Section 236A — Relief to Certain Charitable Institutions or Funds re Certain Dividends

CHAPTER XVIII - RELIEF RESPECTING TAX ON DIVIDENDS IN CERTAIN CASES

Section 236A - Relief to Certain Charitable Institutions or Funds in Respect of Certain Dividends

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

Status: On the statute book but spent. The relief is confined to dividends "declared or distributed during the previous year relevant to any assessment year beginning on or after the 1st day of April, 1966", and its Explanation cross-refers to section 280ZB. Section 280ZB (in Chapter XXII-B) was omitted by the Finance Act, 1990 with effect from 1 April 1990, and the split-rate / additional-tax-on-distributions regime to which it belonged is gone. The section has no live operation today.

Finance Act, 2026: No amendment. Chapter XVIII is untouched by the Finance Act, 2026.

Related provisions: Section 11 (income from property held for charitable or religious purposes - exemption); the now-omitted section 280ZB (Chapter XXII-B - tax credit certificates) and the annual Finance Act definition of "the relevant amount of distributions of dividends".

Litigation profile: No reported decision construes section 236A directly. The authorities collected are cognate: on the legal character of a dividend and the grossing-up / credit fiction, which the section applies in favour of a charitable institution holding a controlling stake.

A. SECTION COMMENTARY

1. Object of the relief

Section 236A addressed the position of a charitable institution or fund that held a controlling block of a company's shares and whose dividend income was exempt under section 11. Under the dividend regime of the time, the company's distribution attracted tax computed under the annual Finance Act with reference to its distributions. To the extent that tax was referable to dividends flowing to an institution whose dividend income was itself exempt for charitable purposes, the burden fell, in substance, on funds dedicated to charity. The section returned to the institution a proportionate credit (or refund) for that tax, so that the charitable exemption was not eroded at the company-distribution stage.

2. The eligibility condition

The relief was available only where seventy-five per cent of the share capital of the company was, throughout the previous year, beneficially held by an institution or fund established in India for a charitable purpose, the dividend income of which was exempt under section 11. The "throughout the previous year" requirement insists on continuity of the controlling holding; a holding acquired or reduced during the year would not qualify.

3. The measure of the credit

By sub-section (2), the credit bears to the tax payable by the company under the annual Finance Act (with reference to the relevant amount of its distributions of dividends) the same proportion as the dividends (other than on preference shares) received by the institution bears to the total dividends (other than on preference shares) declared or distributed by the company during the previous year. Preference-share dividends are excluded on both sides of the proportion. Any excess of the credit over the institution's own tax is refunded.

4. The Explanation and the section 280ZB cross-reference

The Explanation borrows the expression "the relevant amount of distributions of dividends" from the annual Finance Act, and links it to section 280ZB. That cross-reference now points to a repealed provision: section 280ZB, part of Chapter XXII-B (tax credit certificates), was omitted by the Finance Act, 1990 with effect from 1 April 1990. With the supporting machinery gone and the dividend-distribution-tax architecture of that era dismantled, the relief in section 236A is inoperative in current law.

5. Why the section is now spent

Section 236A belongs to a vintage of the law - the period from assessment year 1966-67 onwards - in which a company's distributions were taxed under the Finance Act by reference to a defined "relevant amount", and credit certificates under Chapter XXII-B formed part of the scheme. That scheme has been superseded several times over (and dividend taxation has since passed through the dividend-distribution-tax phase and back to taxation in the recipient's hands). The section survives on the page for completeness but carries no present operation.

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 certain charitable institutions or funds in respect of certain dividends.

236A. (1) Where seventy-five per cent of the share capital of any company is throughout the previous year beneficially held by an institution or fund established in India for a charitable purpose the income from dividend whereof is exempt under section 11, credit shall be given to the institution or fund against the tax, if any, payable by it, of a sum calculated in accordance with the provisions of sub-section (2), in respect of its income from dividends (other than dividends on preference shares) declared or distributed during the previous year relevant to any assessment year beginning on or after the 1st day of April, 1966 by such a company, and where the amount of credit so calculated exceeds the tax, if any, payable by the said institution or fund, the excess shall be refunded.

(2) The amount to be given as credit under sub-section (1) shall be a sum which bears to the amount of the tax payable by the company under the provisions of the annual Finance Act with reference to the relevant amount of distributions of dividends by it the same proportion as the amount of the dividends (other than dividends on preference shares) received by the institution or fund from the company bears to the total amount of dividends (other than dividends on preference shares) declared or distributed by the company during the previous year.

Explanation.—In sub-section (2) of this section and in section 280ZB, the expression "the relevant amount of distributions of dividends" has the meaning assigned to it in the Finance Act of the relevant year.

C. AUTHORITIES

Candour note. There is no reported judgment construing section 236A. The relief is spent and rests on machinery (section 280ZB and the Finance-Act "relevant amount") that has been repealed. The cognate authorities below explain the character of a dividend and the grossing-up / credit fiction which section 236A applies in favour of a charitable institution; the charitable exemption itself is governed by section 11. The citations have been web-verified.

Cluster 1 - Character of a dividend and the shareholder's income

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.

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.

Cluster 2 - The grossing-up / tax-credit fiction applied by the section

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.

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.