Deemded Dividend and Subsequent Set Off

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Querist : Anonymous

Querist : Anonymous (Querist)

23 August 2010 Hi, I have a very categorical query.

My boss holds 90% share in private ltd company. He is also a full time employee holding the CEO post in this company. He took a 10 yrs housing loan of 8lacs in Feb-2009, from this company. Cheque wa directly paid to the builder. This loan is being in continuation and paid in EMI every month by cheque. Now this year company is planning for regular dividend in excess of 10 lacs.

Now, my worries are:
1> Can his loan be question as deemed dividend under 2(22)(e)?
2> As a solution should this upcoming dividend be set off against balance/due loan amount?
3> Or Should this dividend be simply paid and he can repay his loan back to the company, using this amount.

Ideally looking at the complete scenario - what is the best way to plan tax, pay less possible tax only DDT? And what are the possible outcomes/consequences?

Please guide.

thanks
Vinay

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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23 August 2010 1) The loan amount will be deemed dividend to the extent of accumulated profits of the company.
2) Can be set off but cannot escape from the above said provision.
3) Can opt this but here also cannot escape from the ist answer.
The share holder has to pay income tax for the deemed dividend. The company has to pay DDT. No way out as per my understanidg of the issue.

Querist : Anonymous

Querist : Anonymous (Querist)

24 August 2010 Total loan was 8 lacs. 2 lacs has been already repaid. Now if it is set off by declaring 6lacs dividend and company pays DDT on 6 lacs. Should we understand that deemed dividend would only be 2 lacs which happens to be actual loan on which neither DDT not income tax was paid? Does this makes some sense? In other words:

Loan - 8 lacs
RePaid - 2 lacs
Due - 6 lacs
Dividend set off and DDT paid on 6 lacs

So by calculation, Deemed Dividend = ?

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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24 August 2010 Still my understanding of deemed dividend is Rs. 8 lakhs itself.
No DDT for company or income tax in the hands of shareholder for dividend of Rs. 6 lakhs set off against the advance.

Citation :- Walchand & Co Pvt Ltd Vs. CIT (1993) 204 ITR 146 (B0m).

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