06 July 2024
Yes, the transaction described could potentially attract the provisions of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, in the hands of A1 and A2. Here’s how it applies to the scenario:
### Understanding Section 2(22)(e):
Section 2(22)(e) of the Income Tax Act considers certain payments or loans made by a closely-held company to its shareholders, their relatives, or any concern in which such shareholder has a substantial interest, as deemed dividends. This provision is applicable when:
1. **Distribution of Accumulated Profits**: Any payment by a company, not being a company in which the public are substantially interested, made to a shareholder or to a concern in which such shareholder has a substantial interest, is treated as deemed dividend to the extent of accumulated profits of the company.
2. **Applicability to Development Expenses**: If A, the private limited company, uses its general reserves to develop a property owned by its shareholders (A1, A2, and B), and subsequently expects repayment with profit, it can be construed that the company is indirectly benefiting its shareholders.
### Specific Points to Consider:
- **General Reserves Usage**: The usage of general reserves by the company (A) for a development project that directly benefits its shareholders (A1, A2, and B) could be seen as a mode of indirectly distributing accumulated profits.
- **Benefit to Shareholders**: Since A1 and A2 (being shareholders) will eventually repay the funds along with profit after the property development, it could be perceived that the company is providing financial assistance to its shareholders.
- **Deemed Dividend Implications**: If the Assessing Officer determines that the transaction falls under Section 2(22)(e), the amount used from general reserves for property development could be treated as deemed dividend in the hands of A1 and A2. This would result in tax implications as per their individual tax rates.
### Conclusion:
Given the structure of the transaction where a private limited company uses its funds (general reserves) to develop a property owned by its shareholders, and then expects repayment with profit, there is a risk that it could attract deemed dividend under Section 2(22)(e). It’s advisable to consult with a tax advisor or chartered accountant to assess the specific details of the arrangement and consider potential mitigating steps to avoid adverse tax implications.
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