Deemed dividend applicability

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Nilesh Mehta (Querist)
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29 February 2024 A Pvt Ltd Company gives a loan B Ltd Company. C Ltd Company holds 100% shares in B Ltd.
In A Pvt Ltd, an individual shareholder possesses a 40% stake and concurrently holds a 17% share in C Limited. Simultaneously, the spouse of this individual shareholder, who owns 10% of A Pvt Company, also holds a 15% interest in C Limited.
Whether this scenario falls within the purview of Section 2(22)(e).

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)
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06 July 2024 Yes, the scenario described could potentially fall within the purview of Section 2(22)(e) of the Income Tax Act, 1961. Here’s an analysis based on the details provided:

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

Section 2(22)(e) deals with the concept of deemed dividend and applies to certain transactions where a company distributes its accumulated profits to its shareholders or their associates, either directly or indirectly. Here’s how it applies to your scenario:

1. **Loan from A Pvt Ltd to B Ltd**:
- A Pvt Ltd Company gives a loan to B Ltd Company, where C Ltd Company holds 100% shares in B Ltd.
- A Pvt Ltd is indirectly providing financial assistance to C Ltd (through its subsidiary B Ltd) by extending this loan.

2. **Ownership Structure**:
- In A Pvt Ltd Company:
- Individual shareholder (let's call them X) holds 40% stake.
- X also holds a 17% share in C Ltd.
- X's spouse holds 10% stake in A Pvt Ltd and 15% share in C Ltd.

3. **Application of Section 2(22)(e)**:
- Section 2(22)(e) could apply if the Assessing Officer determines that the loan given by A Pvt Ltd to B Ltd (where C Ltd is a 100% shareholder) is essentially a benefit conferred by A Pvt Ltd to its shareholders or their associates (including their relatives).
- Since X and their spouse have substantial interests in A Pvt Ltd and also hold shares in C Ltd, any benefit (such as a loan extended by A Pvt Ltd to B Ltd) could be deemed as a distribution of accumulated profits of A Pvt Ltd.

### Considerations:

- **Indirect Benefit**: A Pvt Ltd providing a loan to B Ltd (owned by C Ltd) indirectly benefits the shareholders of A Pvt Ltd who have interests in C Ltd.
- **Deemed Dividend**: If the Assessing Officer concludes that the loan transaction is a form of indirect distribution of accumulated profits of A Pvt Ltd to its shareholders or their associates (as defined in the Act), it could be treated as deemed dividend under Section 2(22)(e).
- **Tax Implications**: Deemed dividend under Section 2(22)(e) would attract tax in the hands of the shareholders (X and spouse), and A Pvt Ltd might also have withholding tax obligations.

### Conclusion:

Given the complex ownership structure and the transaction involving a loan from A Pvt Ltd to B Ltd (a subsidiary of C Ltd), there is a risk that this arrangement could fall within the ambit of Section 2(22)(e) of the Income Tax Act. It’s crucial to seek advice from a tax professional or chartered accountant who can assess the specifics of the case and provide guidance on potential tax implications and strategies to mitigate risks.

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