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Speaking on “Deemed Dividend under the Income Tax Act, 1961″ at Surat Branch of ICAI on 25 May 2013 4:00 PM

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Scope of Section 2(22)(e)::

Type of Company             :          a Closely Held Company i.e., a Company in which the public is not substantially interested.

[See Note 5 - Definition of "Company in which the public is substantially interested"]

Nature of Payments         :          (i) Any payment by way of advance or loan; OR [See Note 6]

Exception: Loan or advance is granted  [See Note 12]

1. a.             in the ordinary course of its business and [See Note 10]
2. b.             lending of money is a substantial part of the company’s business. (See Section 2(22)(e) (ii)) [See Note 11]

(ii) Any payment, on behalf of, or for the individual benefit of such Shareholder. [See Note 7]

To Person’s Covered         :                (i)             Any shareholder who is a beneficial owner of 10% or more of Voting power of the Company (but the shares shall not be entitled to a fixed rate of dividend, whether with or without a right to participate in profits); Or [See Note 9]

(ii) (a)    To a concern (includes {HUF, Firm, AOP or BOI, Company}) in which such shareholder is a partner or a member , AND;

(b)        has substantial interest (when entitled to 20% or more of the income of such concern).

Author’s Comments: The condition in clause (ii) (a) and (ii) (b) are ‘cumulative’

Amount                           :                  of Advance or Loan.

Subject to maximum of                                   Accumulated Profits (up to date of payment of Dividend). [See Note 8]

A loan not covered by Accumulated Profits is not deemed to be dividend.

Accrual                           :                   In the “previous year” in which the payment was made. {Section 8(a)} [See Note 13]
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