20 July 2024
Certainly! "Deemed Dividend" is a term used in both the Income Tax Act and the Companies Act in India. Here’s a brief explanation of what it means under each:
### Income Tax Act, 1961:
Under the Income Tax Act, 1961, Section 2(22) defines various types of payments by companies that are deemed to be dividends. Section 2(22) includes the following categories of payments that are treated as deemed dividends:
1. **Section 2(22)(a)**: Any distribution of accumulated profits by a company to its shareholders, whether by way of dividend or distribution.
2. **Section 2(22)(b)**: Any distribution to shareholders on the liquidation of a company, whether such distribution is in money or other property.
3. **Section 2(22)(c)**: Any payment by a company to a shareholder, being a payment made by way of advance or loan to the extent of accumulated profits.
4. **Section 2(22)(e)**: Any payment by a company, not being a company in which the public are substantially interested, which results in the benefit or advantage to its shareholders or their associates, whether directly or indirectly.
### Companies Act, 2013:
Under the Companies Act, 2013, the term "dividend" is defined in Section 2(35) as any distribution of profits by a company to its shareholders. The Act further regulates the declaration and payment of dividends by companies.
### Meaning of Deemed Dividend:
In essence, deemed dividend refers to certain transactions or payments made by a company that are treated as dividends for tax or regulatory purposes, even if they are not formally declared as dividends. These payments are considered as distributions of profits to shareholders or their associates, thereby triggering tax implications or regulatory compliance requirements.
**Example Scenarios:**
- **Loans or Advances to Shareholders**: If a closely held company (not substantially owned by the public) provides a loan or advance to its shareholders, such payments can be treated as deemed dividends under Section 2(22)(e) of the Income Tax Act if certain conditions are met.
- **Transactions Resulting in Benefit to Shareholders**: Any transaction or benefit extended by a company to its shareholders or their associates that results in indirect financial benefit or advantage can also fall under the purview of deemed dividends.
### Key Points:
- **Tax Implications**: Deemed dividends are taxed in the hands of shareholders in the year in which they are deemed to have been received.
- **Regulatory Compliance**: Companies must comply with the provisions of the Income Tax Act and the Companies Act concerning the declaration and payment of dividends, including deemed dividends.
In summary, deemed dividends represent distributions of profits by a company to its shareholders through indirect means, triggering tax and regulatory implications under the applicable laws in India.
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