Loan from directors by private limited company

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Querist : Anonymous

Querist : Anonymous (Querist)

29 July 2013 whether section 2(22)e is attracted while repayment of loan taken from director by a private limited company ?

if not applicable than is it recommended to borrow loan from directors ?

Further if in incorporation stage a private limited company borrows money from directors and repay the same before company earns gain than also section 2(22)e is applicable or not?

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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29 July 2013 Section 2(22)(e) of the IT Act’1961 deals with the issue of “deemed dividend.” -

Provisions of Section 2(22)(e) are as under:

“Dividend” includes‑(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) [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.

So Section 2(22)(e) of Income Tax Act 1961 is applicable when loan/advance given to director/shareholders of company and not at the time of repayment of loan taken from director.

Taking loan from director is a main source of finance for private limited companies. So no issues in taking loan from director.

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