Section 4A of The Preference Shares (Regulation of Dividends) Act, 1960
1[4A. Deduction of income-tax.-- Where the stipulated dividend in respect of a preference share of a company--
- (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)is being paid 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, 2[such deduction made by the company from any dividend declared after the 28th day of February, 1966 shall in no case exceed twenty-seven and a half per cent. of the aggregate of--
- (i)the stipulated dividend, and
- (ii)an amount equal to eleven per cent. of the stipulated dividend as specified in sub-section (3) of section 3.]]
Summary
- This section applies when preference share dividends are subject to a deduction on account of income tax payable by the company (whether by agreement or by practice).
- For dividends declared after February 28, 1966, the company's tax deduction must not exceed twenty-seven and a half per cent of a specific total.
- That total is the sum of the promised dividend and an extra eleven per cent of that promised dividend as set out in Section 3(3).
Practical examples
FAQ
1. When does the tax deduction cap in Section 4A take effect?
The cap applies to any preference share dividend declared after February 28, 1966.
2. What is the maximum percentage that can be deducted for tax under Section 4A?
The deduction cannot exceed twenty-seven and a half per cent of the specified total.
3. How is the total amount calculated for applying the twenty-seven and a half per cent cap?
The total amount is the sum of the promised dividend and an extra eleven per cent of that promised dividend under Section 3(3).
4. Does Section 4A apply if there is no written agreement stating the dividend is subject to tax?
Yes, it applies if the dividend was being paid subject to a tax deduction, even if there was no written specification.
Test yourself
Q1.Section 4A applies to tax deductions from preference share dividends declared after which date?
Q2.What is the maximum tax deduction rate allowed under Section 4A?
Q3.What two amounts are added together to find the base for the tax deduction cap in Section 4A?
Q4.Under Section 4A, does the restriction apply if the dividend was paid subject to tax without a written specification?
Q5.Section 4A mentions an eleven per cent increase as specified in which other section of the Act?