Income Tax act Sec 2(22)e

This query is : Resolved 

Querist : Anonymous (Querist) 20 November 2009

There are Two companies One P company which is profit making company & another L company which is loss making comapany, Share holder A 50 % & B 50 % equity holding in p cpmpany & similiarly 50 % each in L company , Now the profit making company has given interest free loan to loss making company transaction thru bank, in srutiny with income tax the Income tax officer wants to add the interest free loan as Dividend income of loss making company treating the laon received as dividend, can he do so,

shakuntala chhangani (Expert)
20 November 2009

Hi, before coming to the main answer, let me clear some terms : which public are substantially interested : In case of a public limited co., if the shares are listed on the recognised stock exchange in India on the last day of the previous year, it will be treated as the co. in which public are substantially interested.
widely held co. : it is a co. in which public are substantially interested
closely held co.:It is a co. in which public are not substantially interested
Now, as per 2(22)(e)
1. loan or advance is given by a closely held co.
2. such loan is given to a concern
3. shareholder beneficially holds 10% or more of the share capital of co. giving the loan and has a substantial interest in the concern receiving loan or advance
4. such loan or advance is taxable as dividend in the hands of recipient concern as dividend u/s 26.
however, the following points must be considered :
a.such loan or advance is treated as dividend to the extent of accumulated profits. it means if there is no accumulated profit, the loan or advance can not be considered as dividend.
b.where money-lending is the suvbstantial part of the business of the co. giving loan, then the above provisions will not apply.
the co. giving such loan / advance need not pay CDT u/s 115-O. it means that the same is taxable in the hands of recipient u/s 56 and exemption u/s 10(33) or 10(34) is not available. regards,
CA Shakuntala Chhangani

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