1. Deemed dividend under section 2(22) from an Indian company or any dividend from a foreign company is taxable in the hands of shareholders under the head “Income from other sources”, regardless of the fact whether shares are held by the assessee as investment or as stock-in-trade.
2. Under section 2(22), the following payments or distributions by a company to its shareholders are deemed as dividends to the extent to accumulated profits of the company.
3. Any distribution entailing the release of company’s assets [2(22)(a)]
4. Any distribution of debenture, debenture-stock, deposit certificates and bonus to preference shareholders.[2(22)(b)]
5. Distribution on liquidation of company. [2(22)(c)]
6. Distribution on reduction of capital. [2(22)(d)]
7. Any payment by way of loan or advance by a closely-held company to a shareholder holding substantial interest provided the loan should not have been made in the ordinary course of business and money-lending should not be a substantial part of the company’s business. [2(22)(e)]
POINTS TO BE KEPT IN MIND:
1. The payment or distribution under the aforesaid clauses can be treated as dividend only to the extent of accumulated profits of the company.
2. Loans and advances received by assessee out of share premium account cannot be treated as deemed dividend CIT v. MAIPO India Ltd. [2008] 24 SOT 42 (Delhi)
3. Distribution in kind may also be termed as a deemed dividend.
4. When, a company issues bonus shares capitalizing its profits then there is no release of assets and, consequently, bonus shares are not taken as dividend.
5. Reorganisation of Capital – No reduction of capital in the aggregate, section 2(22)(d) will not apply.
SECTION 2(22)(e):
1. Loan or advance is given by a closely – held company.
2. Such loan is given to a registered shareholder.
3. The shareholder beneficially holds 10 per cent or more of equity shares in the company.
4. Such loan or advance is treated as dividend in the hands of shareholder.
Points to be borne in mind while applying section 2(22)(e):
1. Where MONEY-LENDING is a substantial part of the business of the company; the above provisions are not applicable. Substantial part must exceed 50% of the whole. CIT v. Parle Plastic Ltd [2011] 196 Taxman 62.
2. Only registered shareholder.
3. No restriction on amount of deemed dividend.
4. Accumulated profits minus dividend under section 2(22)(e).
5. Relationship of debtor and creditor
6. Advance for business transaction would not fall within section 2(22)(e)
7. Repayment of loan before the end of previous year termed as deemed dividend.
8. Bonafide loan termed as a deemed dividend.
9. Overdraft taken by shareholder termed as deemed dividend.
10. Loan given in kind termed as deemed dividend.
11. Loan obtained out of Agricultural Income in the hands of the company will be deemed dividend in the hands of the assessee.
12. Loan made by the company to the employee for the indirect benefit of the director termed as deemed dividend. L.alagusundaram chettair v. cit (2002) 121 Taxman 587 (sc).
13. Personal payment of shareholder by a company termed as deemed dividend.
14. Debit balance of the assessee in the company account termed as loan and consequently termed as deemed dividend.
15. Call money remaining to be paid by the shareholder can not be termed as deemed dividend.
16. Share application money – cannot be treated as dividend under section 2(22)(e).
17. Advance rent – will be deemed as dividends even if the amount is received under the lease agreement – CIT v. P.S. Abubucker [2004] 135 Taxman 77 (Mad.)
18. Advance against sale of property allegedly termed as deemed dividend.
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