Income tax rule regarding loan to directors

There is no specific provision for loan to director. However, if such a director is a\shareholder of the Company, then Sec 2(22)(e) will get attracted.

Dividend includes

"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 shareholder⁹⁴, 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."

 but “dividend” does not include—

- any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;

 - any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;

- any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A ¹ of the Companies Act, 1956 (1 of 1956);

Accumulated Profit

The expression “accumulated profits” shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, ²[but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place].

For the purposes of this clause

(a)  “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ;

 (b)  a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;

Sec - 56: Such deemed dividend will be taxable in the hands of Shareholders u/s 56.