Dividend exemption is proposed to be withdrawn after 31st March 2002 with a simultaneous withdrawal of 10.2% dividend tax. Any declaration of dividend after such date would be subject to tax at the rate of 36.75% in the case of companies and 31.5% in the case of individuals. Domestic companies who make further distribution of dividend income shall however benefit deduction u/s 80M.
The Supreme Court in Dalmia (J.) Vs. Commissioner of Income-tax (53ITR83) held that a declaration by a company in general meeting gives rise to an enforceable obligation, but a resolution of the board of directors resolving to pay interim dividend or even resolving to declare interim dividend pursuant to the authority conferred upon them by the articles of association gives rise to no enforceable obligation against the company, because the resolution is always capable of being rescinded. On this basis the Income tax Act provide for taxation of interim dividend only in the year in which the dividend warrant is issued.
However in a recent amendment made in the Companies Act, 1956 the powers to rescind any such declaration of interim dividend are deemed to have been withdrawn in which case the right to claim even interim dividend is an enforceable debt on the date of such declaration. Under such amendment it is provided that the board of directors are required to deposit such interim/final dividend in a separate bank account within five days from the date of declaration and utilize it for making payment for the desired purpose only meaning that no reversal is possible. It is thus sufficient if such declaration is made on or before 31st March 2002. The actual issue of warrants/cheques can take place even after 31st March 2002 however within the statutory period of 30 days.