04 December 2008
Mr.X is a shareholder in M/s.X Pvt. Ltd. having more than 90% of holding.He has taken loan from the company.What should be the exact amount that should be taxed in the hands of Mr.X as deemed dividend. Option A - As per assessee - Maximum o/s.balance in the loan a/c. during the previous year. or Option B - As per A.O. - All the amount given as loan during the year excluding the opening balance should be taxed as deemed dividend.
n ‘Dividend’ in its ordinary meaning is a distributive share of the profits or income of a company given to its shareholders. By the definition in section 2(22), ‘dividend’ means dividend as normally understood and includes in its connotation several other receipts set out in the definition - Kantilal Manilal v. CIT [1961] 41 ITR 275 (SC).
n The word ‘dividend’ means dividend as ordinarily understood under the Companies Act, and also the head of payment or distribution specified therein - Hari Prasad Jayantilal & Co. v. V.S. Gupta, ITO [1966] 59 ITR 794 (SC).
n ‘Dividend’ in its ordinary connotation means the sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed. Dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholders - CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849 (SC).
Distribution - sub-clauses (a)/(b)/(c)/(d)
n The dictionary meaning of the expression ‘distribution’ is ‘to give each a share, to give to several persons’. The expression ‘distribution’ connotes something actual and not notional. It can be physical; it can also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts or by actually paying to each one of them the amount due to him. The only difference between the expression ‘paid’ and the expression ‘distribution’ is that the latter necessarily involves the idea of division between several persons which is the same as payment to several persons. Distribution is a culmination of a process - Punjab Distilling Industries Ltd. v. CIT [1965] 57 ITR 1 (SC).
Distribution vs. Payment
n The expressions ‘distribution’ and ‘payment’ connote different meanings. ‘Distribution’ is division amongst several persons. It connotes an idea of apportionment among more than one person. In the case of ‘distribution’ the recipients would be more than one, while in the case of ‘payment’ the recipient may be a single person - CIT v. Jamnadas Sriniwas (P.) Ltd. [1970] 76 ITR 656 (Cal.).
n The expressions ‘distribution’ and ‘payment’ connote different meanings, distribution is division amongst several persons. It connotes an idea of apportionment among more than one person. In the case of ‘distribution’ the recipients would be more than one, while in the case of ‘payment’ the recipients may be a single person - CIT v. P.V. John [1990] 52 Taxman 221 (Ker.).
Shareholder - Sub-clause (e)
n The word ‘shareholder’ in section 2(22)(e) refers to the registered shareholder and not to the beneficial owner - CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170 (SC).
Profits - Sub-clause (e)
n The word ‘profits’ occurring in section 2(22) means profits in the commercial sense, that is to say, the profits made by the company in the real and true sense of the term - P.K. Badiani v. CIT [1976] 105 ITR 642 (SC).
Accumulated profits - Sub-clause (e)
n The expression ‘accumulated profits’ occurring in-section 2(22)(e) or for that matter in any other clause, means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the 1922 Act - P.K. Badiani v. CIT [1976] 105 ITR 642 (SC).
n Accumulated profits within the meaning of section 2(22)(e) will necessarily be comprised of the amount available for being distributed as profits. The word ‘accumulated’ means the profit earned bit by bit and accumulated. It does not mean that it should be carried forward from year to year. Profits can accumulate even within a single year. The entire amount which is available for distribution as profits on a particular date would be the accumulated profit and any amount paid as advance or loan to the shareholder to the extent of this amount of accumulated profits will be dividend within the meaning of section 2(22)(e) - CIT v. Roshan Lal [1975] 98 ITR 349 (All.).
n Section 2(22) has used the expression ‘accumulated profits’, whether capitalised or not. This expression tends to show that under section 2(22) it is only the distribution of the accumulated profits which are deemed to be dividends in the hands of the shareholders. By using the expression ‘whether capitalised or not’ the legislative intent clearly is that the profits which are deemed to be dividend would be those which were capable of being accumulated and which would also be capable of being capitalised. The amounts should, in other words, be in nature of profits which the company could have distributed to its shareholders. This would clearly exclude return of part of a capital to the company, as the same cannot be regarded as profit capable of being capitalised, the return being of capital itself. Profits mean only commercial profit - CIT v. Urmila Ramesh [1998] 96 Taxman 533/230 ITR 422 (SC).
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