FCS Deepak Pratap Singh
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INCOME TAX QUESTIONS ANSWERS SERIES PART - V Section 2(22)(e ) of the Income Tax Act, 1961 Dear Friends, Today we are going to consider problem based on provisions of Sections 2(22)( e) of the Income Tax Act, 1961. PROBLEM Mr. X holds 25% voting power in ABC (P)Ltd., he permits his
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FAQ :
Section 2(22)(e) of the Income Tax Act, 1961, defines 'dividend' to include certain payments made by a company to its shareholders, such as advances or loans, to the extent of the company's accumulated profits. This applies to shareholders holding at least 10% of the voting power or concerns where such a shareholder has a substantial interest.
A payment is considered a deemed dividend if it's an advance or loan made by a company (not substantially interested in by the public) to a shareholder who beneficially owns at least 10% of the voting power, or to a concern in which such a shareholder has a substantial interest. This applies to the extent the company has accumulated profits.
No, not all loans or advances are taxable as deemed dividends. If a loan or advance is given to a shareholder as a consequence of a further consideration that is beneficial to the company, it is not considered a deemed dividend.
A gratuitous loan or advance is given without any specific return benefit to the company. A non-gratuitous loan or advance is given in return for an advantage or benefit conferred upon the company by the shareholder, such as securing a business interest or maintaining a company loan.
The Rs. 10.00 Lakhs payment was not considered taxable as a deemed dividend because Mr. X had mortgaged his property to enable the company to obtain a bank loan. The advance was given to protect the company's business interest and ensure the continued benefit of the bank loan, rather than being a gratuitous payment.
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