Deemed Dividend PVT Ltd Co to LLP

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MAKARAND DAMLE (Querist)
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12 August 2024 Deemed Dividend u/s 2(22)(e) covers
Payment of any sum (whether representing a part of the assets of the company or otherwise) by way of advance or
loan to a shareholder (and payment to concerns in which such share holder holds substantial interest);
My question is whether the above clause will be applicable if Pvt Ltd Company advances or gives loan to LLP and in both concerns directors held more than 10% shares and voting power ?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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12 August 2025 Great question about **deemed dividend under Section 2(22)(e)**! Here's a detailed explanation:

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

* This section treats **any loan or advance** given by a company to a **shareholder** (or to an entity in which the shareholder has substantial interest) as a **deemed dividend**, to the extent it exceeds Rs. 1 lakh.
* The rationale: prevent companies from distributing profits disguised as loans/advances.

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### Key points in your scenario:

| Factor | Details |
| -------------------------------------------------- | ---------------------------- |
| Loan/Advance from Pvt Ltd Company | Yes |
| Recipient entity | LLP |
| Directors hold >10% shares/voting power in Pvt Ltd | Yes |
| Directors hold substantial interest in LLP | Yes (assuming >20% interest) |

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### Is Section 2(22)(e) applicable when Pvt Ltd loans/advances to LLP?

* **Applicability depends on whether LLP is a 'concern' in which the shareholder of the company holds substantial interest.**

* **Substantial interest is defined under Explanation to Section 2(22)(e):**

* Shareholder holds directly or indirectly **at least 20% of voting power or share capital** in the concern.
* Or has right to receive or participate in at least 20% of the profits of the concern.

* If the LLP is a concern in which the director/shareholder holds substantial interest (≥20% profits or voting rights), **Section 2(22)(e) applies**.

* It **does not matter whether the recipient is a company or LLP**. The term "concern" covers both companies and other entities.

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### Important considerations:

* If **directors of Pvt Ltd (who are shareholders >10%) hold ≥20% interest in LLP**, then advance/loan from Pvt Ltd to LLP **will be treated as deemed dividend** under 2(22)(e).

* If the director/shareholder does **not hold substantial interest in LLP**, Section 2(22)(e) will **not apply**.

* The **amount treated as deemed dividend = amount of loan/advance (minus Rs. 1 lakh)**.

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### Summary:

| Condition | Result |
| ----------------------------------------------- | ---------------------------------------------------------------------- |
| Loan/advance from Pvt Ltd to LLP | Covered under 2(22)(e) if LLP is a "concern" with substantial interest |
| Director/shareholder holds ≥20% interest in LLP | Yes, deemed dividend applies |
| Director/shareholder holds <20% interest in LLP | No, Section 2(22)(e) not applicable |

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### Final Note:

* Make sure to check the **exact % of interest in LLP** (profits or voting rights).
* Keep documentation of loan/advance and shareholding details.
* Deemed dividend is **taxable in hands of shareholder/director** under the head “Income from Other Sources”.

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If you want, I can help you draft a detailed note or provide case law references related to this. Would that help?

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