Dissecting Section 80M of the Income Tax Act - The known and the unknown

17 March 2020

by Bharathi Krishnaprasad V. Baratwaj

The Finance Bill 2020 (referred to as the ‘Bill’) proposed plethora of amendments in the Income Tax Act, 1961 (referred to as the ‘Act’) on different aspects. One such amendment was to relieve corporates from paying distribution tax on dividends (‘DDT’) and going back to the old school ways of taxing such dividends in the hands of the shareholders.

Consequent to the abolishing of DDT, the Bill also proposed re-introduction of Section 80M of the Act which was omitted vide the Finance Act, 2003. This Article focusses on analysing the proposed Section 80M and understanding certain important intricacies in the same.

Section 80M provides deduction in respect of inter-corporate dividends. The proposed provisions are the same as the Section stood before its omission, making it a case of old wine in a new bottle! The benefits sought to be conferred by the proposed Section 80M are better explained in the following table:

Applicable to Domestic Company1
Condition for deduction Where Gross Total Income (GTI) of such company in any previous year includes income by way of dividends from any other domestic company
Quantification of deduction Lower of the following:
  • Dividends received from any other domestic company
  • Dividends distributed by the assessee company on or before the due date
Meaning of ‘due date’ One month prior to date of furnishing return of income under Section 139(1) of the Act
Bar on double deduction Where deduction has been claimed under this section in any previous year, no deduction is allowed in respect of such amount already claimed in any other previous year

As explained above, the intent of the Section is to ensure that when a company has included dividends from a domestic company as part of its taxable income and has also distributed dividend to its shareholders, some benefit is provided to the company by presuming that such distribution is first made out of the dividends received and hence, allowing deduction to the company in respect of such distributions.

To the extent dividends are further distributed, the company is deemed to be a fiscally transparent entity through which the dividends pass and reach the hands of the ultimate shareholders2, where they are sought to be taxed. While it is a pre-condition that all the companies involved in the chain and distributing dividends must be domestic companies, there is no similar qualification as far as the shareholders to whom such distribution is made. As such, the ultimate beneficiary of the dividend could very well be a non-resident individual or a foreign corporate entity.

Difference in comparison to Section 115-O(1A)

As already stated, the provision has been inserted consequent to the removal of DDT. During the DDT regime, a similar benefit was available to the companies vide Section 115-O(1A) whereby certain dividends received by a domestic company were allowed to be reduced for determining the net amount on which DDT is to be paid by the company. However, there are certain important differences which are highlighted in the table below:

S.No. Section 80M Section 115-O(1A)
1. Applicable to dividends received by a domestic company from any other domestic company, which may or may not be subsidiaries Applicable to dividends received by a domestic company from its subsidiaries
2. Benefit is not available or restricted where the GTI is negative or is not sufficient to absorb the entire eligible deduction. The benefit under this section is available even when the GTI of the company is negative.
3. Benefit is available only in respect of dividends received from domestic company Benefit is available even in respect of dividends received from foreign subsidiaries

Availability of deduction in case the GTI is negative or insufficient

As discussed in the table above, deduction under Section 80M (being a deduction falling under Chapter VI-A of the Act) will not be available or will be restricted, in scenarios where the GTI is negative or insufficient3, even though such company may have distributed sufficient dividends to its shareholders. In other words, any amount of deduction under this Section is available only when the GTI is positive.

Whether deduction is eligible for past distributions?

An interesting question that can arise is whether any distribution made in any earlier year can be claimed as deduction under Section 80M in any subsequent year, if no deduction for such distribution has been claimed earlier under this Section (for any reason). This aspect could be understood with the help of the following illustration:

Particulars Year-1 Year-2
Dividends received by A Ltd from B Ltd. (both are domestic companies) 100 150
Dividends distributed by A Ltd. 80 50
GTI (1000) 1000
Deduction under Section 80M 0
(since GTI of A Ltd is negative)
or 130 (i.e.50+80)?
Where 80 represents dividend distributed in Year 1, but which could not be claimed as deduction under 80M in Year 1

On plain reading of the provisions under Section 80M of the Act, it can be observed that deduction is available in respect of dividends distributed by a domestic company on or before the due date. The deduction is neither qualified by the words ‘distribution made during the previous year’ nor the Section is worded similar to a provision like that of Section 43B4. Further, there is only a bar on double deduction, i.e., an amount distributed as dividend and claimed as deduction under Section 80M in any previous year, cannot be claimed again as deduction in any subsequent year. There is no bar as long as it can be demonstrated that the dividend though distributed in a prior year, was never claimed as deduction previously.

Therefore, it can be argued that as long as the dividends constitute distributions made on or before the specified due date (irrespective of the year in which they are made) and as long as the said distributions are not claimed as deduction earlier, benefit under Section 80M, going strictly by the language of the provision, cannot be denied. In our view, prima facie, there seems to be no bar for claiming deduction of Rs. 80 in Year 2 along with Rs. 50 (i.e. total deduction of Rs.130 in Year 2). However, a point to ponder is, would this interpretation go in tandem with the intention behind introducing Section 80M? Like so many other issues, it may also end up in courts.

Whether deduction is to be claimed on gross or net dividend income?

Another relevant question that can arise is whether deduction under Section 80M is to be computed considering gross dividend income or net dividend income (gross dividend income less allowable deductions). The implication is that in case the deduction is allowed only in respect of net dividends, the deduction under Section 80M would be comparatively lower.

Interestingly, the Act earlier contained a specific Section 80AA which addressed this point that the deduction under Section 80M was to be made considering net dividends and not gross dividends. This Section was omitted consequent to introduction of DDT for the first time from 1st June 1997. With bidding adieu to DDT, the Bill, however, does not propose to introduce any provision similar to that of Section 80AA. Given this, would lack of a specific provision stipulate that deduction is to be allowed against net dividend income lend substance to a stand that such a deduction is to be claimed against gross dividend income?

The authors are of the view that the wordings of Section 80M read with Section 80AB[ Section 80AB5 are clear enough to lead to an interpretation that deduction is to be computed with reference to net dividend income, after deducting expenses, even in the absence of a specific provision like that of erstwhile Section 80AA. However, there are chances that there could be litigations on this aspect in the future.

To conclude, though the proposed beneficial provisions may seem simple and unambiguous, there are chances for disputes in future on certain aspects, some of which are highlighted in the article.

[The authors are Principal Associate and Associate, respectively, in Direct Tax practice, Lakshmikumaran & Sridharan, Chennai]

  1. As per Section 2(22A) of the Act, Domestic Company means an Indian Company or any other company which, in respect of its income is liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income.
  2. Consequent to scrapping of DDT, dividends are taxable in the hands of the shareholders
  3. Second proviso to Section 123 of the Companies Act, 2013, states that in case of inadequacy or absence of profits, the company can declare dividends from its accumulated profits transferred to free reserves and subject to conditions prescribed in the Rules. The conditions are specified in Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.
  4. Section 43B permits certain deductions only in the year in which payment is actually made, however, relaxes the condition by permitting deduction even when such payments are made on or before the due date for filing return of income.
  5. Section 80AB provides that where any deduction is to be computed with reference to any income included in the GTI, the amount of income as computed in accordance with the provisions of this Act shall be deemed to be income included in the GTI.