Section 8 — Dividend Income

Section 8 — DIVIDEND INCOME

BLOCK 1 — VERBATIM TEXT OF SECTION 8 (drawn from official PDF)

Marginal note — Dividend income

(1) Where a specified person receives during the tax year any capital asset or stock-in-trade, or both, from a specified entity in connection with the dissolution or reconstitution of such specified entity, then the specified entity shall be deemed to have transferred such capital asset or stock-in-trade, or both, to the specified person in the year in which such capital asset or stock-in-trade, or both, are received by the specified person.

(2) Any profits and gains arising from the deemed transfer mentioned in sub-section

(1) by the specified entity shall be—

(i) deemed to be the income of such specified entity of the tax year in which such capital asset or stock-in-trade, or both, were received by the specified person; and

(ii) chargeable to income-tax as income of such specified entity under the head “Profits and gains of business or profession” or under the head “Capital gains”.

(3) For the purposes of this section, fair market value of the capital asset or stock- in-trade, or both, on the date of its receipt by the specified person shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer mentioned in sub-section (1).

(4) If any difficulty arises in giving effect to the provisions of this section and section 67(10), the Board may, with the previous approval of the Central Government, issue guidelines for removing the difficulty.

(5) Every guideline issued by the Board under sub-section (4) shall be laid before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both houses agree in making any modification in such guideline or both Houses agree that the guideline, should not be issued, the guideline shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that guideline.

(6) For the purposes of this section,—

(a) “specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society);

(b) “specified person” means a person, who is a partner of a firm or mem- ber of other association of persons or body of individuals (not being a company or a co-operative society) in any tax year;

(c) “reconstitution of the specified entity” means, where—

(i) one or more of its partners or members, of such specified entity ceases to be partners or members; or

(ii) one or more new partners or members are admitted in such speci- fied entity in such circumstances that one or more of the persons who were partners or members, of the specified entity, before the change, continue as partner or partners or member or members after the change; or

(iii) all the partners or members, of such specified entity continue with a change in their respective share or in the shares of some of them. Income deemed to accrue or arise in India.

BLOCK 2 — 1961 ACT COUNTERPART (Section 2(22) read with Section 8)

Section 8 of the 2025 Act consolidates the 1961 s. 2(22) deemed-dividend regime + s. 8 historical accumulated-profits dividend rule. The substantive scope is preserved — all dividend-style distributions (whether actual or deemed) are chargeable in the shareholder's hands at applicable slab rates (post-FA-2020 abolition of DDT).

BLOCK 3 — COMMENTARY

STATUTORY ARCHITECTURE — Deemed Dividend Categories

Section 8 read with s. 2 'dividend' definition catches the following constructive distributions: (a) Distribution of accumulated profits to shareholders involving release of company assets — capitalisation of profits, distribution on liquidation, etc.; (b) Loans / advances by closely-held company to a substantial shareholder (≥ 10% voting power) or concern in which such shareholder is interested — to the extent of accumulated profits; (c) Buy-back of shares (post FA 2024) — taxable in shareholder's hands (replacing earlier company-level s. 115QA buy-back tax).

JUDICIAL EVOLUTION — Deemed Dividend on Loan to Shareholder

The Supreme Court in CIT v. Mukundray K. Shah, (2007) 290 ITR 433 (SC), settled the s. 2(22)(e) construction. The Court held that the deemed-dividend trigger requires (i) closely-held company status, (ii) substantial-shareholder identity (≥ 10% voting power), (iii) loan/advance during the previous year, AND (iv) accumulated profits to the extent of which deeming applies.

HELD: The deeming under section 2(22)(e) is triggered only on payment by way of loan or advance to a shareholder who has substantial interest in the closely-held company — either directly or through a concern in which such shareholder is substantially interested. The deeming applies to the extent of accumulated profits possessed by the company. (per Mukundray K. Shah ¶ 14).

JUDICIAL EVOLUTION — Buy-back Tax Shift to Shareholder (FA 2024)

FA 2024 abolished s. 115QA (company-level buy-back tax) and inserted s. 2(22)(f) — buy-back proceeds received by the shareholder are now deemed dividend in the shareholder's hands and chargeable at applicable slab rates. Effective from 1-10-2024 for buy-backs by both listed and unlisted companies. Major shift — earlier the 23.296% buy-back tax was borne by the company; now the higher of slab-rate tax (often 30%+ for high-net-worth shareholders) or capital-gains tax applies in the shareholder's hands.

JUDICIAL EVOLUTION — Loan vs. Trade Advance Distinction

CIT v. Creative Dyeing & Printing (P.) Ltd., (2009) 318 ITR 476 (Del HC) — held that ordinary trade advances (against future supply, lease deposit, etc.) are NOT loans/advances for s. 2(22)(e) purposes; only loans for shareholder-personal-benefit attract deemed-dividend treatment.

DEPARTMENTAL PRACTICE — TDS on Dividend

Post FA 2020 abolition of DDT, dividend is taxable in shareholder's hands. Section 194 — TDS at 10% on dividend > ₹5,000 per company per FY (resident shareholders). Section 195 — TDS on NR shareholders at applicable DTAA rate or 20% (whichever is lower). Form 26Q (for residents) / Form 27Q (for NRs) reporting. Form 15G / 15H — no-deduction declarations for resident shareholders below taxable threshold.

PLANNING NOTES & LITIGATION DEFENCE

(i) For closely-held company structures with substantial-shareholder loans, document the 'commercial purpose' clearly — board resolutions, business rationale, repayment terms. Cite Creative Dyeing to defeat AO's blanket s. 2(22)(e) characterisation of trade advances. (ii) For buy-back of shares (post FA 2024), evaluate (a) shareholder's slab-rate exposure vs. (b) capital-gains characterisation under s. 67-91. The buy-back deeming under s. 2(22)(f) of 2025 Act takes precedence for unlisted-share buy-backs. (iii) For accumulated-profits computation under s. 2(22)(a)-(e), use book profits as adjusted by Schedule II / III to Companies Act, 2013 — NOT MAT book profit. The two are distinct concepts. (iv) For specified person receiving capital asset / stock-in-trade from company (s. 8 of 2025 Act), evaluate FMV vs. consideration; the differential is deemed dividend.

CROSS-REFERENCES

• Section 2 — Definitions (incl. 'dividend', 'specified person', 'closely held company').
• Section 92(2)(a) — dividend chargeable as 'Income from other sources'.
• Section 194 — TDS on dividend payable to residents.
• Section 195 — TDS on dividend payable to non-residents.
• Schedule II / III to Companies Act, 2013 — accumulated profits computation.