Guranteee given - deemed dividend u/s 2(22)(e)

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yogesh vijaykumar shah (Querist)
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02 February 2012 Suppose closedly held company gives guarantee or provides assets as security to a shareholder who has substantial interest for loan from third party. Whether provisions of section 2(22)(e) applies or not. If yes please give us the case law or judgement in this regard.

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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02 February 2012 Section 2(22)(e) will not apply.

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) 5[ made after the 31st day of May, 1987 , by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.

Purpose of Section 2(22)(e):

Section 2(22)(e) of the Income Tax Act, 1961 plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having companies pay or distribute, what would legitimately be dividend in the hands of shareholders, money in the form of advance or loan.

-Read in CIT v. Raj Kumar (2009) 181 Taxmann 155 (Delhi).

Therefore providing asset as security, in my view, should not attract sec 2(22)(e).

Views of other experts also envisaged.

CA ASHISH GUPTA

CA ASHISH GUPTA (Expert)
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02 February 2012 Section 2(22)(e) apply on payment to shareholder by way of advance or loan. so there shall be a payment, if there is no payment, 2(22)(e) will not be applicable in my view. If the shareholder make default and recovery is being made from the company, at that point of time, deemed dividend will apply.

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