dividend u/s 2(22)(e)

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CA Balakrishna Bhat (Querist)
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20 March 2009 Advance given to a director who holds more than 25% of shareholdings of a private company should be treated as dividend as per 2(22)(e). If the advance given are in the nature of salary advance, purchase advance , toor advance etc then, whether the above mentioned provision will apply or not?

Manmohan ACA, CS

Manmohan ACA, CS (Expert)
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20 March 2009 Section 2(22)(e)
Any payment (whether in cash or in kind) by a company in which public are not substantially interested to the extent of accumulated profit (excluding capitalized profit) -
i) by way of loan or advance to its equity shareholder, who is registered as well as beneficial owner of the shares, holding not less than 10% of voting power in the company (hereinafter referred as specified shareholder);
Stress
 The provision of sec. 2(22)(e) is applicable on equity shareholder, who is registered as well as beneficial owner of the shares. If the holder is merely beneficial holder but not a registered holder or vice versa, then provision of sec. 2(22)(e) shall not be applicable C12
 Advance means an advance given in the nature of loan (with or without interest), which shall be refunded to the company.
 Loan u/s 2(22)(e) also includes trade deposit with specified shareholder C13
Notes
a) No exemption on repayment of such loan: Loan to a specified-shareholder is treated as deemed dividend even if such loan or any part of such loan was refunded before the end of previous year C14.
b) Advance to supplier: If the shareholder deals with the company as a supplier, customer, etc. and he always has a debit balance with the company then such debit balance shall be treated as dividend C15.
c) Bonafide Loan: Sec. 2(22)(e) shall be applicable even when assessee has taken a bonafide loan for a short duration. C 31
Exceptions
a. Set-off of loan with forthcoming declaration of dividend: In case the loan granted to member is adjusted with the forthcoming dividend, then such dividend (newly declared) shall not be taxable in the hands of shareholder who adjusted such loan.
b. Advance or loan in the ordinary course of business: Sec. 2(22)(e) is not applicable if an advance or loan is made by a company in the ordinary course of its business, where the lending of money is substantial part of the business of the company.

So section 2(22)(e) is attracted
Regards………………………..!

CA Balakrishna Bhat

CA Balakrishna Bhat (Querist)
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20 March 2009 thank you mr manmohan, any clarification, circular, notification in this regard

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CA LOKESH KASAT, FCA, M.Com

CA LOKESH KASAT, FCA, M.Com (Expert)
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20 March 2009 Dear Balakrishna,
This may comes under the excpetion of 2(22)e but it can't, therefore Sec 2(22)e is applicable, I believe Case Law is CIT Vs P.K. ABUBUCKER in which judgement was held.

CA Balakrishna Bhat

CA Balakrishna Bhat (Querist)
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21 March 2009 Thank you Experts. I have also seen the same case law but this view may not be upheld in case of purchase advance etc which are purely revenue and temporary in nature by higher authourities. i think this is a debatable issue.
Thank you once again