CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 194 — Dividends (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Revived by the Finance Act, 2020 on abolition of DDT; recent in its current form.
Finance Act, 2026: No amendment.
Mechanism: The principal officer of a domestic company deducts tax (10% for residents) before paying dividend — including deemed dividend under section 2(22) — to a resident shareholder, subject to the statutory threshold and exclusions.
Litigation profile: Sparse in its revived form. The live questions are imported from the mature 'dividend' and deemed-dividend jurisprudence — the candour rule applies.
A. SECTION COMMENTARY
Section 194 requires the principal officer of a domestic company, before making any payment of dividend to a resident shareholder, to deduct tax at the prescribed rate. The section had been effectively dormant from 1 April 2003, when the dividend-distribution-tax regime (sections 115-O to 115-Q) shifted the incidence to the company and exempted dividends in shareholders' hands under section 10(34). The Finance Act, 2020 abolished DDT with effect from 1 April 2020, restored the taxability of dividend in the shareholder's hands, and correspondingly revived section 194 as the collection mechanism for resident shareholders (with section 195 for non-residents).
Scope — including deemed dividend
Because 'dividend' takes its extended meaning from section 2(22), section 194 reaches not only declared dividends but also the deemed dividends enumerated in section 2(22)(a)–(e), including loans and advances by a closely-held company to a substantially-interested shareholder under section 2(22)(e). The deduction obligation, however, can only attach where there is a 'dividend' paid to a 'shareholder'; if the recipient is not a shareholder, the deemed-dividend fiction (and with it the deduction question) does not arise against that recipient.
Thresholds and exclusions
The first proviso exempts deduction below the prescribed threshold for individual shareholders where the dividend is paid by a specified mode, and the section carries exclusions (for instance dividends to LIC, GIC and certain insurers/holders). The rate is ten per cent for residents, raised to the maximum marginal rate where the shareholder has not furnished a PAN (section 206AA).
Why direct authority is sparse
Section 194 in its revived form is recent, so a settled body of deduction-specific case law has not yet formed. The live questions are imported from the mature jurisprudence on the meaning of 'dividend' and on deemed dividend under section 2(22)(e) — in particular the rule that deemed dividend is taxable only in the hands of the registered/beneficial shareholder. In candour, those are cognate authorities; section 194 itself is largely untested.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment by any mode in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) or sub-clause (f) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rate of ten per cent :
Provided that no such deduction shall be made in the case of a shareholder, being an individual, if—
(a) the dividend is paid by the company by any mode other than cash; and
(b) the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed ten thousand rupees:
Provided further that the provisions of this section shall not apply to such income credited or paid to—
(a) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), in respect of any shares owned by it or in which it has full beneficial interest;
(b) the General Insurance Corporation of India (hereafter in this proviso referred to as the Corporation) or to any of the four companies (hereafter in this proviso referred to as such company), formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), in respect of any shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest;
(c) any other insurer in respect of any shares owned by it or in which it has full beneficial interest;
(d) a "business trust", as defined in clause (13A) of section 2, by a special purpose vehicle referred to in the Explanation to clause (23FC) of section 10;
(e) any other person as may be notified by the Central Government in the Official Gazette in this behalf.
C. AUTHORITIES
Candour rule: revived section 194 has little deduction-specific authority. The authorities offered are the mature, cognate jurisprudence on the meaning of 'dividend' and on deemed dividend, which controls the reach of the deduction.
Cluster 1 — Meaning of 'dividend'
Bacha F. Guzdar v. CIT (1955) 27 ITR 1 (SC)
Issue: The character of a dividend received by a shareholder of a company whose income was partly agricultural.
Held: A dividend is income arising from the shareholding — it is a return on the investment in shares and does not retain the character of the company's underlying income; it is therefore not agricultural income in the shareholder's hands even where the company's income is agricultural.
Significance: The foundational statement of what a 'dividend' is — the receipt that section 194 collects against.
Cluster 2 — Deemed dividend under section 2(22)(e): only in the shareholder's hands
CIT v. Ankitech (P) Ltd. (2012) 340 ITR 14 (Del) (affirmed by the Supreme Court)
Principle: Deemed dividend under section 2(22)(e) can be assessed only in the hands of a person who is a registered/beneficial shareholder of the lending company; a concern that receives the advance but is not itself a shareholder cannot be taxed on the deemed dividend.
Use: Limits the universe of payees against whom section 194 deduction on a section 2(22)(e) advance can be insisted upon.
Gopal & Sons (HUF) v. CIT (2017) 391 ITR 1 (SC)
Principle: Where the HUF was the beneficial shareholder (the shares being held through its karta), an advance to the HUF was assessable as deemed dividend under section 2(22)(e); the enquiry is into beneficial shareholding.
Use: Illustrates that the deemed-dividend / deduction question follows beneficial, not merely registered, shareholding.
Cross-reference
Note: The interaction of section 194 with the abolition of DDT (Finance Act, 2020) and with section 2(22) is developed in the commentaries on sections 115-O to 115-Q (DDT, historic) and section 2(22). Section 195 governs the same dividend paid to a non-resident.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 194 — Dividends (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Revived by the Finance Act, 2020 on abolition of DDT; recent in its current form.
Finance Act, 2026: No amendment.
Mechanism: The principal officer of a domestic company deducts tax (10% for residents) before paying dividend — including deemed dividend under section 2(22) — to a resident shareholder, subject to the statutory threshold and exclusions.
Litigation profile: Sparse in its revived form. The live questions are imported from the mature 'dividend' and deemed-dividend jurisprudence — the candour rule applies.
A. SECTION COMMENTARY
Section 194 requires the principal officer of a domestic company, before making any payment of dividend to a resident shareholder, to deduct tax at the prescribed rate. The section had been effectively dormant from 1 April 2003, when the dividend-distribution-tax regime (sections 115-O to 115-Q) shifted the incidence to the company and exempted dividends in shareholders' hands under section 10(34). The Finance Act, 2020 abolished DDT with effect from 1 April 2020, restored the taxability of dividend in the shareholder's hands, and correspondingly revived section 194 as the collection mechanism for resident shareholders (with section 195 for non-residents).
Scope — including deemed dividend
Because 'dividend' takes its extended meaning from section 2(22), section 194 reaches not only declared dividends but also the deemed dividends enumerated in section 2(22)(a)–(e), including loans and advances by a closely-held company to a substantially-interested shareholder under section 2(22)(e). The deduction obligation, however, can only attach where there is a 'dividend' paid to a 'shareholder'; if the recipient is not a shareholder, the deemed-dividend fiction (and with it the deduction question) does not arise against that recipient.
Thresholds and exclusions
The first proviso exempts deduction below the prescribed threshold for individual shareholders where the dividend is paid by a specified mode, and the section carries exclusions (for instance dividends to LIC, GIC and certain insurers/holders). The rate is ten per cent for residents, raised to the maximum marginal rate where the shareholder has not furnished a PAN (section 206AA).
Why direct authority is sparse
Section 194 in its revived form is recent, so a settled body of deduction-specific case law has not yet formed. The live questions are imported from the mature jurisprudence on the meaning of 'dividend' and on deemed dividend under section 2(22)(e) — in particular the rule that deemed dividend is taxable only in the hands of the registered/beneficial shareholder. In candour, those are cognate authorities; section 194 itself is largely untested.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment by any mode in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) or sub-clause (f) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rate of ten per cent :
Provided that no such deduction shall be made in the case of a shareholder, being an individual, if—
(a) the dividend is paid by the company by any mode other than cash; and
(b) the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed ten thousand rupees:
Provided further that the provisions of this section shall not apply to such income credited or paid to—
(a) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), in respect of any shares owned by it or in which it has full beneficial interest;
(b) the General Insurance Corporation of India (hereafter in this proviso referred to as the Corporation) or to any of the four companies (hereafter in this proviso referred to as such company), formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), in respect of any shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest;
(c) any other insurer in respect of any shares owned by it or in which it has full beneficial interest;
(d) a "business trust", as defined in clause (13A) of section 2, by a special purpose vehicle referred to in the Explanation to clause (23FC) of section 10;
(e) any other person as may be notified by the Central Government in the Official Gazette in this behalf.
C. AUTHORITIES
Candour rule: revived section 194 has little deduction-specific authority. The authorities offered are the mature, cognate jurisprudence on the meaning of 'dividend' and on deemed dividend, which controls the reach of the deduction.
Cluster 1 — Meaning of 'dividend'
Bacha F. Guzdar v. CIT (1955) 27 ITR 1 (SC)
Issue: The character of a dividend received by a shareholder of a company whose income was partly agricultural.
Held: A dividend is income arising from the shareholding — it is a return on the investment in shares and does not retain the character of the company's underlying income; it is therefore not agricultural income in the shareholder's hands even where the company's income is agricultural.
Significance: The foundational statement of what a 'dividend' is — the receipt that section 194 collects against.
Cluster 2 — Deemed dividend under section 2(22)(e): only in the shareholder's hands
CIT v. Ankitech (P) Ltd. (2012) 340 ITR 14 (Del) (affirmed by the Supreme Court)
Principle: Deemed dividend under section 2(22)(e) can be assessed only in the hands of a person who is a registered/beneficial shareholder of the lending company; a concern that receives the advance but is not itself a shareholder cannot be taxed on the deemed dividend.
Use: Limits the universe of payees against whom section 194 deduction on a section 2(22)(e) advance can be insisted upon.
Gopal & Sons (HUF) v. CIT (2017) 391 ITR 1 (SC)
Principle: Where the HUF was the beneficial shareholder (the shares being held through its karta), an advance to the HUF was assessable as deemed dividend under section 2(22)(e); the enquiry is into beneficial shareholding.
Use: Illustrates that the deemed-dividend / deduction question follows beneficial, not merely registered, shareholding.
Cross-reference
Note: The interaction of section 194 with the abolition of DDT (Finance Act, 2020) and with section 2(22) is developed in the commentaries on sections 115-O to 115-Q (DDT, historic) and section 2(22). Section 195 governs the same dividend paid to a non-resident.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.