Deemed dividend

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Querist : Anonymous

Querist : Anonymous (Querist)

04 November 2014 A pvt ltd ,b pvt ltd,c pvt ltd had taken loan from ganpati pvt ltd in which they had shareholdins of 9% each> these companies went in merger and formed f ltd. Due to merger the % shareholdings of f ltd in Ganpati PVT LTD increased to 27%. whether provision of sec 2(22)(e) attracted?

Querist : Anonymous

Querist : Anonymous (Querist)

05 November 2014 kindly answer the above querry

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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20 July 2024 In the scenario described, where A Pvt Ltd, B Pvt Ltd, and C Pvt Ltd each had a 9% shareholding in Ganpati Pvt Ltd, and then merged to form F Ltd, which resulted in F Ltd collectively holding 27% in Ganpati Pvt Ltd, the applicability of Section 2(22)(e) of the Income Tax Act, 1961 needs to be examined carefully.

### Understanding Section 2(22)(e)

Section 2(22)(e) deals with the concept of deemed dividends. It states that any payment by a company (not being a company in which the public are substantially interested) which results in the benefit or advantage, directly or indirectly, to its shareholders or their associates, is deemed to be a dividend. The section specifically includes loans and advances made by a company to its shareholders or their associates.

### Application to the Scenario

1. **Loan from Ganpati Pvt Ltd**: A Pvt Ltd, B Pvt Ltd, and C Pvt Ltd each took a loan from Ganpati Pvt Ltd.
2. **Merger**: A Pvt Ltd, B Pvt Ltd, and C Pvt Ltd merged to form F Ltd.
3. **Increased Shareholding**: Post-merger, F Ltd collectively holds 27% in Ganpati Pvt Ltd.

Now, the key question is whether the transaction (i.e., the loan taken by A Pvt Ltd, B Pvt Ltd, and C Pvt Ltd from Ganpati Pvt Ltd) can be deemed to have resulted in a benefit or advantage to the shareholders (now shareholders of F Ltd) under Section 2(22)(e).

### Analysis

- **Benefit or Advantage**: Typically, the courts have interpreted 'benefit or advantage' broadly. In this case, the merger leading to an increase in the collective shareholding of F Ltd in Ganpati Pvt Ltd from 27% could potentially be seen as conferring a benefit or advantage indirectly to the shareholders of F Ltd.
- **Deemed Dividend**: Given that the loan from Ganpati Pvt Ltd was initially taken by A Pvt Ltd, B Pvt Ltd, and C Pvt Ltd (which became part of F Ltd after the merger), and the subsequent increase in collective shareholding, there is a possibility that Section 2(22)(e) might apply.

### Conclusion

To determine conclusively whether Section 2(22)(e) is attracted in this scenario, a detailed analysis of the nature of the loan, the timing of its origination, the merger process, and its impact on the shareholding in Ganpati Pvt Ltd would be necessary. It is recommended to consult with a tax expert or legal advisor who can review all relevant details and provide specific advice tailored to the circumstances of the merger and the applicable provisions of the Income Tax Act, 1961.

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