Loans & Advances by closely held company deemed as Dividend [Sec. 2(22)(e)] - Income Tax - Ready Reckoner - Income Tax

SEC 2(22)(e) : LOANS ADVANCES BY CLOSELY HELD COMPANY DEEMED AS DIVIDEND DIVIDEND INCLUDES any payment by a company not being a company in which public are substantially interested, of any sum by way of loan or advance to i. a shareholder being the beneficial owner of shares ii. holding not less than 10% of voting power or i.to any concern in which such shareholder is a member or a partner and in which he has a substantial interest or i. to any person on behalf of or for the individual benefit of such a shareholder to the extent to which the company possesses accumulated profits. Notes: Following conditions must be satisfied on the date on which loan/ advance is given, to attract section 2(22)(e) : Beneficial owner of shares Holding 10% or more voting power Member/ Partner in concern Concern means a HUF, or a firm or a company or an AOP/ BOI. Substantial Interest means 20% voting power/ share in profit at any time during the previous year. Accumulated profits shall include all profits up to the date on which loan or advance is given to the shareholder or concern or any other person referred to in section 2(22)(e) . For the purpose of section 2(22) , accumulated profits gets reduced by the amount deemed as dividend under section 2(22)(e) even if no adjustment is made in the books of account. The fact that the loan or advance is repaid does not make a difference in the applicability of section 2(22)(e). Section 2(22)(e) is also attracted if company charges market rate of interest from shareholder. Company is required to deduct 10% TDS on deemed dividend under section 2(22)(e). Even advance rent or any other advance given to such shareholder is deemed dividend under section 2(22)(e). AMENDMENT BY FA 2018 wef 1/4/2018 In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation. The Finance Act levied tax on Deemed Dividend as Dividend Distribution Tax (DDT) under section 115-O of Income Tax Act, 1961 at rate of 30% from companies to prevent hiding of dividends in form of loans/advances. Since, Deemed dividend under section 2(22)(e) is brought under the purview of DDT u/s 115-O , therefore, exemption u/s 10(34) shall also be applicable to shareholders and income from such deemed dividend shall be tax free.