CAN LOAN BE Give to Director Son From A Private LTD COMPANY?

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

07 September 2010 I am Director in Constructions Pvt Ltd

This company at times give surplus money at loans to various persons and entities . My son is not a share holder or director in the company.

1) Can i give a Loan to my own son from Contructions PVT LTD . Who is in Need of some finance and charge interest to him?

2)The loan given to my son from Contructions PVT LTD will treated as deemed dividend or not ?

SANJAY TALATI

SANJAY TALATI (Expert)
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07 September 2010

section 2(22)(e) of the Income Tax Act,1961, dealing with the deemed ividend in case of a closely held company says " any payment by a company, not being a company in which the public are substantially interest of any sum by way of advnace or loan to a shareholder being person who is the beneficail owner of shares holding not less than ten percent of voting power or to any concern in which such share holders is a member or partner and in which he has a substantial interest 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 possesseess accumulated profits........"

In your case, the loan is given to the son of the Director of a pvt. company who is neither a shareholder nor a director, hence provisions of deedmed ivd would not be attracted.

Sec. 295 of the Companies Act, 1956 which restricts the giving of a loan or guarantee or providing security in respect of the loan given to the specified persons is not applicable to the Pvt. Ltd. Company . But, Provisions of Sec. 299 which requires the disclosure of Interest by the interested director will be applicable and requires to be complied with.

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SANJAY TALATI

SANJAY TALATI (Expert)
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07 September 2010 Deeming fiction contemplated by section 2(22)(e) of IT Act can be applied only in hands of shareholder

In the light of the intention behind the provisions of section 2(22)(e) and in the absence of indication in said section to extend the legal fiction to a case of loan or advance to a non-shareholder also, loan or advance to a non-shareholder cannot be taxed as “Deemed Dividend” in the hand of a non-shareholder.

ITAT, Mumbai Bench ‘E’ Special Bench
ACIT v Bhaumik Colour Pvt. Ltd. , ITA No. 5030/Mum/04 Dated : 19.11.2008

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