Taxability of dividends received

[Asked by Guest]

Cooperative banks have to pay regular income tax.After such payment they distribute dividend.Such dividend should be tax free in the hands of shareholder.Under the basic provision of double taxation such dividends must be tax free.

[DEV KUMAR KOTHARI]

Dividend paid by coop Bank is not covered by S. 115 O or any similar provision. There appears no exemption for such dividend in hands of shareholder u/s 10 . It is in nature of income of share holder as reward for capital invested by him. However, co-op bank can claim the same as business expenditure as bank and its shareholders are different persons, dividend is paid for servicing the existing capital which is raised and used for business of co op bank, dividend is not paid to raise capital, but to serve capital it is not personal exp. of bank, it is not capital expenditure, it is paid on ground of commercial expediency and in usual course of business, it is not covered by S. 30-36 , 40 and 40A it is also not covered by S. 115 O (4) for non allowability. As it satisfy all tests laid down for allowability and not disentitled for deduction one can claim dividend paid by co-op bank to its members as business expenses u/s 37 or u/s 28. However disputes will arise and one has to forcefully and very carefully press claim before authorities/ courts to get a deduction of dividend paid as business expenses.

[DEV KUMAR KOTHARI]

read my article in the Chartered Accountant - November 2008 issue.

AI Summary

Taxability of cooperative bank dividends: shareholders taxed; banks may claim deduction as business expenditure, subject to dispute.
Dividends received by cooperative bank members are income in the hands of shareholders and not covered by the discussed dividend exemption. A cooperative bank may claim dividends paid to members as business expenditure under general deduction principles because such payments can satisfy allowability tests and are not expressly disallowed by the referenced disallowance provisions, but the claim is fact-sensitive and may provoke disputes with tax authorities.