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Deemed Dividend – Section 2(22)(e)
In the form of certain loans and advances a company pay to a category of shareholders or for the benefit of this category of shareholders, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest. Thus is called as a deemed dividend defined by income tax act as under :
“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 10% 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”
Thus all payments covered under deemed dividend is not subject to the dividend distribution tax u/s.115-O, and is therefore a taxable income, in the hands of recipient not exempt u/s.10(34) of the Act.
Following conditions should be satisfied to call the payment as a deemed dividend :
(1) Receiver of the loan or advance or any other payment covered by sec 2 should have at least 10% voting power in the company.
(2) If the individual is a shareholder not only in his individual capacity but also a shareholder in the capacity of a Karta of an Hindu Undivided Family then the voting power for this purpose includes total voting power in both the capacities.
(3) This concept of deemed dividend is applicable to any entity, in which such share holder (receiver) is a member or a partner and in which he has a substantial interest. Substantial interest means, that person is entitled to not less than 20% of the income of such entity.
(4) In order to attract the provisions of section 2 in respect of deemed dividend there must be a loan or advance paid to the person who is covered by the act. We have to ensure that following conditions are met in order to call it as a loan or advance eligible for calling it as a deemed dividend :
(a) Payer :
Company should be an entity in which public are not interested substantially :
The company which is paying certain amount to its shareholders should be a closely held company i.e other than “a public company in which large public interest is there”.
(b) Payee :
Receiver should be a shareholder having a substantial interest in the company on the date on which loan/ advance is given.
(c) If the loan or advance is given to any other business concern then the shareholder should at least have 20% voting power in that company to call it as a deemed dividend.
(d) Out of accumulated profits :
The amount of loan or advance should be paid out of its accumulated profits.