Deemed dividend
This query is : Resolved
03 January 2014
loan to shareholder is covered under section 2(22)(e) subject to criteria defined in the section. But my query is whether loan from Subsidiary to ultimate holding company is also covered under above Section.
03 January 2014
depends on facts of the case. Inc ase of Farida Holdings 21 taxmann.com 462, it was held that it was not to be considered as deemed dividend (but the judgment was on the facts of the case)
So unless peculiar circumstances can be established, a normal loan by subsidiary to holding company will normally get covered by deemed dividend. (in the case of Sadhna Textile Mills (p) Ltd. vs. CIT(1991) 188 ITR 318 has dealt with question of holding and subsidiary companies and has held that section 2(22)(e) applies to a holding company and a subsidiary company. Therefore, High Court in this case has held that loan given by subsidiary company to the holding company would fall within the ambit of Section 2(22)(e))
So unless peculiar circumstances can be established, a normal loan by subsidiary to holding company will normally get covered by deemed dividend. (in the case of Sadhna Textile Mills (p) Ltd. vs. CIT(1991) 188 ITR 318 has dealt with question of holding and subsidiary companies and has held that section 2(22)(e) applies to a holding company and a subsidiary company. Therefore, High Court in this case has held that loan given by subsidiary company to the holding company would fall within the ambit of Section 2(22)(e))
03 January 2014
thanks for your reply. can u please give clarification on the below 2 points also.
1. loan from Subsidiary to the Holding Company of Subsidiary's Holding Company will also be treated u/s 2 (22)(e).
2. Quantum of deemed dividend
The principle is that where loan given by the company exceeds the accumulated profits, deemed dividend would be to the extent of accumulated profits and balance of loan amount would not be deemed dividend.
means , If there are no accumulated profits, there would not be any question of loan being treated as deemed profits.
please guide on the above points also.
thanks for anticipation in advance.
thanks for your reply. can u please give clarification on the below 2 points also.
1. loan from Subsidiary to the Holding Company of Subsidiary's Holding Company will also be treated u/s 2 (22)(e).
2. Quantum of deemed dividend
The principle is that where loan given by the company exceeds the accumulated profits, deemed dividend would be to the extent of accumulated profits and balance of loan amount would not be deemed dividend.
means , If there are no accumulated profits, there would not be any question of loan being treated as deemed profits.
please guide on the above points also.
thanks for anticipation in advance.
03 January 2014
1. Yes, I believe so. since the holding company's holding company (ultimate holding company) will be the beneficial owner!!
2. ya very much so. in absence of accumulated profits, no deeming fiction can be created for dividend.
2. ya very much so. in absence of accumulated profits, no deeming fiction can be created for dividend.
03 January 2014
thank you very much for your straight and quick reply.
03 January 2014
One more thing, I am a bit skeptical about the applicability of deemed to the ultimate holding company. On the basic assumption it does appear that that it applies. However, may be, it is possible to argue that 1. ultimate holding company is not registered shareholder 2. the the the holding company doesn't hold any shares in the ultimate holding company.
But as I said before, I am skeptical and have not been able to test this angle.
But as I said before, I am skeptical and have not been able to test this angle.
03 January 2014
yeah! there are some points which I would like to discuss on this. Let me prepare the points to be analyzed for more clear interpretation of this section.
03 January 2014
sure. we can have a relook at this based on your points.
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