Deemed dividend - loan repaid with interest within 2 months

The first option of Mr.Hari Wadhwa might work, but how do you declare dividend after so many months ?  And the second and third options are plain skulduggery.  You CANNOT alter the partnership deed retrospectively and though it is a closely held company, you still have to file the shareholding details to the RoC.  Tax avoidance is OK, but not downright evasion.  Exercise caution.

I agree with Mr. Wadhwa,

It will be deemed dividend , if

1. it is not distributed as a normal dividend after paying Dividend Distribution Tax under Sec.115-O or

2. The company is not having the sufficient accumulated profits to give such loan.

Hence, it seems in your case deemed dividend is applicable.

Now, the consequences,

1. the company is liable to deduct TDS @ 10% under Section 194 on such payments;, else penalty of the same amount would be levied but no addition to the income of the co. will be made as it is not an expense claimed by the co.;

2. The payment made would be taxable in the hands of the recipients under Section 56(2)(i)...

3. Repayment of such loan does not hold its good in such cases.

Hence, it is advisable to avoid such transactions, as you could show it to be a normal dividend, much better for both the parties....

In case of loan advanced to an assessee who has substantial interest in the closely held company, it attracts Sec. 2(22)(e). Repayment of loan does not alter the position - Tarulata Shyam vs CIT (1977) 108 ITR 345 (SC).

But here assessee has no substantial interest. Even then , according to me this is a deemed dividend (because the 2nd sentence is independent of the first one).

vinodaca74 @ gmail.com