Private company having accumulated profit takes loan from bank and advanced to its director (50% share) is it treated as deemed dividend.
Please note the company had not advance any amount from its accumulated profit but from loan taken from bank.
Jaice (CA) (32 Points)
04 November 2010Private company having accumulated profit takes loan from bank and advanced to its director (50% share) is it treated as deemed dividend.
Please note the company had not advance any amount from its accumulated profit but from loan taken from bank.
CA.Madhusudan B.P.
(Chartered Accountant)
(1157 Points)
Replied 04 November 2010
Definately the provisions of Sec 2(22) (e) of the Income tax 1961 comes into picture. Its a deeming friction which attracts dividend distribution tax (though not actual dividend) limiting to the accumulated profits of the company.
chirag
(Article & C.A Final Student)
(42 Points)
Replied 04 November 2010
i agree with madhusudan, sec 2(22)(e) covers a point where any personal benefit derived by a member of a co. having substantial interest amounts to deemed dividend.thus it attracts ddt.
sahana Murthy
(Student)
(123 Points)
Replied 05 November 2010
Hi
My interpretation of sec 2(22) (e) is as follows:
1. The company has either current year or accumulated profit.
2. The directors account is showing a debit balance.
On cumulative satisfaction, the IT act deems the debit balance upto maximum of balance in P & L to be the dividend distributed.
I have a doubt. When this section is presumption on part of the Act, how can TDS is be levied on the same.
Calling the experts for clarification on this matter.
Regards
Sahana Murthy
DR GAURAV GUPTA FCA, FCS, LL.B
(COMPANY SECRETARY)
(1046 Points)
Replied 05 November 2010
2(22)(e) is attracted because directors holds 50% shares and also tds provisions are also applicable
CA.Madhusudan B.P.
(Chartered Accountant)
(1157 Points)
Replied 05 November 2010
Sahana Murthy
It is not TDS. pl read it is DDT Dividend Distrubution Tax. When a Compnay declares/distributes/pays dividend company is under the obligation to pay DDT. This is in addition to normal Income tax.
Warmth Regards
sahana Murthy
(Student)
(123 Points)
Replied 10 November 2010
Hi Jaice,
The source of the funds do not matter. Any credit balance in P & L and payment to registered shareholder attracts provision of Sec 2(22)(e). It is deemed dividend.
The shareholder has to provide PAN, if not TDS is at 20%.
Madhusudan Sir,
Sec 194 is attracted for dividends where Sec 115 O is not covered.
Regards
Sahana Murthy
CA.Madhusudan B.P.
(Chartered Accountant)
(1157 Points)
Replied 10 November 2010
Sahana Murthy
Sec 2(22) deals with the provisions of Dividends
Sec 115O deals with Tax on distributed profits of Domestic Companies.
Sec 194 deals with the deduction of Tax at the time of declaring dividends. Sec 194 does not apply to those dividends which are covered by Sec 115O,Sec 115O does not include deemed dividend as mentioned in Sec 2(22) (e), so on combimed reading of the above section, TDS would apply.
The original question of Jaice was applicablity of Sec 2(22)(e) or not .And you extended the question further to whether TDS is applicalbe, So I did not want to confuse Jaice at the first instance.
It will not be an income taxable in the hands of sharesholder, IT IS ONLY A DEEMING FRICTION.
Deemed income under section 2(22)(e) does not become income of the shareholder - Section 2(22)(e) of the Act, inter alia, provides that a loan by a company to a director or a person who has substantial interest in the company is treated as a dividend to the extent of its accumulated profits, but the said section does not transform the character of the loan granted by the company in favour of a director or other persons as his own money. In other words, the loan granted does not become the borrower’s own money and the borrower is still obliged to return the money and the character of the loan is not changed by mere treatment of the said loan as dividend in his hands for assessment purposes. The Income-tax Act is not concerned with the title to the money in dispute and only for the purpose of making assessment, the amount is treated as dividend in his hands. Some indications are also seen from the provisions of section 2(22)(e) of the Act itself, and under the said provisions, it is open to set off the dividend paid by the company against the loan granted and treated as dividend and to the extent to which it is set off the assessee will not be taxed again. The intention of the Legislature is clear that the loan does not become the income of the shareholder and if it is otherwise, then the question of set off would not arise at all. Therefore, the view the deemed dividend under section 2(22)(e) of the Act becomes the income of the shareholder is unsustainable in law - CIT v. T.P.S.H. Selva Saroja [2000] 244 ITR 671 (Mad.).
Naveen Vijay
(CA Practice )
(18 Points)
Replied 10 November 2010
What would be the status if the Company has accumulated losses and also share premium account. Does Share Premium Account will also be treated as Reserves & Surplus for the purpose of DDT.
Thanks,
CA. Naveen Vijaywargia
CA.Madhusudan B.P.
(Chartered Accountant)
(1157 Points)
Replied 10 November 2010
My understanding from your language is that Whether the security premium amount can be used for the purpose of dividends & DDT.
Security premium amount shall be utilized only to those specific 4 items as per Sec78 (2) of the companies Act 1956,
Section 78
APPLICATION OF PREMIUMS RECEIVED ON ISSUE OF SECURITIES.
(1) Where a company issues securities at a premium, whether for cash or otherwise, a sum equal
to the aggregate amount or value of the premiums on those securities shall be transferred to an
account, to be called "the securities premium account"; and the provisions of this Act relating to
the reduction of the securities capital of a company shall except as provided in this section, apply
as if the securities premium account were paid-up share capital of the company.
(2) The share premium accounts may, notwithstanding anything in sub-section (1), be applied by
the company -
(a) in paying up unissued securities of the company to be issued to members of the company as
fully paid bonus securities;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of
securities or debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable preference
securities or of any debentures of the company.
Naveen Vijay
(CA Practice )
(18 Points)
Replied 11 November 2010
My question is : Whether IT Department can treat Security Premium Account as Reserves & Surplus, when the actual Reserves & Surplus of the Company is in negative, for the purpose of Deemed dividend provisions.
Thanks,
CA. Naveen Vijaywargia
CA.Madhusudan B.P.
(Chartered Accountant)
(1157 Points)
Replied 11 November 2010
The AO may despose case to case basis..........
Accumulated profits
Return of capital cannot form part of accumulated profits - The use of the expression ‘accumulated profits, whether capitalised or not’ in section 2(22) tends to show that under that provision it is only the distribution of the accumulated profits which are deemed to be dividends in the hands of the shareholders. By using the expression ‘whether capitalised or not’, the legislative intent clearly is that the profits which are deemed to be dividend would be those which were capable of being accumulated and which would also be capable of being capitalised. The amounts should, in other words, be in the nature of profits which the company could have distributed its shareholders. This would clearly exclude return of part of a capital to the company, as the same cannot be regarded as profit capable of being capitalised, the return being of capital itself - CIT v. Urmila Ramesh [1998] 96 Taxman 533 (SC).
Profits must be understood in commercial sense - The expression ‘accumulated profits’ occurring in sub-clause (e) of section 2(6A) of the 1922 Act [corresponding to section 2(22) (e) of the 1961 Act] or for the matter in any other clause means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the 1922 Act - P.K. Badiani v. CIT [1976] 105 ITR 642 (SC
Emphasis is on ‘possessing’ accumulated profits - Payments made by way of loan or advance to a shareholder or any payments made on behalf or for the benefit of a shareholder are to be treated as dividend in either case to the extent to which the company possesses accumulated profits. The emphasis in this connection must be on-the word ‘possesses’. If the company does not possess the amount, it cannot pay the same. A company can be said to have profits or to be possessed of profits when it actually possess the amount or is in its control - R. Dalmia v. CIT [1982] 133 ITR 169 (Delhi).
Naveen Vijay
(CA Practice )
(18 Points)
Replied 11 November 2010
Thanks Mr. Madhusudan for addressing my query so quickly.
CA.Madhusudan B.P.
(Chartered Accountant)
(1157 Points)
Replied 11 November 2010
Mr.Naveen Vijay,
Was it in any way helpful for you Sir?
Rajesh
(Director)
(45 Points)
Replied 02 September 2011
Emphasis is on ‘possessing’ accumulated profits - Payments made by way of loan or advance to a shareholder or any payments made on behalf or for the benefit of a shareholder are to be treated as dividend in either case to the extent to which the company possesses accumulated profits. The emphasis in this connection must be on-the word ‘possesses’. If the company does not possess the amount, it cannot pay the same. A company can be said to have profits or to be possessed of profits when it actually possess the amount or is in its control - R. Dalmia v. CIT [1982] 133 ITR 169 (Delhi
Dear Sir,
Does a company whose investment in fixed asset is more than the total of the paid up capital and its accumulated profits is said to possess accumulated profits for considering any payment made to substantial shareholder as deemed dividend
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