Deemed Dividend

CA. PRAMOD JAINFCA, FCS, FCMA, DISA, MIMA

LUNAWAT & CO.Chartered Accountants

What is deemed dividend?

Where is it defined?

Lunawat & Co.

Where is it defined?

Lunawat & Co.

Dividend

DDT

Tax free in hands of

shareholder

2 (22) (a) to (d)

No DDT

Taxable in hands of

shareholders

2 (22) (e)TDS u/s

194

Dividend – 2(22)Lunawat & Co.

(a)

• Distribution of accumulated profits (AP) resulting in release of company’s assets

(b)

• Distribution of debentures, deposits certificates, etc , bonus to preference shareholders to the extent of AP

• Distribution on liquidation attributable to AP just before

(c)

• Distribution on liquidation attributable to AP just before liquidation

(d)

• Distribution on reduction of share capital to the extent of AP

(e)• Loan or advance to shareholder

Deemed Dividend• Section 2(22)(e) – object

• Any payment of any sum by way of loan or advance to:

– A shareholder who is a beneficial owner – not less than 10% of voting power

– Any concern in which such shareholder is a

Lunawat & Co.

– Any concern in which such shareholder is a member/partner & in which he has substantial interest

• Company – shareholder has at least 20% voting power

• A Concern (other than company) - shareholder has at least 20% interest

• Any payment by such company on behalf or for the individual benefit of any such shareholder

• Dividend would be - to the extent of accumulated profits

Deemed Dividend• Applicable to all companies except co. in which public

are substantially interested .

• Exclusions:– Given in ordinary course of business where lending is

substantial part of business

– Any dividend is paid which is set-off against previously paid amount and treated as deemed dividend

Lunawat & Co.

– Any dividend is paid which is set-off against previously paid amount and treated as deemed dividend

• Directorship is no basis

• To be strictly construed as it is not actual dividend– CIT vs. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC)

• Amount paid ahead of time when is due to be paid is advance.– CIT vs. K. Srinivasan (1963) 50 ITR 788 (Mad)

Deemed Dividend – ?• A is shareholder on behalf of his HUF. Loan given by

Co. to HUF. Is 2(22)(e) applicable?

• AB P. Ltd profits are Rs. 50000/- A having 50% shareholding – amount advanced to him Rs. 40000/-how much is deemed dividend?

• Advance given to shareholder for construction of

Lunawat & Co.

• Advance given to shareholder for construction of building which was to be let out to Co. and advance was to be adjusted against future rent. Is 2(22)(e) applicable?

– CIT vs. P. K. Abukar (2003) 259 ITR (Mad) - Y

• Are advances towards purchases covered?

– CIT vs. Raj Kumar (2010) 228 CTR (Del) 506 – N

– CIT vs. Nagindas M. Kapadia (1989) 177 ITR 393 (Bom)

Accumulated Profits – ?• What does accumulated profits mean? Taxable profits or

commercial profits?

– Commercial – P. K. Badiani vs. CIT (1976) 105 ITR 642 (SC)

– Share premium N - DCIT vs. Maipo India Ltd. 116 TTJ (Del) 791

– Undisclosed income assessed in block assessment cannot form part of

accumulated profits-Parmod Kumar Dang vs. JCIT 105 TTJ (Del) 511

Lunawat & Co.

accumulated profits-Parmod Kumar Dang vs. JCIT 105 TTJ (Del) 511

• Whether loans given in earlier years are to reduced to

calculate accumulated profits?

– ITO vs. Gordhadas Khimji (1985) 11 ITD 158 (Cochin)

– CIT vs. G. Sarsinham (died) (1999) 236 ITR 327 (SC)

• Depreciation as per books or IT?

– Navnitlal C. Jhaveri vs. CIT (1971) 80 ITR 582 (Bom)

– CIT vs. Jamnadas Khimji Kothari (1973) 92 ITR 105 (Bom)

– ACIT vs. Yasin Hotels P. Ltd. (2009) 121 TTJ (Chennai) 713

Deemed Dividend – ?• Loan taken and repaid by declaration. Is 2(22)(e) applicable?

– Walchand & co. P. Ltd. vs. CIT (1993) 204 ITR 146 (Bom) - Y

• Amount transferred from one a/c to that of a shareholder by a book entry?

– CIT vs. Smt. Savithri Sam (1998) 144 CTR (Mad) 17

• Loan given to company in which the shareholder has substantial interest. Deemed Dividend in whose hand?

Lunawat & Co.

substantial interest. Deemed Dividend in whose hand?

– CIT vs. Ankitech P. Ltd [2011-ITRV-HC-DEL-109]

• Loan given to partnership firm which has invested in substantial shares in name of partners? Is 2 (22)(e) applicable?

– CIT vs. National Travel Services [2011-ITRV-HC-DEL-224]

• Is security deposit given by exporters to buying agents of

foreign principle covered?

– ACIT vs. Yasin Hotels P. Ltd. (2009) 121 TTJ (Chennai) 713

Deposit ??

• A holds substantial interest in ABC P. Ltd. as well as XYZ P. Ltd. ABC P. Ltd (having AP of Rs. 2 Crs) gives ICD of Rs. 3 Crs @ 15% to XYZ P. Ltd.

• Is 2 (22)(e) applicable?

Lunawat & Co.

• Is 2 (22)(e) applicable?

• If yes on what amount and on whom?– IFB Agro Industries Ltd vs. JCIT [2013-ITRV-ITAT-

KOL-172]

– Seamist Properties P. Ltd. (2005) 28 SOT 383 (Mum)

– Bombay Oil India Ltd. (2009) 28 SOT 383 (Mum)

Advances ?• M being MD holds substantial interest in PQR P. Ltd. He

gives personal guarantee and collateral security to obtain loan for PQR P. Ltd, with a condition that whenever required he would withdraw money for his personal use. He withdraws Rs. 20 Lacs from PQR P. Ltd. (AP Rs. 15 lacs) and repays within same year. Is 2 (22)(e) applicable? If yes on what amount?

– ACIT vs. Smt. G. Sreevidya [2012-ITRV-ITAT-CHE-276]/ 138 ITD 427

Lunawat & Co.

– ACIT vs. Smt. G. Sreevidya [2012-ITRV-ITAT-CHE-276]/ 138 ITD 427

• M being MD holds substantial interest in ABC P. Ltd. He gives his flat on rent to ABC P. Ltd and allows it to be mortgaged by the Company. Apart from security deposit he takes an advance for Rs. 50 Lacs from ABC P. Ltd. (AP Rs. 60 lacs) and repays within same year. Is 2 (22)(e) applicable? If yes on what amount?

– Pradip Kumar Malhotra vs. CIT [ 2011-ITRV-HC-KOL-274 ] “non-gratuitous” advances to substantial shareholder is not deemed dividend u/s 2(22)(e)

Advance• CIT vs. Arvind Kumar Jain [2011-ITRV-HC-DEL-270] CIT

Vs. Raj Kumar 318 ITR 462 followed

– the term “advance’ has undoubtedly more than one meaning

depending on the context in which it is used;

– both the terms, that is, advance or loan are related to the “accumulated

profits’ of the company;

– the purpose behind insertion of the term advance was to bring within

Lunawat & Co.

– the purpose behind insertion of the term advance was to bring within

the tax net payments made in guise of loan to shareholders by

companies in which they have a substantial interest so as to avoid

payment of tax by the shareholders;

– Keeping the aforesaid rule in mind we are of the opinion that the word

“advance’ which appears in the company of the word “loan’ could only

mean such advance which carries with it an obligation of repayment.

Trade advance which are in the nature of money transacted to give

effect to a commercial transactions would not, in our view, fall within

the ambit of the provisions of Section 2(22)(e) of the Act

Share Application ??

• A holds substantial interest in ABC P. Ltd. as well as XYZ P. Ltd. ABC P. Ltd (having AP of Rs. 2 Crs) gives share application money of Rs. 3 Crs out of which Rs. 50 Lacs was alloted and Rs. 2.50 Crs was refunded back.

Lunawat & Co.

Rs. 2.50 Crs was refunded back.

• Is 2 (22)(e) applicable? If yes on what amount and on whom?– DCIT vs. Vikas Oberoi [2013-ITRV-ITAT-MUM-051]

– Ardee Finvest (P) Ltd. vs. DCIT 70 TTJ (Del) 378

Exclusion ??• ABC P. Ltd engaged in trading for FY 2012-13 the details are:

• Turnover Rs. 50 Cr. ; Capital Employed Rs. 3 Cr. ; Total

assets Rs. 10 Cr. ; Accumulated Profit Rs. 1 Cr.

• Loan advanced to substantial Shareholder Rs. 3 Cr. in FY

2011-12; Further loan in FY 2012-13 – Rs. 75 Lacs; Interest

accrued in FY 2012-13 Rs. 25 Lacs ?

Lunawat & Co.

accrued in FY 2012-13 Rs. 25 Lacs ?

• Is 2 (22)(e) applicable? If yes, how much?

– CIT vs. Parle Plastics Ltd [2010-ITRV-HC-MUM-098]

• S. 2(22)(e) covers only amount received during PY by way of loans /

advances and not amounts received in an earlier year.

• Increase in outstanding on a/c of provision for interest not covered

• “Substantial part” does not connote an idea of being the “major

part” or the part that constitutes majority of the whole. Any business

which the company does not regard as small, trivial, or inconsequential

as compared to the whole of the business is substantial business.

Lunawat & Co.

CA. PRAMOD JAIN

pramodjain@lunawat.com

+919811073867

© 2014 CA. Pramod Jain, Lunawat & Co© 2014 CA. Pramod Jain, Lunawat & Co