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Please Help: Deemed Dividend u/s 2(22)(e)

Posted Date : 02-Dec-2013 , 10:35:47 am | Posted By: Devendra Ranka

Category : Income Tax | Answers : 2| Comments : 7| Hits: 230

As per Sec. 2(22)(e):- Any PAYMENT Made BY Company to its Directors or Shareholders as a Loans & Advances will be Classified as Deemed Dividend u/s 2(22)(e). My Question is If Company RECEIVED any Loans & Advances FROM any Company in Which Directors or Shareholders have Subsential Interest will Classify as Deemed Dividend. Kindly Provide your valuable Reply with Support of Section and Case laws (if any)

Answers:
   Answer by: SUBHASH KUMAR JHA
yes. Mr.X is benificial owner of XYZ Ltd.and director in ABC Ltd. now if ABC Ltd.will provide loans & Advances to Mr.x then it will be taxable under the head other source to Mr.x if ABC Ltd.will provide loans & Advances to XYZ Ltd. then it will be taxable under the head other source to XYZ Ltd. in this case company need to deduct TDS u/s 194 @ 10%
   Answer by: SUBHASH KUMAR JHA
yes. Mr.X is benificial owner of XYZ Ltd.and director in ABC Ltd. now if ABC Ltd.will provide loans & Advances to Mr.x then it will be taxable under the head other source to Mr.x if ABC Ltd.will provide loans & Advances to XYZ Ltd. then it will be taxable under the head other source to XYZ Ltd. in this case company need to deduct TDS u/s 194 @ 10%
Comments
Posted By : Devendra Ranka 10-Dec-2013, 12:51:01
whether Balance of Reserve & surplus ( General Reserve & profit & loss a/c only) as on last balance sheet date will consider as accumulated profit for the purpose of Sec 2(22)(e). Profit for the year upto the date of Loans & Advances or for the whole financial year will consider as Accumulated Profit for the purpose of Sec 2922)(e).
 
Posted By : SUBHASH KUMAR JHA 07-Dec-2013, 10:59:23
yes. Mr.X is benificial owner of XYZ Ltd.and director in ABC Ltd. now if ABC Ltd.will provide loans & Advances to Mr.x then it will be taxable under the head other source to Mr.x if ABC Ltd.will provide loans & Advances to XYZ Ltd. then it will be taxable under the head other source to XYZ Ltd. in this case company need to deduct TDS u/s 194 @ 10%
 
Posted By : Anand Sharma 04-Dec-2013, 07:04:24
(1) Yes, section 2(22)(e) shall attract. (2) On Rs 20 Lacs only if the company has accumulated profits. If the company has paid Rs 20 lacs as part repayment of Rs 150 lacs of further loan then Rs 20 lacs will not be treated as deemed dividend. Method of calculation of Interest payment has no bearing on deemed dividend provisions. What has to be checked is that rate of interest and method of calculation is as per market norms. If ROI exceeds market interest the disallowed u/s 40A(2)
 
Posted By : Devendra Ranka 04-Dec-2013, 11:06:28
Thanks Anand ji, My Query Almost Solved, but I want to confirm Follwing points :- If Outstanding Loan from Shareholders( any CONCERN) on Specific Date is 100 Lakhs and Company has REPAY 120 Lakhs (not for Interest). 1) Then Deemed will be applicable or not ? 2) On which Amount 20 lakhs or 120 Lakhs ? Note :- Company has further taken Loan of 150 lakhs after above specific date and company will pay Interest calculated on Daily Outstanding at the END OF THE YEAR.
 
Posted By : Anand Sharma 03-Dec-2013, 04:33:01
No, in that case deemed dividend u/s 2(22)(e) would not get attracted. Loan given by a shareholder is termed as a loan received in ordinary course of business by the company. The logic behind deeming fiction u/s 2(22)(e) is that the company should be prevented from giving dividend to shareholders in any form other than dividend if the company has accumulated profits in its books. If a shareholder gives loan to the company and the same is repaid by the company then it would be covered as a ordinary business transaction. But regard has to be given to the amount of interest on such loan. Such interest should not be more than the fair amount of interest applicable in the market on the same amount of loan and for the same tenure. Any payment of interest which is more than the above shall be chargeable to tax u/s 40A(2)
 
Posted By : Devendra Ranka 02-Dec-2013, 02:45:33
Thanks for your Reply... But I want to Know that if Shareholder(holding 20 % or more) has given loan TO The Company and Company REPAY such Loan amount to Shareholders with Interest. weather REPAYMENT of loans & advances to Shareholders will be taxable as Deemed Dividend in the hand of shareholders.
 
Posted By : Anand Sharma 02-Dec-2013, 02:09:43
Any payment as loans and advances made by any CLOSELY HELD COMPANY (i.e. private company)to any CONCERN (including any COMPANY)in which a shareholder, holding 10% or more equity shares in the first mentioned private company, is also holding substantial interest (i.e. 20% or more voting rights)in the said concern shall be deemed dividend to the extent of accumulated profits. What you have to check is that - the loan and advance is paid by a private company - the same is paid to a company in which a shareholder is a member having 20% or more voting rights (or equity shares) - the same shareholder is also holding 10% or more equity shares in the said private company. - deemed dividend amount cannot exceed accumulated profits of the private company. FYI directors are not covered in 2(22)(e). For further info click on the following link http://canirmalg.wordpress.com/2010/02/02/deemedividend/
 

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