30 March 2024
Will deemed be attracted in the following arrangement:
A pvt ltd company transfers money in partnership firm as its capital contrirbution in the capacity as a partner and the same amount is withdrawn by another partner who is a director and shareholder in the said pvt ltd company. But shareholding is less than 5%
If not deemed dividend, does any other provisions/consequences apply in the said arrangement?
06 July 2024
In the scenario described, where A Pvt Ltd company contributes money to a partnership firm as its capital contribution, and subsequently, another partner (who is a director and shareholder in A Pvt Ltd) withdraws the same amount, the applicability of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, is unlikely. Here’s an analysis:
### Deemed Dividend under Section 2(22)(e):
Section 2(22)(e) applies when a closely-held company (like A Pvt Ltd) provides a direct or indirect benefit to its shareholders or their associates. Typically, this includes:
- Any payment made by the company, on behalf of or for the individual benefit of the shareholder or their associate. - Any advance or loan made to the shareholder or their associate.
However, in the given scenario:
1. **Capital Contribution in Partnership Firm**: A Pvt Ltd contributes money to a partnership firm as its capital contribution. This contribution is made in the capacity of a partner in the partnership firm.
2. **Withdrawal by Another Partner (Director and Shareholder of A Pvt Ltd)**: - Another partner in the partnership firm, who happens to be a director and shareholder in A Pvt Ltd (with less than 5% shareholding), withdraws the contributed amount.
### Analysis:
- **Deemed Dividend**: Deemed dividend under Section 2(22)(e) is typically concerned with direct or indirect financial benefits provided by a company to its shareholders or their associates. Since the withdrawal from the partnership firm is made by another partner (not A Pvt Ltd directly), and this partner's shareholding in A Pvt Ltd is less than 5%, it does not directly trigger deemed dividend under Section 2(22)(e).
- **Other Provisions/Consequences**: - **Tax Implications**: While deemed dividend may not apply, the transaction should be reviewed for any potential tax implications in terms of capital gains, if applicable, in the hands of A Pvt Ltd or the withdrawing partner. - **Partnership Firm Taxation**: The partnership firm's taxation and accounting implications should be considered separately, especially regarding the treatment of capital contributions and withdrawals.
### Conclusion:
In the described scenario, deemed dividend under Section 2(22)(e) is unlikely to be attracted because the withdrawal from the partnership firm is made by a partner who holds less than 5% shareholding in A Pvt Ltd. However, it's essential to review the transaction comprehensively with the assistance of a tax advisor or chartered accountant to ensure compliance with all relevant tax laws and to understand any other potential consequences, such as partnership taxation and individual tax implications.
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