TDS on deemed dividend -issue of bonus debentures by a company

1340 views

Save Share

Rammohan

163 Points Posted on 26 March 2021

Some companies issue bonus debentures to shareholders. The paid-up value of these debentures, on allotment, is considered to be 'deemed dividend' in the hands of shareholders, and shareholders are required to include this value in their Income-Tax Return under 'Dividend', and pay tax on it.

If the value of this deemed dividend exceeds Rs 5,000/-, is the company required to deduct TDS? How would this provision be implemented by companies since deemed dividend is not paid in cash?

Replies (4)

Quick Summary

This discussion explores the tax implications of companies issuing bonus debentures to shareholders. These debentures are often considered a 'deemed dividend' under tax law, requiring shareholders to declare and pay tax on their value. The core question is whether companies must deduct Tax Deducted at Source (TDS) on these non-cash bonus debentures. While not explicitly covered in tax acts, the prevailing interpretation is that bonus debentures, funded by company reserves, are treated as deemed dividends. The market price of the debenture on the ex-bonus date is suggested as the basis for calculating the TDS amount, with a reverse calculation (grossing up) applied due to the absence of cash payment.

Kapadia Pravin

10683 Points Posted on 26 March 2021

I think bonus debentures are to be treated like bonus shares. I have not come across any such bonus debentures.

Rammohan

163 Points Posted on 27 March 2021

I would request you to refer to the following webpage of Britannia Industries Ltd. in which are given details of the proposal to issue bonus debentures. Thank you.

https://britannia.co.in/pdfs/scheme_of_arrangement/Scheme-Arrangement-2020/Scheme-of-Arrangement.pdf

Guest

Posted on 05 June 2021

Debenture bonus is deemed dividend u/s.2(22), since company needs to utilize(debit) its reserves for debenture bonus. It converts free reserves into debt. Debenture bonus is no where mentioned in both income tax act and companies act. So this is just an interpretation that it is deemed dividend as there is no specific provision dealing with it in income tax act.

Market price(nse/bse) of debenture on ex-bonus date can be taken as the value of each debenture bonus to calculate amt for tds u/s.194. Shareholder accordingly pay tax in the year of bonus itself because of sec.8. Such dividend can be included into cost of acquisition for sale of debentures later.

The reason for selecting price on ex-bonus date is that on ex-bonus date, right to share in reserves is unconditionally made available to shareholders i.e., any buy order for equity shares before ex-date entails the shareholder to become member of company as on record date, and thereby eligible for debenture bonus to the extent of holding on record date depending upon on bonus ratio.

Pls note that ex-date is business day immediately preceeding record date.