Section 85A

CHAPTER VII — INCOMES FORMING PART OF TOTAL INCOME ON WHICH NO INCOME-TAX IS PAYABLE

SECTION 85A — DEDUCTION OF TAX ON INTER-CORPORATE DIVIDENDS (OMITTED)

Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)

STATUTORY POSITION (Income-tax Act, 1961, as in force)

Marginal heading (as originally enacted): Deduction Of Tax On Inter-Corporate Dividends

81. to 85C. [Omitted by the Finance (No. 2) Act, 1967, w.e.f. 1-4-1968. Provisions of sections 81, 82, 83, 84, 85, 85A, 85B and 85C were incorporated from the same date in sections 80P, 80Q, 10(29), 80J (now omitted), 80K (now omitted), 80M (now omitted), 80N (now omitted) and 80-O, respectively.]

A. SECTION COMMENTARY

A.1 Original subject-matter (pre-1968 position)

Section 85A mitigated the cascading of tax on inter-corporate dividends. Where a company received dividends from an Indian company, the section operated (broadly) to confine the tax on such inter-corporate dividend to a reduced effective rate, so that profits already taxed in the paying company were not taxed in full again as they passed up a corporate chain.

A.2 Insertion and statutory history

Section 85A was inserted by the Finance Act, 1965, w.e.f. 1-4-1965.

A.3 Omission and migration of the provision

With effect from 1 April 1968 the relief was recast as the section 80M deduction ('deduction in respect of certain inter-corporate dividends'). Section 80M has had a chequered history — repealed when the dividend-distribution-tax regime was introduced and re-enacted by the Finance Act, 2020 (w.e.f. AY 2021-22) once dividends became taxable again in the shareholder's hands. The interpretive principle that the deduction attaches to net, not gross, dividend was settled under the successor provision.

A.4 Current status

Section 85A does not exist as a live operative provision of the Income-tax Act, 1961. The Chapter VII slot bears only the omission entry reproduced above. Its policy lives on in section 80M (and the provisions that have in turn succeeded it). For an assessment under the 1961 Act there is nothing to apply under section 85A itself; the analysis must proceed under the successor provision and the head of income to which the receipt belongs.

A.5 CA practitioner pointers

(1) Do not cite section 85A in a current return, computation, assessment or appeal — it has stood omitted since the date shown above and any reference to it is liable to be treated as a mistake. (2) Where the receipt in question is of the kind the old section addressed, frame the claim under the successor provision and satisfy its conditions. (3) When relying on older judgments decided on the omitted section, treat them as authority on the underlying concept only, and check that the successor provision has not altered the conditions on which the earlier ruling turned.

B. FA 2026 IMPACT NOTE

The Finance Act, 2026 does not revive or amend section 85A; the section remains omitted. FA 2026 makes no change to Chapter VII. (For completeness, the only live section of Chapter VII — section 86 — is also not amended by FA 2026.)

Transition note: the Income-tax Act, 2025 (which commences on 1 April 2026 and replaces the 1961 Act) does not re-enact this omitted provision under its old number; the relief, to the extent it still exists, is found in the corresponding deduction/exemption of the new Act.

C. CASE LAW

No case law subsists under section 85A as a live provision: it was omitted with effect from the date noted above, so no assessment is decided under it today. The jurisprudence on its subject-matter now resides under the successor provision (section 80M). For cross-reference and continuity of doctrine, the leading authorities on the successor provision are set out below; they are noted here as authority on the underlying concept, decided under the successor section and not under section 85A.

1. Distributors (Baroda) P. Ltd. v. Union of India (1985) 155 ITR 120 (SC)

Facts: The question was whether the inter-corporate-dividend deduction under section 80M is computed on the gross dividend received or on the net dividend (after deducting expenses and interest referable to earning it), read with section 80AA.

Held: A larger Bench of the Supreme Court overruled Cloth Traders (P) Ltd. v. Addl. CIT (1979) 118 ITR 243 (SC) and held that the deduction under section 80M is allowable only on the net dividend income included in the gross total income, not on the gross dividend.

Relevance: Leading authority on the inter-corporate-dividend deduction (section 80M) into which old section 85A was carried; establishes the 'net income' principle for Chapter VI-A dividend reliefs.