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Question
Assertion :Dividend payable on preference shares are not tax-deductible Reason: Preference dividend is not a charge on earnings or an item of expenditure; it is an appropriation of earnings
Assertion :Dividend payable on preference shares are not tax-deductible Reason: Preference dividend is not a charge on earnings or an item of expenditure; it is an appropriation of earnings
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Solution
The correct option is A Both Assertion and Reason are correct and Reason is the correct explanation for Assertion
The rate of dividend on preference shares is generally higher than the rate of interest on debentures.The dividend paid is not deductible from profits as an expense. Thus, there is no tax saving as in the case of interest on loans.
The issaunce of preference shares is generally not considered a loan, even if it has been issued on a redeemable basis. Hence, payment of interest\dividend on redeemable on such preference shares is not deductible as interest on borrowed capital under normal taxation provisions of ITA.
The rate of dividend on preference shares is generally higher than the rate of interest on debentures.
The dividend paid is not deductible from profits as an expense. Thus, there is no tax saving as in the case of interest on loans.
The issaunce of preference shares is generally not considered a loan, even if it has been issued on a redeemable basis. Hence, payment of interest\dividend on redeemable on such preference shares is not deductible as interest on borrowed capital under normal taxation provisions of ITA.
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