Deemed dividend

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This discussion explores whether a loan from a holding company to its subsidiary, where a shareholder holds a significant stake (50% in this case) in both entities, constitutes a deemed dividend under Section 2(22)(e) of the Income Tax Act. The query highlights that while such loans are common for business purposes, the section's deeming fiction appears to apply when a shareholder has substantial interest in both the lending and borrowing concerns. The clarification sought is whether this interpretation is correct or if other interpretations exist.

deepak

deepak (Querist)

07 July 2020 Dear sir, if there is a common shareholding in Holding & subsidiary company, and holding company given a loan to subsidiary company, can it is be treated as deemed dividend because i think we covered in i.e. loan to a concern in which such shareholder has substantial interest, in my case Mr A is a 50% shareholder in holding company as well as in subsidiary company, because in so many cases we see where Holding company given a loan to subsidiary company and has common shareholders for business purposes. but as per deeming fiction of section 2(22) (e) it is covered in deemed dividend.

please clarify.

whether there is any other interpretation or my interpretation wrong.

VIKASH KUMAR

VIKASH KUMAR (Expert)

09 July 2020 Section 2(22)(e) of the Income Tax Act mandates that deemed dividends are loans or advances extended by a company (barring a closely held one) to the following personnel:

A shareholder who is the beneficial owner of shares,
and holds a minimum of 10% of the voting rights

In case shareholding is 10% or more then Sec 2(22)e attracted in each case, irrespective of holding or subsidiary co.

deepak

deepak (Querist)

11 July 2020 Thanks for reply,

sir ,Normally holding company gives a loan to a subsidiary and having common shaeholders, whether section attracted.

please Read this line in section 2(22)(e) :

or to a concern in which he is a member/partner and is beneficially entitled to not less than 20% of income of the concern ;

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