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Deemed Dividend
Statutory Provisions

A session by
Prashant Kumar Thakur
At DTRTI , Kolkata
18/07/2012

The term “deemed dividend” is
described in section …………..of
the I.T.Act ,1962.
1. 2(22)(a)
2. 2(22)(b)
3. 2(22)©
4. 2(22)(d)
5. 2(22)(e)
6. None

Surprise ! Surprise !

Nowhere in section 2(22)
, the word “deemed” is
used.


Section 2(22)(e)
any payment by a company, not being a company in which the
public are substantially interested, of any sum (whether
as representing a part of the assets of the company or
otherwise) [made after the 31st day of May, 1987, by way
of advance or loan to a shareholder, being a person 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 (hereafter in this
clause referred to as the said concern)] 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


Why section 2(22)(e)?
The object behind this provision is succinctly stated in the
Circular No. 495 of 22nd September, 1987 particularly in the
Explanatory Notes to Finance Act, 1987 when this provision
was amended. It reads as under:-
With the deletion of Section 104 to 109 there was a likelihood of
closely held companies not distributing their profits to
shareholders by way of dividends but by way of loans or
advances to that these are not taxed in the hands of the
shareholders. To forestall this manipulation, sub-clause (3) of
clause (22) of Section 2 has been suitably amended. Under the
existing provisions, payments by way of loans or advance to
shareholders having substantial interest in a company to the
extent to which the company possesses a accumulated profits
is treated as dividend.


14 benefits out of this session !
1. Why deemed dividend is so important for assessment of HNI?
2. 7 conditions for applying section 2(22)(e).
3. Which types of companies covered u/s 2(22)(e)?
4. What types of share ownership not covered u/s 2(22)(e)?
5. What is the meaning of shareholder for section 2(22)(e)?
6. What you can not ignore about quantum of shareholding?
7. Who is taxed –shareholder or the Firm or Trust or AOP or BOI which received
money ?
8. What is the meaning of term “advance” for the purpose of section 2(22)(e)?
9. Loan was advanced and returned within two days. Will there be deemed dividend
if all other conditions are satisfied?
10. What profits are not “accumulated profits “?
11. Whether loan or advance in kind comes under 2(22)(e)?
12. Whether “substantial part of business” of a company means major part ?
13. How to detect the cases of deemed dividend in case of Individuals?
14. Should there be TDS if there is deemed dividend?

7 Conditions !
1. any payment by a company, not being a company in which the public are
substantially interested
2. of any sum (whether as representing a part of the assets of the company or
otherwise) [made after the 31st day of May, 1987
3. by way of advance or loan
4. to a shareholder
1. being a person 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)
2. holding not less than ten per cent of the voting power,
5. or to any concern
1. concern in which such shareholder is a member or a partner
2. and in which he has a substantial interest (hereafter in this clause
referred to as the said concern)
6. or any payment by any such company on behalf, or for the individual benefit,
of any such shareholder
7. to the extent to which the company facebook.com/directtaxpossesses accumulated
Prashant Thakur: in either case
profits

What is public substantially
interested company?

Section 2(18) defines “company in which public is
substantially interested” as under:
1. Listed companies
2. Government companies
3. Section 25 companies
4. Companies having no share capital and declared by
Board
5. Mutual benefit finance companies declared by Central
Govt as Nidhi or Mutual Benefit Society
6. Companies in which one or more cooperative society
holds more than 50 % of voting shares throughout the
year.


Which types of companies
covered u/s 2(22)(e)?
Section 2(22)(e) applies when loan or
advance is given by two types of
companies
1. Closely held public company or
2. Private Limited Company


What type of shares ownership
not covered u/s 2(22)(e)?

1. Shares having fixed rate of dividend?
2. Shares having no voting rights.

Preference shares : Shares which commands fixed
rate of dividends and generally has no voting
rights


Any Sum ??
Does the term “any sum” covers
payment in kind or goods? Or
Just cash or cheque payments?

Kolkata High Court in M.D.Jindal vs CIT [1986]
28 Taxman 509 (Cal) held that provision u/s
2(22)(e) is applicable even if loan is advanced in
kind.


Advance ??
Mr X is an architect and runs his own consultancy business under
his name . He has shareholding of 50% in ABC Pvt ltd which
is in construction business. Time to time , the company passes
the architectural job to Mr X also pays advance related to such
jobs.

Whether the advance given by ABC Pvt Ltd to Mr X will come
under section 2(22)(e)?
Revenue Favour:
Dr. Shiv Kant Mishra vs DCIT-Central Circle , Kanpur [2009] 118
ITD 347 (LUCK.) A company comprising of only two directors, viz., assessee, a doctor and
his wife, in terms of an MOU, advanced money to assessee for purchase of a land and in turn


Repayment Does Not Matter

Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC)
Miss P. Sarada v. CIT [1998] 96 Taxman 11 (SC).
Fact of repayment of loan is not relevant - The Legislature has
deliberately not made the subsistence of the loan or
advance, or its being outstanding on the last date of the
previous year relevant to the assessment year, a
prerequisite for raising the statutory fiction. In other words,
even if the loan or advance ceased to be outstanding at the
end of the previous year, it can still be deemed as a
‘dividend’ if the other four conditions factually exist to the
extent of the accumulated profits possessed by the
company. -


Advance mean loan ??
Delhi High Court in CIT vs Raj Kumar (2009) 181 Taxmann 155
applied judicial interpretation maxim “noscitur a sociis” which means the
meaning of word can be known by the company which it keeps or from context
It held “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
Further reliance can be placed on CIT vs Nagindas M Kapadia (1989) 75 CTR
161 (Bom) and Supreme Court judgment in Bombay Steam Navigation
Company Pvt ltd vs CIT (1965) 56 ITR 52 wherein the Apex court held that
every sale of goods on credit does not amount transaction of laon.
However, when a company advanced money to its MD who was having substantial
shares , for construction of house , which MD was supposed to lease out to
company itself, such advance was considered fit for addition u/s 2(22)(e) by
Madras High court in CIT vs P.K.Abubucker (2003) 185 CTR 558


To Shareholder
Which one out of following
shareholder is covered u/s
2(22)(e)?
1. Shareholder not beneficial owner
2. Shareholder who is beneficial owner
3. Beneficial owner but not registered
shareholder Prashant Thakur: facebook.com/directtax

1922 Act vs 1961 Act
Under 1922 I.T.Act, section 2(6A)e) ( corresponding
to section 2(22)(e) had no words or phrase “being
a person who is beneficial owner of shares”

Under I.T.Act 1961, section 2(22)(e) requires that
the person should be
Shareholder
And
Beneficial owner of the shares


Shareholder & Beneficial Owner?
1. A person buys shares and his name is entered
in company register.
2. A trust buys shares of a private limited
company. The trustee name is entered in the
company shareholder register.
– Who is the shareholder ?
– Who is beneficial owner of the shares?


Who is to be taxed –shareholder or
the Firm or Trust or AOP or BOI
which received money ?

• Mumbai Special bench ACIT vs Bhowmik Colour P Ltd [2009] 313 ITR
146 held
– Deemed dividend can be charged in hand of shareholder only and not any
other person who is not shareholder because intention of legislature is to
tax dividend only in hand of shareholder and the concern which received
payment.
• CIT vs National Travel Services [2011] 202 Taxman 327[Delhi]
• Firm on whose behalf a partner name is registered in company as
shareholder, is actually shareholder for the purpose of section 2(22)(e)

Revenue Favour : Skyline India Recruit.com. (P.) Ltd. Vs ITO 9(3) [2008]
24 SOT 402 (MUM.) (SMC) if the payments of any sum by way of
advance or loan is given to company in which there is a common
shareholder and that shareholder has/have the beneficial interest in
both the companies. The loans and advances shall be deemed
dividend under section 2(22)( e) of the Act.


What You Can not Ignore About
quantum of shareholding?
The balance sheet of Mr X showed liability in form of loan from M/s
ABC Pvt Ltd of Rs 1 Crore. The A.O got the details that the Mr X
has 45 % shareholding and M/s ABC Pvt Ltd had accumulated
profit of Rs 2 Crore. He added Rs 1 Crore in Mr X hand
And department lost the case before appellate authorities when the fact
was brought on the record that on the date of receipt of Rs 1 Crore,
Mr X had only 9 % of shareholding .His shareholding increased to
45 % in February i.e after loan receipt.
Refer CIT vs Late C.R.Dass [2011] 57 DTR 201 wherein the assessee
received security deposit in form of shares against lease of hs
property. The shareholding on the date of receipt of security deposit
was 9 % only and later increased on account of security deposit.


What is not included in Accumulated
Profit?
The balance sheet of M/s ABC Pvt Ltd shown
accumulated profit of Rs 1 Crore as on 31/03/2011 .
A.O found the Mr X 20 % of shareholding received
loan of RS 1 Crore. He added Rs 1 Crore u/s
2(22)(e) of the Income Tax Act.

The case was lost before appellate authroity.
Before CIT(A) , the assessee brought the facts that accumulated profit
was out of exempt long term capital gains on shares .


Inclusion & Exclusion from Accumulated Profits

Excluded
1. Addition made by A.O for inadmissible expense [P.K.Badiani vs CIT
105 ITR 642 (SC) in which Apex Court held that accumulated profit
should be understood to mean commercial profits and not assessed
income
2. Capital Gains not chargeable to tax CIT vs Mangesh J Sanzagiri
[1979] 119 ITR 962 (Bombay)
3. Balancing Charge under section 41(2) as per CIT vs Urmila Ramesh
[1998] 230 ITR 422 (Supreme Court)
4. Share premium is not profit.
5. Share forfeiture receipts [1971] 80 ITR 582 (Bombay)
Included
1. General Reserve
2. Income Tax refund
3. Chargeable Capital gains
4. Development rebate reserve


What is meaning of “substantial
part of the business “?
(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

It has been judicially held that in Mrs Rekha Modi vs Ito
[2007] 13 SOT 512 (Delhi that the ratio of money lending
business during the relevant previous year should be 20
% or more to be considered as a substantial part of
business.
Bombay High court in CIT vs Parle Producs Pvt ltd [
2011] 332 ITR 63 Prashant Thakur: facebook.com/directtax not necessarily
substantial part does
mean major part of business.

How to Detect a case of Deemed
Dividend in case of Individual?
Balance Sheet observation
– for shareholding
– For loan or advance taken.

Bank statement credit side description
should be obtained


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