Section
2 (22) (e) Deemed Dividend a Study
2 (22) (e) "dividend" includes—
any payment by
a company, not being a company in which the public are
substantially interested,
of any sum
by way of advance or
loan
to a shareholder
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 ie. entitled to
not less than 20% of the income)
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—
(ii) 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 ;
The plain reading of the section brings the taxability of
accumulated profits which are distributed by closely held companies to its
shareholders in form of loans and advances. The intent of the section is to
curb the practice adopted by closely held companies of avoiding tax on dividend
in the hands of the share holders by giving them as loans & advances.
But the section alone is not as clear as it seems, for following
reasons:
Definition of Loan?
Definition of Advance?
Type of Loan?
Period for taxation?
If the section is applied without through understanding of
above terms the section can include a lot of transactions as deemed dividend
which actually should not be so treated. Since the terms have not been defined
in the act the meaning for the same & intent of the legislature has to be
construed from various judicial pronouncements as summarised here under.
LOAN & ADVANCE
A Loan is defined by the Oxford English Dictionary as " a
thing lent; something the use of which is allowed for a time, on the
understanding that it shall be returned or an equivalent given ; esp., a sum of
money lent on these conditions and usually with interest."
In Suradindu
Sekhar v. Lalit Mohan Mazumdar money was due to the plaintiff and the defedant
had executed a bond in respect thereof. The defendat claimed relief under the
Bengal Money Lenders Act. The Court said, "leaving the purchase money
unpaid is leaving a debt unpaid. Every loan is a debt but every debt is not a
loan. The purchase money due to the plaintiff is a debt due to the plaintiff
but is not a loan or a transaction which is in substance a loan"
Similarly in
the case of Dr. Fredie Ardheshir Mehta v. Union of
India [1991] 70 Comp. Cas.
210 (Bom) it was decided that The essential requirement of a loan is the
advance of money (or of some article) upon the understanding that it shall be
returned, and it may or may not carry interest.
Therefore there should be actual flow of money along with
the understanding that it should be paid back. Also interest on loan should not
be considered as loan.
The term Advance has undoubtedly a wide meaning depending on the context in
which it is used. In its widest meaning it may or may not include lending or
obligation of repayment.
In the case of CIT v Raj Kumar [2009] 181 taxman 155/318
ITR 462 (delhi) the answer was given in detail by applying rule of noscitur a
sociis it is a legitimate rule of construction to construe words in an
Act of Parliament with reference to words found in immediate connection with
them".
Hence the word advance which is in with the word loan could
only mean such advance which bear with it an obligation of repayment.
Type of Loan
Loan can be in kind also. M.D. Jindal v. CIT [1986] 28
Taxman 509 (cal.)
Period for
Taxation
As per section 8(a) deemed Dividend accrues in the previous
year in which the payment is made. Hence payments made in current year are
covered and any outstanding balances have to be ignored.
Various Judicial
Pronouncements for Better Understanding
There should be actual outflow of money as loan or advance
from the company, mere creation of debtor & creditor relationship between
company and the assessee will not be enough. CIT v. G. Venkataraman [1975] 101
ITR 673 (Mad.)
Actual amount received as loan alone is taxable as dividend.
CIT v Parle Plastics Ltd. [2011] 196 taxman 62 (Bom.)
Trade Advances are not covered. CIT v. Raj Kumar [2009] 181
taxman 155/318 itr 462 (delhi).
Payments made towards personal liability of the shareholder
are also covered. CIT v. K. Srinivasan [1963] 59 ITR 788 (Mad.)
Inter-corporate deposits shall not be treated as deemed
dividend. Bombay Oil Industries Ltd. v. DCIT (2009) 28 SOT 383 (Mum)
If the amount does not bear the characteristic of loan and
advance section 2(22)(e) shall not be applicable. CIT v. creative Dyeing &
Printing P Ltd [2009] 184 Taxman 483 (Delhi).
Share Application money received by closely held company
can not be treated as deemed dividend. Ardee Finvest P Ltd. V. CIT [2001] 79
ITD 547 Delhi).
Loan on behalf of the assessee are also assessable as
deemed dividend. L. Alagusundaram Chettiar v. CIT [2002] 121 Taxman 587 (SC).
Payment on Behalf of Shareholders are also covered. CIT v.
K. Srinivasan [1963] 50 ITR 788 (Mad.).
____________________________________________________________________
For suggestions and feedback
please feel free to contact us via e-mail; dhruvjainassociates@yahoo.co.in or you can log on to our
website: http://dhruvjainassociates.in/contact
___________________________________________________________________________________
This blog is the property of Dhruv Jain &
Associates. Any form of reproduction, dissemination, copying, disclosure,
modification, distribution and/or publication of the content of blog or of the
blog itself without the prior written
consent of the author of this blog is strictly prohibited and doing so will
attract legal proceedings. Any views or opinions presented in this blog post
are solely those of the author and for informative purpose only and should not
be treated /used as guiding rule or professional consultancy in any case. The
matter of discussion is highly sensitive to the amendments made by the
government under various laws and may not be updated as per the changes.
Readers are suggested to take prior professional consultancy of experts before
using the blog or its material in any way.
___________________________________________________________________________________
