.

Explanation

Section Summary:

This section provides a deduction for domestic companies that receive dividends from other domestic companies, foreign companies, or business trusts. The deduction is allowed for the amount of dividends received, provided the domestic company distributes an equivalent or lesser amount of dividends to its shareholders by a specific deadline (one month before the due date for filing the income tax return).

Key Changes:

1. Scope of Deduction: The deduction now explicitly includes dividends received from foreign companies and business trusts, in addition to domestic companies.
2. Timing of Distribution: The deduction is contingent on the domestic company distributing dividends to its shareholders by a specific deadline (one month before the due date for filing the income tax return).
3. No Double Deduction: If a deduction is claimed in one tax year, the same amount cannot be claimed again in any other tax year.

Practical Implications:

1. For Domestic Companies: Companies receiving dividends from other domestic companies, foreign companies, or business trusts can reduce their taxable income by the amount of dividends distributed to their shareholders, provided the distribution meets the deadline.
2. For Shareholders: Shareholders may benefit from timely dividend distributions, as companies are incentivized to distribute dividends to claim the deduction.
3. Compliance Burden: Companies must ensure accurate tracking and timely distribution of dividends to qualify for the deduction.

Critical Concepts:

1. Gross Total Income: This refers to the total income of the company before any deductions or exemptions.
2. Dividend Distribution: The act of paying dividends to shareholders. The deduction is linked to the amount distributed by the company.
3. One-Month Deadline: The deadline for distributing dividends is one month before the due date for filing the income tax return under Section 263(1).

Compliance Steps:

1. Track Dividend Income: Maintain records of dividends received from domestic companies, foreign companies, and business trusts.
2. Distribute Dividends: Ensure that dividends are distributed to shareholders by the specified deadline (one month before the due date for filing the income tax return).
3. Documentation: Keep detailed records of dividend distributions to substantiate the deduction claim.
4. File Accurate Returns: Report the dividend income and the corresponding deduction in the income tax return.

Examples:

1. Scenario 1: Company A receives ₹10 lakh in dividends from Company B (a domestic company). Company A distributes ₹8 lakh in dividends to its shareholders by the specified deadline. Company A can claim a deduction of ₹8 lakh against its gross total income.
2. Scenario 2: Company X receives ₹15 lakh in dividends from a foreign company and ₹5 lakh from a business trust. Company X distributes ₹18 lakh in dividends to its shareholders by the deadline. Company X can claim a deduction of ₹18 lakh (the total dividends received).

This section encourages timely dividend distribution and provides tax relief to domestic companies, aligning with broader tax policy objectives.