Central
Section 3 of The Preference Shares (Regulation of Dividends) Act, 1960
- (1)Where the stipulated dividend in respect of a preference share of a company 1[issued and subscribed for before the 1st April, 1960],--
- (a)is specified to be free of income-tax and no deduction is made therefrom on account of the income-tax payable by the company, or
- (b)was being paid before the 1st April, 1960, without any deduction therefrom on account of the income-tax payable by the company, notwithstanding the absence of any specification that the dividend would be free of income-tax, every such share shall, as respects dividends declared after the commencement of this Act, carry a preferential right to be paid without any deduction aforesaid such amount as would exceed the stipulated dividend by thirty per cent. thereof.
- (2)Where the stipulated dividend in respect of preference share of a company issued and subscribed for after the 31st March, 1959 2[and before the 1st April, 1960] is free of income-tax, and the company, besides paying the stipulated dividend to the holder such share, pays to Government on his behalf any sum on account of income-tax payable thereon, then, every such share shall, as respects dividends declared after the commencement of this Act, carry a preferential right to be paid free of income-tax such amount as together with the sum aforesaid would exceed the stipulated dividend by thirty per cent. thereof.
- (3)Where the stipulated dividend in respect of a preference share of a company2[issued and subscribed for before the 1st April, 1960]--
- (a)is specified to be subject to income-tax and a deduction is made therefrom on account of the income-tax payable by the company, or
- (b)was being paid before the 1st April, 1960, subject to a deduction therefrom on account of the income-tax payable by the company, notwithstanding the absence of any specification that the dividend would be subject to income-tax, then every such share shall, as respects dividends declared after the commencement of this Act, carry a preferential right to be paid subject to the deduction aforesaid such amount as would exceed the stipulated dividend by eleven percent.thereof.
- (4)Where a company has in relation to a preference share 2[issued and subscribed for before the 1st April, 1960] declared,--
- (a)after the 31st March, 1959, and before he 1st July, 1960, a dividend in respect of a previous year relevant to its assessment year 1960-61 or a subsequent assessment year, or
- (b)after the 30th June, 1960, and before the commencement of this Act, a dividend in respect of any previous year, it shall declare, in respect of the said previous year, an additional dividend of such amount as, together with the dividend already declared, would exceed the stipulated dividend-- (i)by thirty per cent.of the stipulated dividend in the cases referred to in sub-section (1), or
- (ii)by eleven per cent. of the stipulated dividend in the cases referred to in sub-section (3).
- (5)For the purposes of sub-section (1), sub-section (3) and sub-section (4), any reference therein to the stipulated dividend shall, in respect of a preference share issued and subscribed for on or before the 31st March, 1959, be construed as a reference to the stipulated dividend as on that day.
- (6)For the removal of doubts, it is hereby declared that any reference in this section 2[and section 4A] to deduction made from a dividend "on account of income-tax payable by the company" does not include any amount deducted by the company from the dividend under 3[section 194 of the Income-tax Act, 1961(43 of 1961)].
Summary
- For preference shares issued and subscribed for before April 1, 1960, if the dividend was tax-free (either by agreement or by practice), the dividend must be increased so that the new payment exceeds the promised dividend by thirty per cent.
- If the preference shares were issued and subscribed for after March 31, 1959 and before April 1, 1960, and were tax-free with the company paying the tax to the government on behalf of the shareholder, the total benefit (the dividend plus the tax paid) must exceed the promised dividend by thirty per cent.
- For preference shares issued and subscribed for before April 1, 1960, if the dividend was subject to tax deductions (either by agreement or by practice), the dividend must be increased so that it exceeds the promised dividend by eleven per cent, still subject to the tax deduction.
- If a company declared dividends for certain periods between March 31, 1959 and the start of this Act, it must declare an additional dividend to bring the total up to the new level (the thirty per cent increase or eleven per cent increase).
- For shares issued and subscribed for on or before March 31, 1959, the promised dividend is calculated based on what it was on March 31, 1959.
- Tax deductions mentioned in this section do not include standard tax deductions made under section 194 of the Income-tax Act, 1961.
Practical examples
1Sita owns preference shares in Delta Manufacturing issued on January 15, 1958. Her agreed dividend was 100 rupees tax-free. Under Section 3(1), after the law started, her dividend is increased by thirty per cent, meaning she must be paid 130 rupees without tax deduction.
2Vikram owns preference shares in Zenith Industries issued on November 10, 1957. His agreed dividend was 100 rupees subject to tax deductions. Under Section 3(3), his dividend is increased by eleven per cent, so his new dividend is 111 rupees, which is still subject to tax deductions.
FAQ
1. What is the cut-off date for shares to be covered under Section 3?
The shares must have been issued and subscribed for before April 1, 1960.
2. By how much is a tax-free preference share dividend increased under Section 3?
The dividend must be increased by thirty per cent of the promised dividend.
3. By how much is a tax-subject preference share dividend increased under Section 3?
The dividend must be increased by eleven per cent of the promised dividend.
4. Does the term tax deduction under Section 3 include deductions made under section 194 of the Income-tax Act, 1961?
No, Section 3(6) clarifies that any deduction under section 194 of the Income-tax Act, 1961 is excluded from this definition.
Test yourself
Q1.Under Section 3(1), by what percentage must a tax-free preference dividend be increased?
Q2.Under Section 3(3), by what percentage must a tax-subject preference dividend be increased?
Q3.To be eligible for the tax-free dividend increase under Section 3(1), when must the preference shares have been issued and subscribed for?
Q4.If a tax-free preference share was issued after March 31, 1959 and before April 1, 1960, and the company paid tax on behalf of the shareholder, what must the new total amount exceed the stipulated dividend by?
Q5.For shares issued on or before March 31, 1959, the stipulated dividend is based on the rate as on which date?