Tax planning to avoid deemed dividend non compliance ??

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CA Abhishek Singh (Querist)
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13 February 2013 Hello everyone,

it is normal in case of a pvt co. that members who are also directors transfer funds from company's bank a/c to their personal bank a/c for personal use.

since loan or advance by a company to its directors holding more than 10% of shares is treated as deemed dividend and is taxable in the hands of the director and company is also supposed to deduct tax at source.

can we do the following tax planning
1. appoint another person as member with say 1% shares and whenever director/members need funds they can do so by first transferring from co a/c to to his a/c and then they can withdraw from him.

Is it practically possible or there is any better way of tax planning ??

waiting for the views of the experts

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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13 February 2013 I think, Income Tax Officers are more clever than the assessee. If they find any nexus the deemed loan to 1% Shareholder can also be brought to tax net easily.
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CA Abhishek Singh

CA Abhishek Singh (Querist)
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14 February 2013 another option is to capitalise the reserves & surplus by issuing bonus shares. i think this will be better

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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14 February 2013 The question of immediate requirement can not be solved by issuing bonus shares as the same is also under certain procedural requirements. Further sale of shares attract capital Gains as well as the transfer is not also so easy.
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So, on case to case basis planning can be made, but it is also true that the loose ends are regularly being tightened by the Regulators.
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