Inter corporate Tax planning on dividend income in India. Deduction in respect of certain inter corporate dividends. Section 80M of the Income Tax Act- Inter corporate dividends

Income tax section Section 80M provides deduction in respect of inter-corporate dividends. The following section shall be inserted with effect from the 1st day of April, 2021, namely:—

“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 any other domestic company or a foreign company or a business trust, 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 or foreign company or business trust as does not exceed the amount of dividend distributed by it 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.’.”

The benefits sought to be conferred by the proposed Section 80M are better explained in the following table:

Applicable toDomestic Company
Condition for deductionWhere Gross Total Income (GTI) of such company in any previous year includes income by way of dividends from any other domestic company
Quantification of deductionLower of the following:Dividends received from any other domestic companyDividends 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 deductionWhere 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 shareholders, 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.

This aspect could be understood with the help of the following illustration:

Dividends received by A Ltd from B Ltd. (both are domestic companies)100150
Dividends distributed by A Ltd.8050
Deduction under Section 80M0
(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 43B. 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).