Section 4 of The Preference Shares (Regulation of Dividends) Act, 1960
1[Where any preference share of a company has been issued and subscribed for before the 1st April, 1960, and any portion of the profits and gains of the company] in respect of the relevant period is exempt from income-tax under the 2[Income-tax Act, 1961 (43 of 1961)], by reason of such portion being agricultural income, then, for the purpose of the increase in the dividend in relation to any such preference share under the provisions of section 3, the increase of thirty per cent. or eleven per cent. referred to therein shall be taken to be such proportion of the said thirty per cent. or eleven per cent. as the case may be, as the total amount of the profits and gains of the company excluding the portion of the profits and gains which is so exempt in respect of the relevant period bears to the total amount of the profits and gains thereof in respect of that period. Explanation.-- For the purpose of this section, "relevant period", in relation to the profits and gains of a company, shall mean--
- (a)the previous years relevant to such of the three assessment years as immediately precede the assessment year ending on the 31st March, 1961, and in each of which the net result of the computation of profits and gains of the company has not been loss or where there are only two such years, such two years, or where there is only one such year, such one year; or
- (b)in any case where clause (a) is not applicable, the previous year relevant to the assessment year ending on the 31st March, 1961 or a subsequent assessment year immediately following thereafter in which the net result of the computation of profits and gains has not been a loss.
Summary
- This section applies when a company has issued preference shares before April 1, 1960, and a portion of its profits during the relevant period is exempt from income tax because it is agricultural income.
- In such cases, the thirty per cent or eleven per cent dividend increase required by Section 3 is reduced proportionally.
- The reduced increase is calculated by comparing the company's taxable profits (total profits minus exempt agricultural income) to its total profits during the relevant period.
- The relevant period is generally the non-loss previous years of the three assessment years right before the assessment year ending March 31, 1961.
- If those three years cannot be used (for example, if there were only losses), the relevant period is the first non-loss previous year ending on March 31, 1961, or a subsequent year immediately after.
Practical examples
FAQ
1. Why does Section 4 reduce the dividend increase for certain companies?
It reduces the increase because a portion of the company's profits is exempt from income tax as agricultural income.
2. What types of exempt income trigger Section 4?
It is triggered when a portion of the company's profits and gains is exempt from income tax because it is agricultural income.
3. How is the proportional increase calculated under Section 4?
The increase (thirty per cent or eleven per cent) is multiplied by a fraction: the company's total profits minus the exempt agricultural income, divided by the total profits.
4. What does relevant period mean if the company had no losses in the three years preceding March 31, 1961?
It means the previous years relevant to those three assessment years that immediately precede the assessment year ending on March 31, 1961.
Test yourself
Q1.Under Section 4, what type of exempt income reduces the Section 3 dividend increase?
Q2.For Section 4 to apply, the preference shares must have been issued and subscribed for before which date?
Q3.How is the proportional increase in Section 4 calculated?
Q4.In the definition of relevant period, how many preceding assessment years are initially looked at before the year ending March 31, 1961?
Q5.Under Section 4, what net result of computation of profits prevents a previous year from being included in the relevant period?