In my company director was advanced a loan of Rs. 20Lacs. Director's shareholding in that company is more than 10%. In that year company earned total income of Rs.7 lacs out of which Rs. 6 Lacs is through interest income.
05 March 2010
If you extend any loan to director and that company is not in the business of financing then automatically it becomes deemed dividend. If reserves and surplus of that company is more than 20 lakhs as on the date of loan then you are in more danger . You cannot fight also.
05 March 2010
Sir I feel that two more conditions are to be looked into before arriving the answer. 1) whether the company is a closely held company. 2) whether the company had accumulated profits.
If the company is a private limited company, then deemed dividend would definitely apply or If it is a public limited company which is closely held, then also the basic section would apply, subject to the other conditions given therein.
If the company giving the loan to Director is a private limited company, then Section 295 of the Companies Act would also be attracted which is an equally dangerous section. Approval of Central Government is required in that case.
06 March 2010
Para 4 of the articles amply clarifies that my view:
As per clause (e) of section 2(22), any payment made by a closely held company by way of loans or advance shall be deemed to be dividend taxable u/s 56 provided the following conditions are satisfied:
Payment is made to a shareholder having substantial interest [i.e., holding >10%] of voting power in the company and is beneficial holder of equity shares;
06 March 2010
Thanks Dear Rasesh, Please see the answer to Q3.
Here it is mentioned that if the income from money lending is 20% or more of the total income any loans or advances made by the said company to its principal shareholder cannot be deemed to be dividend. As i have mentioned above my compant (PVT LTD) advanced a loan to a shareholder holding more than 10% shares and in the same year its interest income was Rs. 6 Lacs out of total income of Rs.6.5 lacs.
So in above circumstances sec 2(22)(e) is applicable or not?
You are mentioning the percentage of interest income vis-a vis the total income of the company. The section 2(22)(e) envisages a situation where in the assessee is ito money lending buiness and has substatial income from that activity. A company having total income of 6.5 lac earning interest of 6 lac may not be necessarily in the buiness of money lending as it may earn interest income by investing idle money in interest bearing securities. Hope this calrifies the issue to you.
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