Deemed dividend 2(22)(e)
This query is : Open
01 July 2010
acompany has made payment of LIC,personal loan EMI of share holder(holding more than 10%).
company has adjust this amount against director remuneration/salary of the said share holder.
Q whether this sitution attract 2(22)(e)?
company has adjust this amount against director remuneration/salary of the said share holder.
Q whether this sitution attract 2(22)(e)?
01 July 2010
pLEAE FIND THE BELOW DIFFERENT SITUATION OF LOAN OR ADVANCE FOR DEEMED DIVIDE
AS PER MY VIEW, THERE IS NO DEEMED DIVIDEND. YOU ARE SHOWING ADVANCE AGAISNT DIRECTOR REMUNERATION WHICH IS ADJUST ITSELF.
o Loan or advance
Section 269SS of IT Act specifies that ' for the purpose of this section,"loan or deposit" means 'loan or deposit of money'. A loan creates a relationship of a lender and a borrower.
• Can a bonafide loan given to a major shareholder for a short duration be covered by this section? In CIT v. Bhagwat Tewari [1979] 105 ITR 62 (Cal) it was held that a bonafide loan for a short duration is treated as dividend if all the conditions of section 2(22)(e) are satisfied.
• What is the position when a shareholder has a current account with the company? When a current account shows a debit balance of the shareholder in company's books, it will take character of a loan. Therefore, position after every entry will have to be ascertained.
• In order to attract the provisions of section 2(22)(e), the important consideration is that there should be loan/advance by a company to its shareholder. Every payment by a company to its shareholder may not be loan/advance. To be treated as loan every amount paid must make the company a creditor of the shareholder for that amount. If, however, at the time when payment is made, the company is already the debtor of the shareholder, the payment would be merely a repayment by the company towards its already existing debt. It would be a loan by the company only if the payment exceeds the amount of its already existing debt and that too only to the extent of the excess. If the shareholder has a current account with the company, the position as regards each debit will have to be considered individually, as it may or may not be a loan. In such case the debit balance of the shareholder with the company at any point of time cannot be taken to represent an advance/loan by the company; nor can the amount at the end of the previous year be alone taken as loan.CIT v. P.K. Badiani[1970] 76 ITR 369 (Bom.).
• Whether an overdraft taken by a major shareholder from the company will be covered as deemed dividend? An overdraft taken by a shareholder from the company is treated as loan and taxable as dividend if conditions of section 2(22)(e) are satisfied—CIT v. K..Srinivasan [1963] 50 ITR 788 (Mad.).
• What will be the position when a major shareholder misappropriated some amount from the company? Amount misappropriated by the director cannot be treated as deemed dividend in his hands since in such a case there is no lending or advancing by the company. It cannot be said that in such a case the company has paid anything and unless there is an actual payment by the company as a loan or advance to the assessee, it cannot be treated as dividend under section 2(22)(e). CIT v. G. Venkataraman [1975] 101 ITR 673 (Mad.)
• If a loan is repaid before the end of the previous year, the section will be attracted? Yes, even if a loan is repaid before the end of the previous year the section will be attracted. In Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) the Supreme court held that under section 2(22) the liability to tax attaches to any amount taken as loan by the shareholder from a controlled company to the extent it possesses accumulated profits at the moment the loan is borrowed and it is immaterial whether the loan is repaid before the end of the accounting year.
• Whether Book debts will be covered by "loans and advances"? Where the assessee-shareholder, having business of his own, was transacting business with the company and the account of the assessee in the company always showed a debit balance, it was held that the said debit balance would amount to a loan from the company to the assessee. CIT v. Jamnadas Khimji Kothari [1973] ITR 105 (Bom.)
• Every sale of goods on credit does not amount to a transaction of loan. A loan contracted no doubt creates a debt but there may be a debt without contracting a loan. Bombay Steam Navigation Company P. Ltd. v. CIT(1965) 56 ITR 52(SC)
• Whether Security deposit to a major shareholder for use of premises will be covered under clause(e)? Genuine security deposit without any element of loan may not be considered as a loan.
• Whether loans or advance to relatives of a major shareholder will be covered? Loans to relatives of substantial shareholders are not covered as loans or advances to the shareholder. However such loans or advances may be covered as" payment on behalf of or for the individual benefit" of the shareholder.
Clause (ii) to section 2(22) provides that "dividend" does not include any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of business, where the lending of money is a substantial part of the business of the company;
If a majority of a company's assets and income are from money-lending business, it will be proper to assume that lending of money is a substantial part of the company's business.
In Walchand & co. Ltd. V. CIT,(1975)100 ITR 598(Bom) it was held that the onus to prove these facts lies on the assessee.
Clause (iii) to section 2(22) provides that "dividend" does not include any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e),to the extent to which it is set off.
This clause gives some relief to the assessee by way of avoiding double taxation as well as brings in some scope for Scope for tax-planning. Thus, if a loan is already treated as a dividend it may make sense to declare dividend and adjust the outstanding loan amount against the dividend declared. No tax will be payable by shareholder on such dividend declared.
However, if the loan has been repaid by the shareholder and nothing is due by the shareholder against the loan referred in section 2(22)(e), then no set-off would be possible. Also if the sum due by the assessee is on account of some other payments not covered by section 2(22)(e), then set-off will not be possible.
It appears that liability to pay tax on distributed profits u/s 115-O can not arise in a case where a dividend paid by a company is set-off by the company as mentioned above, since the amount itself is not to be treated as a dividend . EEEEeee xplanation to section115Q may be referred to for this purpose.
o Payment on behalf of or for the individual benefit of
A benefit means some advantage to a person or something for the good of a person.
• A managing director of a company, whenever he needed money used to ask an employee to take a loan from the company and pass it on to him even without executing any pronote. Can he be said to have received any benefit? It was held that the loans made by the company to the employee fell in the category of "benefit" to the assessee managing director and were, therefore, assessable as deemed dividends in his hands—CIT v. L.Alagusundaram Chettiar [1977] 109 ITR 508 (Mad.).
• In one case, the assessee, having substantial interest in a company X, obtained from company Y two loans of Rs. 75,000 and Rs.2,00,000 on July 30, 1968 and September2, 1968, respectively. The question for consideration was whether these amounts could be treated as deemed dividend in the hands of the assessee under section 2(22)(e) on the ground that Y had made these loans to the assessee out of loans received by Y from X on the same dates.The Court held (in Nandlal Kanoria v. CIT [1980] 122 ITR 405 (Cal.)), that there was no loan given by X to the assessee. However, as the loan of Rs. 75,000 was given by Y to the assessee out of an equal amount received as loan from X on the same date, this amount was a payment by X for the benefit of the assessee and fell within the mischief of section 2(22)(e). The same could not be said of the loan of Rs. 2,00,000, as on the date of making that loan, Y had received loans not only from X but from another source also and the loan was made out of blended amount.
AS PER MY VIEW, THERE IS NO DEEMED DIVIDEND. YOU ARE SHOWING ADVANCE AGAISNT DIRECTOR REMUNERATION WHICH IS ADJUST ITSELF.
o Loan or advance
Section 269SS of IT Act specifies that ' for the purpose of this section,"loan or deposit" means 'loan or deposit of money'. A loan creates a relationship of a lender and a borrower.
• Can a bonafide loan given to a major shareholder for a short duration be covered by this section? In CIT v. Bhagwat Tewari [1979] 105 ITR 62 (Cal) it was held that a bonafide loan for a short duration is treated as dividend if all the conditions of section 2(22)(e) are satisfied.
• What is the position when a shareholder has a current account with the company? When a current account shows a debit balance of the shareholder in company's books, it will take character of a loan. Therefore, position after every entry will have to be ascertained.
• In order to attract the provisions of section 2(22)(e), the important consideration is that there should be loan/advance by a company to its shareholder. Every payment by a company to its shareholder may not be loan/advance. To be treated as loan every amount paid must make the company a creditor of the shareholder for that amount. If, however, at the time when payment is made, the company is already the debtor of the shareholder, the payment would be merely a repayment by the company towards its already existing debt. It would be a loan by the company only if the payment exceeds the amount of its already existing debt and that too only to the extent of the excess. If the shareholder has a current account with the company, the position as regards each debit will have to be considered individually, as it may or may not be a loan. In such case the debit balance of the shareholder with the company at any point of time cannot be taken to represent an advance/loan by the company; nor can the amount at the end of the previous year be alone taken as loan.CIT v. P.K. Badiani[1970] 76 ITR 369 (Bom.).
• Whether an overdraft taken by a major shareholder from the company will be covered as deemed dividend? An overdraft taken by a shareholder from the company is treated as loan and taxable as dividend if conditions of section 2(22)(e) are satisfied—CIT v. K..Srinivasan [1963] 50 ITR 788 (Mad.).
• What will be the position when a major shareholder misappropriated some amount from the company? Amount misappropriated by the director cannot be treated as deemed dividend in his hands since in such a case there is no lending or advancing by the company. It cannot be said that in such a case the company has paid anything and unless there is an actual payment by the company as a loan or advance to the assessee, it cannot be treated as dividend under section 2(22)(e). CIT v. G. Venkataraman [1975] 101 ITR 673 (Mad.)
• If a loan is repaid before the end of the previous year, the section will be attracted? Yes, even if a loan is repaid before the end of the previous year the section will be attracted. In Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) the Supreme court held that under section 2(22) the liability to tax attaches to any amount taken as loan by the shareholder from a controlled company to the extent it possesses accumulated profits at the moment the loan is borrowed and it is immaterial whether the loan is repaid before the end of the accounting year.
• Whether Book debts will be covered by "loans and advances"? Where the assessee-shareholder, having business of his own, was transacting business with the company and the account of the assessee in the company always showed a debit balance, it was held that the said debit balance would amount to a loan from the company to the assessee. CIT v. Jamnadas Khimji Kothari [1973] ITR 105 (Bom.)
• Every sale of goods on credit does not amount to a transaction of loan. A loan contracted no doubt creates a debt but there may be a debt without contracting a loan. Bombay Steam Navigation Company P. Ltd. v. CIT(1965) 56 ITR 52(SC)
• Whether Security deposit to a major shareholder for use of premises will be covered under clause(e)? Genuine security deposit without any element of loan may not be considered as a loan.
• Whether loans or advance to relatives of a major shareholder will be covered? Loans to relatives of substantial shareholders are not covered as loans or advances to the shareholder. However such loans or advances may be covered as" payment on behalf of or for the individual benefit" of the shareholder.
Clause (ii) to section 2(22) provides that "dividend" does not include any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of business, where the lending of money is a substantial part of the business of the company;
If a majority of a company's assets and income are from money-lending business, it will be proper to assume that lending of money is a substantial part of the company's business.
In Walchand & co. Ltd. V. CIT,(1975)100 ITR 598(Bom) it was held that the onus to prove these facts lies on the assessee.
Clause (iii) to section 2(22) provides that "dividend" does not include any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e),to the extent to which it is set off.
This clause gives some relief to the assessee by way of avoiding double taxation as well as brings in some scope for Scope for tax-planning. Thus, if a loan is already treated as a dividend it may make sense to declare dividend and adjust the outstanding loan amount against the dividend declared. No tax will be payable by shareholder on such dividend declared.
However, if the loan has been repaid by the shareholder and nothing is due by the shareholder against the loan referred in section 2(22)(e), then no set-off would be possible. Also if the sum due by the assessee is on account of some other payments not covered by section 2(22)(e), then set-off will not be possible.
It appears that liability to pay tax on distributed profits u/s 115-O can not arise in a case where a dividend paid by a company is set-off by the company as mentioned above, since the amount itself is not to be treated as a dividend . EEEEeee xplanation to section115Q may be referred to for this purpose.
o Payment on behalf of or for the individual benefit of
A benefit means some advantage to a person or something for the good of a person.
• A managing director of a company, whenever he needed money used to ask an employee to take a loan from the company and pass it on to him even without executing any pronote. Can he be said to have received any benefit? It was held that the loans made by the company to the employee fell in the category of "benefit" to the assessee managing director and were, therefore, assessable as deemed dividends in his hands—CIT v. L.Alagusundaram Chettiar [1977] 109 ITR 508 (Mad.).
• In one case, the assessee, having substantial interest in a company X, obtained from company Y two loans of Rs. 75,000 and Rs.2,00,000 on July 30, 1968 and September2, 1968, respectively. The question for consideration was whether these amounts could be treated as deemed dividend in the hands of the assessee under section 2(22)(e) on the ground that Y had made these loans to the assessee out of loans received by Y from X on the same dates.The Court held (in Nandlal Kanoria v. CIT [1980] 122 ITR 405 (Cal.)), that there was no loan given by X to the assessee. However, as the loan of Rs. 75,000 was given by Y to the assessee out of an equal amount received as loan from X on the same date, this amount was a payment by X for the benefit of the assessee and fell within the mischief of section 2(22)(e). The same could not be said of the loan of Rs. 2,00,000, as on the date of making that loan, Y had received loans not only from X but from another source also and the loan was made out of blended amount.
01 July 2010
Dear Biren / BK
In my opinion, in this situation the it will be treated as deemed dividend if other conditions of section 2(22)(e) are met. The reason for my view is that it is a personal obligation of such shareholder met by company, may be for a short period as this is adjusted by the company against the directors remuneration as directors remuneration is a separate obligation of the company.
In my opinion, in this situation the it will be treated as deemed dividend if other conditions of section 2(22)(e) are met. The reason for my view is that it is a personal obligation of such shareholder met by company, may be for a short period as this is adjusted by the company against the directors remuneration as directors remuneration is a separate obligation of the company.
02 July 2010
against this payment,company has adjusted director remuneration by not paying the remuneration to director.
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