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Deemed Dividend under Section 2(22)(e)

Neethi V. Kannanth 
on 16 April 2021


Section 2(22)(e) states that any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;

From the above it is clear that

  • The company must be a company in which the public are not substantially interested i.e. a closely held company. It means that the company which is paying loan/advance should be a closely held company but the company which is receiving such loans/advances can be a public company or a listed company on the stock exchange.
  • The borrower must be a shareholder having a substantial interest in the company on the date on which loan/ advance is given. (Not less than 10% of voting power).
  • Loan advanced by a company can be deemed to be dividend only to the extent the company possesses accumulated profits on the date of loan/advance being given.
Deemed Dividend under Section 2(22)(e)

Meaning of the following terms

Substantial Interest

Substantial interest means a shareholder holding 20% or more interest in the company.

Accumulated Profits

Accumulated profit for the purpose of this section is required to be calculated till the date of payment of each loan/advance.


Exclusions to Section 2(22)(e)

Section 2(22)(e) is not applicable in the following situations-

  • Loan given by a company involved in money lending, where loans have been extended in the ordinary course of business
  • Loan extended to shareholders, subsequently adjusted against dividend declared and distributed later
  • As per CBDT Circular No. 19/2017 dated 12 June 2017 Trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ in section 2(22)(e) of the Act.
  • Amount received for providing corporate guarantee, not deemed dividend u/s 2(22)(e)- Where assessee received certain amount from subsidiary company as advance towards security for providing corporate guarantee, it could not be brought to tax as deemed dividend under section 2(22)(e)

Income Tax Implications

Section 115-O of the Income Tax Act, 1961, mandated companies giving loans and advances to pay DDT at the rate of thirty percent, as increased by the surcharge and cess applicable, on the deemed dividends. However, simultaneously exemption u/s 10(34) is provided to the recipient in respect of said deemed dividend.

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Category Income Tax
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Neethi V. Kannanth 

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