by Under Section 2(40) of the Income-tax Act, 2025, the term “Dividend” has an inclusive meaning and covers not only ordinary dividends distributed by a company but also certain specified distributions and payments treated as dividend by law. It broadly includes distribution of accumulated profits involving release of company assets, distribution of debentures or deposit certificates in specified circumstances, distributions on liquidation or reduction of capital, and certain loans or advances to specified shareholders or concerns. The provision also contains exclusions for prescribed transactions. The purpose of this definition is to identify company distributions that are treated as dividend income for taxation purposes.
1. Distribution involving Release of Company Assets
Dividend includes any distribution by a company of its accumulated profits where such distribution involves the release of all or any part of the company’s assets to its shareholders. The distribution need not necessarily be made in cash; transfer or release of property or other assets representing accumulated profits may also fall within the definition. The amount is treated as dividend to the extent that the company possesses accumulated profits as determined under the applicable provisions. This rule prevents companies from avoiding dividend taxation merely by distributing assets instead of cash. Therefore, both the substance and nature of the distribution to shareholders are relevant.
2. Distribution of Debentures or Deposit Certificates
The definition of dividend also covers specified distributions by a company to its shareholders through debentures, debenture-stock or deposit certificates, where the statutory conditions are satisfied. In the case of a company having preference shareholders, certain distributions of bonus shares to such shareholders may also come within the inclusive definition. Such distributions are treated as dividend to the extent they represent the company’s accumulated profits. The provision recognises that a company may distribute economic benefits to shareholders through instruments other than ordinary cash dividends. Consequently, the legal form of the distribution does not necessarily prevent it from being treated as taxable dividend income.
3. Distribution on Liquidation of Company
Where a company goes into liquidation and distributes assets to its shareholders, the distribution may be treated as dividend to the extent attributable to the company’s accumulated profits, subject to the conditions and exclusions contained in Section 2(40). Liquidation ordinarily involves realisation and distribution of the company’s assets after satisfying its liabilities. The provision separates the portion representing accumulated profits from other amounts representing the shareholder’s capital interest. Only the amount falling within the statutory definition is treated as dividend. Therefore, taxation of a liquidation distribution depends upon the nature of the amount distributed and the extent to which it represents accumulated profits.
4. Distribution on Reduction of Capital
A company may undertake a reduction of share capital and distribute money or other assets to its shareholders. Under Section 2(40), such distribution may be treated as dividend to the extent that it represents the company’s accumulated profits, subject to the prescribed conditions and exclusions. The provision ensures that accumulated profits distributed through reduction of capital do not escape dividend treatment merely because the payment is described as a return of capital. However, the entire amount distributed on capital reduction is not automatically treated as dividend. The character of the distribution and the portion attributable to accumulated profits must be determined under the statutory rules.
5. Loans or Advances to Specified Shareholders
Section 2(40) also treats certain loans or advances made by a closely held company as dividend where the prescribed conditions are satisfied. Broadly, this may apply to payments made to a shareholder having the required substantial interest, or to a concern in which such shareholder has the prescribed interest. The amount is generally treated as dividend only to the extent of the company’s accumulated profits. Certain payments made in the ordinary course of a money-lending business and other specified transactions may be excluded. This deemed-dividend provision prevents accumulated company profits from being distributed to specified shareholders in the form of loans instead of dividends.
