23 March 2009
I have two Pvt. Co. namely A ltd. & B Ltd. In which our share holding pattern are as bellow:- Equity Share in A Ltd. 25% Equity Share in B Ltd 7%
B ltd given loan to me Rs. 22,00,000/- is it deemed dividend u/s 2(22)(e) of IT Act?
A ltd given loan to B ltd Rs. 2,00,000/- is it deemed dividend u/s 2(22)(e) of IT Act?
23 March 2009
The intention behind enacting provisions of section 2(22)(e) are that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would became taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by his deeming provisions such payment, by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which it’s shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern.
Here in both the cases You dont have substantial shareholding, the loan amount will not fall under the definition of Deemed Dividend under Sec2(22)(e).
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