Income Tax Act, 1961 · Historical company tax relief
Section 236 of the Income-tax Act, 1961: Relief on Dividends Paid from Past Taxed Profits
Section 236 provided a narrowly defined tax credit to certain companies distributing dividends out of profits already charged to income tax for an assessment year ending before 1 April 1960. It is a historical transitional provision, not a general deduction for present-day dividend distributions.
What did Section 236 provide?
Under Section 236(1), an eligible company could obtain a credit against income tax payable on profits and gains of the previous year in which it paid a qualifying dividend. Where the computed credit exceeded the income tax payable for that year, the excess was refundable. The relief depended on the source of the dividend and the specific statutory conditions; the provision did not grant an unconditional refund to every company.
Conditions under Section 236(1)
- The dividend was paid by an Indian company or by a company that had made the prescribed arrangements for declaring and paying dividends within India.
- The payment occurred in a previous year relevant to an assessment year commencing after 31 March 1960.
- The dividend was paid wholly or partly from profits and gains actually charged to income tax for an assessment year ending before 1 April 1960.
- The company deducted tax from the dividend in accordance with Chapter XVII-B of the Income-tax Act, 1961.
Only the part of the dividend demonstrably attributable to qualifying past taxed profits could enter the Section 236 credit computation.
Credit under Section 236(2): 10% of qualifying dividends
Section 236(2) fixed the credit at 10% of the qualifying dividend amount paid out of profits taxed for assessment years ending before 1 April 1960.
Historical illustration: If a qualifying company distributed Rs. 2,00,000 in dividends, of which Rs. 80,000 was established as arising from eligible pre-1960 taxed profits, the statutory credit would be Rs. 8,000 (10% of Rs. 80,000), subject to the other requirements. This is an illustration of the old provision, not a claim of present-day eligibility.
Explanation 1: Ordering of distributable income
For the purpose of identifying the source of dividends, Explanation 1 deemed the aggregate dividends declared for a previous year to come first from that year's distributable income. Any remaining dividend was then treated as coming from the undistributed distributable income of immediately preceding years, working backwards only so far as necessary. Amounts already used to cover dividends for another year could not be counted again.
Explanation 2: Meaning of distributable income
Distributable income meant assessed total income for the previous year, computed before deductions under Chapter VI-A, subject to the following statutory adjustments:
| Reductions | Additions |
|---|---|
| Income tax payable by the company on its total income | Profits, gains or receipts not included in total income computed before Chapter VI-A deductions |
| Other government or local-authority taxes to the extent not already allowed in computing total income | Amounts attributable to allowances deducted in computing taxable business profits but not reflected in the company's profit and loss account |
| Amounts relating to deductions allowable under Section 80G | — |
| For a banking company, the amount actually transferred to a reserve fund under Section 17 of the Banking Regulation Act, 1949 (historically described as the Banking Companies Act, 1949) | — |
The deemed ordering rule and distributable-income definition are essential to tracing the portion of dividends that could qualify for the 10% credit.
Legislative history and present-day relevance
Section 236 appeared in Chapter XVIII: Relief Respecting Tax on Dividends in Certain Cases. The text reflected amendments by the Finance Act, 1967, including changes to the definition and adjustments of distributable income effective in 1967 and 1968. Its reference to profits taxed before 1 April 1960 makes it primarily relevant to historical assessments, records, or disputes.
The Income-tax Act, 1961 was replaced prospectively by the Income-tax Act, 2025 from 1 April 2026, subject to savings and transition rules for earlier periods. A reader researching a modern dividend distribution should instead examine the law governing that tax year and the applicable dividend taxation and withholding provisions; Section 236 should not be relied on as a current general relief.
Frequently asked questions
Was Section 236 a dividend exemption?
No. It provided a company-level tax credit on a tightly specified portion of dividends, subject to statutory conditions.
What was the rate of relief?
The credit was 10% of dividends paid out of qualifying profits actually taxed for assessment years ending before 1 April 1960.
Could the credit produce a refund?
Yes. Under Section 236(1), any excess of the calculated credit over the company's income tax payable for the relevant previous year was refundable.
Does Section 236 apply to ordinary dividends in 2026?
No general current-year entitlement should be inferred. The provision concerns historical pre-1960 taxed profits, and the new Act governs tax years beginning from 1 April 2026, subject to the statutory savings framework.
Official statutory sources
- Income Tax Department: Section 236, Income-tax Act, 1961
- Income Tax Department: Income-tax Act, 1961 as amended by Finance Act, 2025 (PDF)
- Income Tax Department: Scope and transition to the Income-tax Act, 2025
This page explains a historical statutory provision for legal research and general information. Application to any particular assessment, refund or saved proceeding requires verification of the governing law and records.