24 September 2009
if company gives advance to HUF for purchase of property of HUF and karta of HUF is director shareholder of company holding 22% share, does it amount to deemed dividend.
25 September 2009
But HUF has a property and co. have given advance for purchase that property, then how will this be deemed dividend. I am little confused. pl. explain
20 July 2024
I understand your confusion. Let me clarify the concept of deemed dividend and its application in the scenario you've described.
### Deemed Dividend under Section 2(22)(e):
According to Section 2(22)(e) of the Income Tax Act, any payment made by a company to its shareholder, directly or indirectly, which results in the benefit or advantage to the shareholder (or to any person on behalf of the shareholder), is deemed to be a dividend. Here, "shareholder" includes any beneficial owner of shares, which can include a Hindu Undivided Family (HUF) where the karta (head) of the HUF is a shareholder.
### Scenario Analysis:
1. **Advance to HUF for Property Purchase:** - If a company provides an advance to an HUF for the purchase of a property, and the karta of the HUF is also a director and shareholder (holding 22% shares) in the company, this transaction can potentially fall under Section 2(22)(e). - The key consideration here is whether the advance provided by the company to the HUF can be seen as a benefit or advantage to the karta (who is a shareholder).
2. **Benefit or Advantage Test:** - The test under Section 2(22)(e) focuses on whether the transaction results in a benefit or advantage to the shareholder. In this case, if the advance helps the HUF (and indirectly benefits the karta) to purchase a property, it can be argued that the company has provided a financial benefit to the karta (through the HUF).
3. **Nature of Transaction:** - Even though the HUF already owns a property, if the company is providing an advance for another property purchase, it suggests a financial assistance that could benefit the shareholder indirectly (through the HUF).
### Clarification on HUF Property Ownership:
- If the HUF already owns a property and the advance is for another property purchase, it may mitigate the argument for deemed dividend slightly because the company's advance is not directly enhancing the shareholder's current asset base.
- However, the applicability of Section 2(22)(e) hinges on whether the transaction can be construed as providing a benefit or advantage to the shareholder. If it can be demonstrated that the advance indirectly benefits the karta (by assisting in property acquisition), tax authorities might view it as deemed dividend.
### Conclusion:
In conclusion, while the HUF owning a property itself does affect the direct interpretation of deemed dividend, the critical aspect remains whether the advance provided by the company to the HUF can be seen as conferring a financial benefit or advantage to the karta (who is a shareholder). Each case is assessed on its merits, considering the specifics of the transaction and the nature of benefit derived by the shareholder.
CAclubindia
