Deemed dvidend

ITR 739 views 7 replies

Sandeep

Managing Director

40 Points Joined August 2011

Hello, I am new to this forum and this is my first message. Unfortunately the first message I have to post in this forum is a problem. I am in a situation for which I would like to know if there is any way I can escape from the deemed dividend

We have two companies X and Y. In the year 2008-09 we have transferred a sum of 60 lakhs from X to Y as loan and subsequently half of the amount is repaid after few months. By the time the amount was transferred Y is not a share holder in X. At a later stage Y bought 30% stake in X and after an year we merged X with Y. The outstanding amount is being shown as a loan for the past 3 years in the balance sheets of Y. However recently, IT people have asked us to pay a dividend tax as this amount is considered to be a deemed dividend with interest for the last 3 years.

We were unaware of this rule and are caught by surprise now. Is there anyway I can come out of this situation without paying the dividend tax ? Is there any exception? There was no intention to evade tax when we transferred the amount, it was a genuine mistake and now we are in a soup.

Replies (7)

Siddarth R Sunder Ram

Finance Professional

230 Points Joined June 2010

I presume the IT department must be asking Y to pay up tax on dividend under Section 2(22)(e) of the Income Tax Act. There are only few ways to prove that this transaction is not deemed dividend:

a. X should not be a company in which public are substantially interested OR

b. Y should be holding less than 10% of the stake in X at the time of granting the loan

c. Y should NOT be holding equity shares (in other words, it should be holding only shares giving fixed rate of dividend,i.e preference shares) .

If any of these conditions are satisfied, the contention of the department may not stand, in which case, you do not have to pay up

The disclosure of the amount as a loan in the balance sheet of Y is apparently irrelevant.

Sandeep

Managing Director

40 Points Joined August 2011

Thank you for the reply. One more query,

If I am a substantial shareholder in both the compnanies X and Y, and if there is a money transfer between X and Y, will it attract section 2(22)(e)? Pleas note that X and Y don't hold any equity in each other. Thank you

CA. Rashi Goyal

Chartered Accountant

512 Points Joined December 2008

Dear Sidharth,

As per section 2(22)(e) there is no exemption for a company in which public are not substantially interested. This section specifically applies to a company in which public are not substantially interested.

Dear Sandeep,

The shareholding as on the date of granting of loan has to be seen. If the shares are aquired after loan transaction than section 2(22)(e) is not applicable. As per section 2(22)(e) the relation of shareholder needs to exist on the date of granting of loan or anytime before granting loan.

In your case as Y was not shareholder as on the date when amount has been transferred from X to Y. There is no requirement of paying dividend tax.

Sandeep

Managing Director

40 Points Joined August 2011

Dear Rashi,

Thank you for your reply. However, does the second question I have asked comes under the purview of deemed dividen? That is, if I have more than 20% shares in both the companies, is deemed dividend applicable? I am a share holder in both the companies with more than 20% stake. Thank you