Tuesday, July 30, 2013

The Concept of Deemed Dividend

The legislative intent to bring this provision in the statue related to taxation of any advance or loan to a share holder, being a person who is the beneficial owner of shares holding not less than 10% of voting power, in a closely held company, as deemed dividend in the hands of shareholder. Shareholder for the purpose of Section 2(22)(e) means being a person who is the beneficial owner of shares (not being shares entitled to a fix rate of dividend whether with or without a right to participate in profits). It means only equity shareholder who has substantial interest in a company in which public is not substantially interested has to have substantial interest in the lending company i.e. 10% or more of voting power. As far as voting power is concerned, in a case where individual is a shareholder not only in his individual capacity but also a shareholder in the capacity of a ‘Karta’ of HUF, then the voting power computation would include the total voting power in both the capacities.

The fiction of deemed dividend is not restricted to a beneficial owner of shares only, but is extended to any concern also, in which such share holder is a member or a partner and in which
he has a substantial interest. Substantial interest means, that person is entitled to not less than 20% of the income of such concern.

In order to attract the provisions of Section 2(22)(e), the important consideration is that, there should be loan/advance by a company to is shareholder. Every amount paid must make the company a creditor of the shareholder of that amount. But at the same time, every payment by company to its shareholder may not be a loan/advance and thereby fall within the ambit
of Section 2(22)(e) i.e. “Deemed Dividend.”

Lets have some glance on various judgement decided in favor of revenue is as under:-

P. Sarada Vs CIT(SC) 229 ITR 444:
“The fact that loan or advance was ultimately adjusted at the end of the year against the credit balance of another shareholder will not alter the position. Account of another shareholder was not debited on various dates of withdrawals and hence it cannot be said that the assessee was paid money out of the funds lying to the credit of the other shareholder.”

Tarulata Shyam & Ors. Vs CIT(SC) 108 ITR 345:
“Loan advanced to a shareholder was re-paid within 23 days still deemed dividend under Section 2(22)(e)- If the assessee comes under the letter of law, he has to be taxed, however great the hardship may appear to the judicial mind to be.”

Rajesh P. Ved Vs ACII (ITAT, Mum) 1 ITR (Trib)
275: “Accumulated profits means profits upto the date of payment of loan – subsequent repayment of loan not to be considered amount credited to wards remuneration of shareholder cannot be set off against the alleged loan considered as deemed dividend.”

CIT Vs P.K. Abubucker (Mad) 259 ITR 507:
“Advance to shareholder for building construction which will be later on taken on lease by company- As per the agreement, such advance to be set off against future rent still deemed dividend arises and is taxable.”

M.D. Jindal vs CIT(Cal) 164 ITR 28:
Building material advanced to shareholder for construction advance to be set off against purchase consideration when the company buys some flats from assessee later on- value of advance in kind is also taxable as deemed dividend.”


L. Alagusundaram Chettiar vs CIT(SC) 252 ITR
“Company advancing large amount to low-paid employee. Employee advancing loan to assessee, the Managing Director of the said company. Deemed dividend to be assessed in the hands of assessee.”

CIT vs. T.P.S.H. Sokkalal (99) 236 ITR 981 (MAD):
Shares held on behalf of minor children has to be included as the guardian can exercise voting power in respect of those shares in addition to shares held by guardian in his individual capacity.

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