Section 236 — Relief to Company re Dividend Paid Out of Past Taxed Profits

CHAPTER XVIII - RELIEF RESPECTING TAX ON DIVIDENDS IN CERTAIN CASES

Section 236 - Relief to Company in Respect of Dividend Paid Out of Past Taxed Profits

Case Laws & Commentary - Income-tax Act, 1961 (as amended by the Finance Act, 2026) - bharattax.co Treatise

Status: On the statute book but spent / dormant. The relief operates only where a dividend is paid out of profits and gains "actually charged to income-tax for any assessment year ending before the 1st day of April, 1960". Every such assessment year having long closed, the section can have no live application today; it survives as a transitional / savings provision.

Finance Act, 2026: No amendment. Chapter XVIII is untouched by the Finance Act, 2026, which (in clause 64 and the surrounding clauses) amends the Income-tax Act, 2025, not the 1961 Act.

Statutory lineage: Corresponds to the relief machinery of the Indian Income-tax Act, 1922 (the section 49B family of provisions), which created the legal fiction that income-tax paid by a company on a dividend is income-tax paid by the shareholder.

Litigation profile: No reported decision construes section 236 directly. The authorities below are cognate: they expound the grossing-up / tax-credit fiction and the meaning of "dividend" and "profits" on which the section is built.

A. SECTION COMMENTARY

1. The double-taxation problem the section addressed

Before the dividend reforms of 1959-1965, the profits of a company bore income-tax in the company's hands, and the dividend distributed out of those profits was again brought to tax in the shareholder's hands, subject to the shareholder being given credit (by "grossing up") for the tax the company had paid. When the regime began to change after the Finance Act, 1959, a transitional difficulty arose: a dividend paid after 31 March 1960, but out of profits that had already been "actually charged to income-tax" in an assessment year ending before 1 April 1960, could in substance be taxed a second time without the benefit of the old credit. Section 236 is the legislative answer - it returns to the paying company a defined credit (or refund) referable to such past-taxed profits.

2. The conditions for relief

Three conditions must be satisfied. First, the payer must be an Indian company, or a company that has made the prescribed arrangements for the declaration and payment of dividends within India. Secondly, the dividend must be paid - wholly or partly - out of profits and gains actually charged to income-tax for an assessment year ending before 1 April 1960. Thirdly, tax must have been deducted from the dividend in accordance with Chapter XVII-B. Where these are met, credit is given against the income-tax payable by the company for the previous year in which the dividend is paid, and any excess of the credit over that tax is refunded.

3. Quantum of the credit

By sub-section (2), the credit is a sum equal to ten per cent of so much of the dividend as is paid out of the profits and gains actually charged to income-tax for an assessment year ending before 1 April 1960. The ten-per-cent figure reflects the rate element of the old company-level charge that the relief was designed to return.

4. The ordering rule - Explanation 1

Because a dividend is rarely labelled as coming from a particular year's profits, Explanation 1 supplies a tracing rule. The aggregate of the dividends declared for any previous year is deemed to come first out of the distributable income of that previous year, and the balance out of the undistributed distributable income of the immediately preceding year or years, taking just enough to cover the balance and excluding any amount already used to cover the balance of another year. This prevents the same past-taxed profits being counted twice for relief.

5. "Distributable income" - Explanation 2

Explanation 2 defines "distributable income of any previous year" as the total income (computed before any Chapter VI-A deduction) assessed for that year, reduced by the company's tax on its total income, by other taxes levied by Government or a local authority to the extent not already allowed, by sums qualifying for deduction under section 80G, and (for a banking company) by amounts transferred to a reserve fund under section 17 of the Banking Companies Act, 1949; and increased by the company's exempt profits, gains or receipts not in the total income, and by allowances given in the assessment that the company has not taken into its profit and loss account. The definition thus measures the real pool of profit available for distribution.

6. Why the section is now spent

The trigger is permanently anchored to "any assessment year ending before the 1st day of April, 1960". With those years closed and their profits long since distributed, no fresh claim can in practice arise. The section is retained for completeness and as a savings provision for any vestigial claim, but it has no operative role in current assessments.

B. STATUTORY POSITION (verbatim text)

Reproduced verbatim from the Income-tax Act, 1961 (as amended up to the Finance Act, 2025); the Finance Act, 2026 makes no change.

Relief to company in respect of dividend paid out of past taxed profits.

236. (1) Where in respect of any previous year relevant to the assessment year commencing after the 31st day of March, 1960, an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India, pays any dividend wholly or partly out of its profits and gains actually charged to income-tax for any assessment year ending before the 1st day of April, 1960, and deducts tax therefrom in accordance with the provisions of Chapter XVII-B, credit shall be given to the company against the income-tax, if any, payable by it on the profits and gains of the previous year during which the dividend is paid, of a sum calculated in accordance with the provisions of sub-section (2), and, where the amount of credit so calculated exceeds the income-tax payable by the company as aforesaid, the excess shall be refunded.

(2) The amount of income-tax to be given as credit under sub-section (1) shall be a sum equal to ten per cent of so much of the dividends referred to in sub-section (1) as are paid out of the profits and gains actually charged to income-tax for any assessment year ending before the 1st day of April, 1960.

Explanation 1.—For the purposes of this section, the aggregate of the dividends declared by a company in respect of any previous year shall be deemed first to have come out of the distributable income of that previous year and the balance, if any, out of the undistributed part of the distributable income of one or more previous years immediately preceding that previous year as would be just sufficient to cover the amount of such balance and as has not likewise been taken into account for covering such balance of any other previous year.

Explanation 2.—The expression "distributable income of any previous year" shall mean the total income (as computed before making any deduction under Chapter VI-A) assessed for that year as reduced by—

(i) the amount of tax payable by the company in respect of its total income;

(ii) the amount of any other tax levied under any law for the time being in force on the company by the Government or by a local authority in excess of the amount, if any, which has been allowed in computing the total income;

(iii) any sum with reference to which a deduction is allowable to the company under the provisions of section 80G; and

(iv) in the case of a banking company, the amount actually transferred to a reserve fund under section 17 of the Banking Companies Act, 1949 (10 of 1949),

and as increased by—

(a) any profits and gains or receipts of the company, not included in its total income (as computed before making any deduction under Chapter VI-A); and

(b) any amount attributable to any allowance made in computing the profits and gains of the company for purposes of assessment, which the company has not taken into account in its profit and loss account.

C. AUTHORITIES

Candour note. No reported judgment construes section 236 itself; it is a spent transitional credit tied to pre-1-4-1960 taxed profits. The authorities below are cognate and explain the principles the section assumes - the grossing-up / tax-credit fiction, the identity of the person entitled to the credit, and the meaning and reach of "dividend" paid "out of profits". They have been web-verified.

Cluster 1 - The grossing-up / tax-credit fiction the section operationalised

Purshottamdas Thakurdas v. Commissioner of Income-tax, Bombay - [1963] 48 ITR 206 (SC)

Statute: Sections 18, 18A, 16(2), 18(5) and 49B of the Indian Income-tax Act, 1922 - advance tax, deduction of tax from dividend, and the legal fiction that tax on a dividend is deemed paid by the shareholder.

Facts: In his estimate of income for advance-tax purposes under section 18A, the assessee did not include dividends on his shares. The Revenue treated the dividends as income on which advance tax was payable and charged penal interest for the shortfall.

Held: By the combined operation of sections 16(2), 18(5) and 49B a dividend is income from which tax is deemed to have been deducted at source - the income-tax paid by the company is, by legal fiction, treated as paid by the shareholder. Dividend was accordingly not income on which advance tax under section 18A was payable, and penal interest could not be sustained.

Relevance: The clearest exposition of the section 49B legal fiction that tax paid by the company on a dividend is tax paid by the shareholder. That fiction is the mechanism which the Chapter XVIII reliefs (especially section 236) adjust where the underlying profits were charged in pre-1-4-1960 assessment years.

Messrs. Howrah Trading Co. Ltd. v. Commissioner of Income-tax, Calcutta - [1959] 36 ITR 215 (SC)

Statute: Sections 16(2) and 18(5) of the Indian Income-tax Act, 1922 - "grossing up" of dividend and credit to the shareholder for income-tax deemed paid by the company; meaning of "shareholder".

Facts: The assessee purchased shares under blank transfers not registered in the companies' books. Though it received the dividends, it was not the registered holder. It claimed the benefit of grossing up and of credit for the tax deemed paid by the company.

Held: "Shareholder" in section 18(5) means the shareholder registered in the books of the company - the "member" in the company-law sense. A transferee under a blank transfer, although clothed with an equitable right to the dividend against the transferor, is not the shareholder qua the company and cannot claim the grossing-up benefit or the credit for tax deemed paid by the company.

Relevance: Fixes the identity of the person who may claim the dividend tax credit. The registered-shareholder concept marks the outer boundary of the credit fiction that the Chapter XVIII reliefs operate upon, and shows the relief follows legal, not merely beneficial, title.

Commissioner of Income-tax v. Clive Insurance Co. Ltd. - [1978] 113 ITR 636 (SC)

Statute: Double-taxation relief; grossing up of dividends received from foreign companies by the tax deemed paid abroad.

Facts: The assessee, an Indian company, received net dividends from companies in the United Kingdom and Ceylon after deduction of the taxes payable in those countries. The question concerned the measure of the dividend and the credit to be given for double-taxation relief.

Held: For double-taxation relief the dividend had to be taken at its gross figure - inclusive of the tax deemed to have been paid in respect of it - and credit given for that tax accordingly. The grossing-up principle operated to ensure the income was measured before, and relief given for, the tax already suffered.

Relevance: Extends the grossing-up principle to the cross-border setting and illustrates the identical machinery - tax borne at the company level being carried to and credited at the recipient level - that section 236 applied domestically to dividends paid out of profits charged before 1 April 1960.

Cluster 2 - Meaning and reach of "dividend" paid "out of profits"

Kantilal Manilal v. Commissioner of Income-tax, Bombay - [1961] 41 ITR 275 (SC); AIR 1961 SC 1038

Statute: Meaning of "dividend" (section 2(6A) of the Indian Income-tax Act, 1922) - whether a distribution in specie is a dividend.

Facts: A company was offered shares of another company at a price well below market value and distributed to its own shareholders the right to acquire those shares at the concessional price. The question was whether the value of the right distributed was "dividend" in the shareholders' hands.

Held: "Dividend" in its ordinary sense is the distributive share of the profits of a company received by a shareholder; it need not be distributed in money. The transfer of a valuable right in specie was a payment of dividend, and the benefit so distributed was chargeable as dividend.

Relevance: Confirms the breadth of "dividend" and that the form of the distribution does not defeat its character. It informs what counts as a "dividend ... paid ... out of profits" for section 236, which speaks of dividends paid wholly or partly out of past taxed profits.

Bacha F. Guzdar v. Commissioner of Income-tax, Bombay - [1955] 27 ITR 1 (SC); AIR 1955 SC 74

Statute: Meaning of "dividend"; the character of a shareholder's income; section 2(1) ("agricultural income") read with rule 24 under the Indian Income-tax Act, 1922.

Facts: The assessee held shares in two tea companies. Under the then rule 24, sixty per cent of a tea company's income was treated as agricultural income (exempt) and forty per cent as business income. She contended that sixty per cent of her dividends should likewise be agricultural income in her hands and exempt.

Held: A shareholder has no interest in the assets or in the income of the company as such; the company is a distinct juristic person and its profits are its own. A dividend is income arising to the shareholder by virtue of his shares - not a distribution of the company's profits retaining their original character. The dividend therefore did not bear the stamp of agricultural income, and the whole of it was chargeable to tax.

Relevance: The foundational pronouncement on the legal character of a "dividend" - the very subject-matter of the reliefs in Chapter XVIII. It establishes the separation between tax borne at the company level and tax borne at the shareholder level, the gap which sections 235, 236 and 236A were designed to bridge or mitigate.

Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text reproduced verbatim from the Income-tax Act, 1961 (as amended up to the Finance Act, 2025); the Finance Act, 2026 makes no amendment to Chapter XVIII. Citations have been web-verified; readers should consult the official reports before relying on any authority.