Section 194 of the Income Tax Act, 1961 deals with the deduction of tax at source on payment of dividends by any domestic company. When an Indian company or a company which has made prescribed arrangement for declaration and payment of dividends in India, pays dividend to resident shareholders, tax will be deducted at source. Here it has to be specifically noticed that only payments to resident shareholders come under the purview of section 194. In case of dividends payable to non-residents, tax is deducted at source under section 195.
For the purpose of this section dividend means dividend on equity or preference shares. Dividend may be dividend as understood in common parlance or it may be deemed dividend under section 2(22). Dividend may be interim dividend also. Profits earned after the commencement of the winding up of a company are not dividends and cannot be the subject matter of any deduction of income tax at source under section 194.
The expression ‘shareholder’ in section 194 does not refer to a registered shareholder but refers only to a holder of shares. In view of section 144 of the Indian Companies Act, 1956, a holder of share warrants, even though not registered in the books of the company as a shareholder would be regarded as a holder of shares and, therefore, such a person would be entitled to the credit of tax deducted at source from dividends in respect of such share warrants.
The principal officer of the Indian company or a company which has made the prescribed arrangement for declaration of dividend in India, or the said company is liable to make deduction of tax at source. Deduction shall be made at the rate of ten percent on the dividend. Tax is to be deducted at the earliest of the following stages –
a) before making any payment of dividend in cash,
b) before issuing any cheque or warrant in respect of dividend, or
c) before making any distribution or payment to a shareholder, of any dividend within the meaning of section 2(22).
No amount of tax is to be deducted from any recipient of dividend if such dividends are referred to in section 115 O. Section 115 O refers to dividend distribution tax. No deduction of tax has to be made on those dividends on which dividend distribution tax has been paid.
The shareholder has the option to get no deduction or deduction at a lower rate. On an application by the shareholder in Form No. 13, the Assessing Officer shall give an appropriate certificate to the payer company, authorising to pay dividends without deduction of tax at source. Such a certificate will be valid for such periods as the assessing officer may specify therein, unless it is cancelled by him at any time before the expiry of the specified period. With effect from 1st April 2010, the Assessing Officer shall not grant such certificate unless the application in Form No. 13 contains the Permanent Account Number of the applicant. The certificate would cease to be valid if the person mentioned in the certificate transfers the shares to any other person.
Further a shareholder can apply in Form No. 15 G of 15 H for lower deduction or no deduction. With effect from 1st April 2010, the Assessing Officer shall not grant such certificate unless the application contains the Permanent Account Number of the applicant. If the PAN provided is found to be wrong or that the PAN is found to be not belonging to the deductee, it will be deemed that the deductee has not furnished his PAN.
The TDS provisions will not apply to dividend receivable by LIC, GIC, its subsidiaries or any other insurer provided the shares are owed by them, or they have full beneficial interest in such shares.
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