Allowability of such interest u/s 37(1) - interest @ 8% on deferred dividend. - Income Tax - 875/CBDT

INSTRUCTION NO. 875/CBDT Dated : September 5, 1975 Section(s) Referred: 37 Statute: Income - Tax Act, 1961 Under the provisions of the Companies (Temporary Restriction and Dividends) Act. 1974, companies are not allowed to declare dividend in excess of 1/3rd of the distributable profits or 12 per cent dividend whichever was less. Under the Companies (Temporary Restriction on Dividends) Amendment Act, 1975. companies are now allowed to declare dividends in excess of such distributable profits provided, however, the payment of such excess dividend will be deferred for a period of two years, and distributed thereafter in two equal annual instalments. Section 4 of this Act provides that on the amounts deferred for payment interest will be payable @ 8% per annum to the shareholders by the Company. 2. The Board had an occasion to examine the allowability of such interest u/s 37(1) of the Income-tax Act, 1961 in consultation with the Ministry of Law. The Ministry of Law have advised that as the companies are required to pay an interest @ 8% on deferred dividend under a statutory provision, it will be an essential expenditure which will be falling for consideration for its allowability u/s 37(1) of the Income-tax Act, 1961, under which any expenditure laid out an expended wholly or exclusively for the purpose of business and profession can be allowed as deduction in computing the income chargeable under the head "profits and gains of business or profession". Further, under section 37, the fact that though a liability is a present liability but it is to be performed in future, will make no difference. The said Amendment Act provides that the provision of section 205A of the Companies Act, 1956, shall not apply to any installment of deferred dividend. In view thereof, it may be said that the interest paid on the deferred dividend by a company it its shareholders will constitute an admissible deduction in the computation of total income of the company u/s 37(1) of the Income-tax Act, 1961. 3. Necessary instructions may kindly be issued to all the officers working in your charge on the above lines for their information and guidance.