Dividend - Exclusions in accordance with Section 2(22) of the Income Tax Act, 1961

Dividend – Exclusions in accordance with Section 2(22) of the Income Tax Act, 1961

As per Section 2(22), dividends shall not include the following –

(i) Loan advanced in the ordinary course of business a distribution made in accordance with by the money lending company

Any advance or loan made to a shareholder or specified concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company. This exception shall apply only when two cumulative conditions are fulfilled –

The loan should have been made by the company in the ordinary course of business
Money lending should be substantial part of the company’s business.

‘Ordinary course of business’ shall mean that the loan or advance should be given to such shareholder at the same rate and terms as it is given to other borrowers.

(ii) Dividend paid if set off against loan already treated as deemed dividend

Any dividend paid by a company which is set off by the company against the whole or any part of loan or advance previously paid by it and which has been treated as a deemed dividend under section 2(22)(e). In this case the dividend so set off shall not be treated as dividend in the hands of shareholder.

(iii) Distribution in respect of non-participating shares issued for full consideration

Any distribution made in accordance with clause (c) or clause (d) of section 2(22) in respect of any share issued for full cash consideration if the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;

(iv) Buy back of shares as per section 77A of Companies Act

Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);

(v) Distribution of shares to the shareholders of demerged company

Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).