Section 2(22)(e): Deemed Dividend - Taxability in FY 20-21

Last updated: 18 April 2022

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Quick Summary

Section 2(22)(e) of the Income Tax Act addresses 'deemed dividends', which are certain payments made by a company to shareholders who hold 10% or more equity and have a substantial interest in a 'concern'. These payments are taxed up to the extent of accumulated profits at the time of payment. Importantly, dividend distribution tax is not applicable from April 1, 2020, but such deemed dividends are now taxable in the hands of the shareholder under Section 56.

Payment by a company to whom

to Equity shareholder holding 10% or more
to any "concern" in which "Equity shareholder holding 10% or more" has "substantial interest" (i.e. a beneficial owner of 20% or more of the concern's income"
to anyone on behalf of "Equity shareholder holding 10% or more".

(Any subsequent repayment / adjustment against remuneration / rent etc. is immaterial. Such payment will still be taxed)

Deemed Dividend Taxability FY 20-21: Section 2(22)(e)

How much will be treated as a dividend?

To the extent of accumulated profits (accumulated profits calculated till the date of payment)

When is it taxed?

The payment is taxed in the year of payment.

Any exception to section 2(22)(e)

Any payment by NBFC as loan or advance in ordinary course of business

Taxability in hands of Company

Nil (Section 115(0) has been amended effective 1-4-20 and dividend distribution tax is not applicable from 1-4-20 (including tax on deemed dividend).

Taxability in hand of shareholder

Dividend is taxable u/s 56 in hands of shareholder from 1-4-20 and exemption u/s 10(34) has been removed.

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About the Author

Rish s

Proprietor of R.Sethia Associates, Chartered accountants. CA year 2000. Experience in Banking, Corporate law, Manufacturing cos systems and audit, Income Tax etc.

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