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Deemed Dividend

Sowmya P K (Chartered Accountant) (251 Points)

21 August 2009

A jewellery-making company declares annual dividend. In addition, a discount coupon is attached to the annual report wherein the shareholders are entitled to buy gold from the company's retail outlets at a discounted rate. A time limit of say 2 months from the date of AGM is given to avail the same.

Whether this discount given shall amount to deemed dividend u/s 2(22)(a)?? If yes, on what amount should CDT be paid and what is the due date for the payment??

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8 Replies

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 21 August 2009

Normally this should not be considered as deemed dividend is levied if any advance is given to shareholder. The right to get discount will only arise if the shareholder purchases gold and not otherwise. And as far as i know special discount is not considered as deemed dividend and also it is option given to all the shareholders.

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Sowmya P K (Chartered Accountant) (251 Points)
Replied 21 August 2009

Thanks Aditya

I agree that discount may not be dividend, but here dividend tax may be evaded in the name of discount. The real intention is to give some benefit to shareholders itself as it is not available to the general public.

And 2(22)(a) talks about distribution of assets to shareholders. My viewpoint is that to the extent of the discount given, it can be treated as distribution of assets, i.e gold inventory of the company to the shareholders.

Ashish M (Chartered Accountant) (2731 Points)
Replied 21 August 2009

Sec.2(22)(a) talks about the release of assets by the company shall be deemed to be dividend to the extent accumulated profits whether ccapitalised or not.....here the section lays stress upon the release of assets. A mere discount extended to the shareholder can't be said to entail a realese of asset.

it is just the benifit given to them. as for deeming the giving of gold inventory to the shareholder as release of assets, the assets are not given free of cost, they are just given discount onthe purchase of such gold from the company by the shareholder. and the company is free to give discount unless it is abnormal and their is need to lift the corporate veil to know the real intention of the company..............mere discount extended can't be termed as deemed divndend.

section 2(22) is not their to tax every benifit extended by a company to its shareholder, but ot tax that benifit which seems excess or unreasonalbe and reeks of asserted intention to evade tax...........

Moreover the company is made of its shareholders and it has no responsibility to give anything to the general public.....they can grant any benifit to its shareholder subject to law made is this regard and not to evade tax........

In my view, Unless any case law is cited in this regard, its hard and unreasonalbe to deem it dividend..........

llllVICTORllll (Internal Auditor) (511 Points)
Replied 21 August 2009

good explanation by Ashish..... thanks

Naresh Biyani (Manager-Investment Banking) (115 Points)
Replied 21 August 2009

Sec 2 (22) (e)

Any Loans and advances given by Closey held company to its Directors or a person who is substantaly interested in the company.

ot to any enterprises in which its directors are Substantantaly Interested in case of company 10% Voating Right and in other case

20% Interest in Profit if given than such amount will be deemed as Deemed Divident as per Sec 2 (22) (e).

The such amount should be out of earned Profit.

Discount cannot be treated as deemed dividend under sec 2 (22) (e).

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CA Kingsley (Audit Manager) (470 Points)
Replied 21 August 2009

If this company is closely held company and if such share holder utilised the discount coupon, then the different will be added back u/s 40A(2)(b). Let us say, normal rate is rs 100, but to share holders they are given for 80, then Rs 20 loss will be disallowed u/s 40A(2)(b). So rs 20 will not be taxed as dividend. It will be disallowed and tax will be recovered.

CA Kingsley (Audit Manager) (470 Points)
Replied 21 August 2009

Hey. sorry. i gave reply wrongly. 40A applies only to exp. not for income. I have to think over it and tell u. It is interesting case

sivadas chettoor (CA) (2644 Points)
Replied 21 August 2009

DEEMED DIVIDEND

Attention is invited to some points which may be of some help to the readers. The first thing to be noted is that the definition is an inclusive definition and any receipt which does not fall under the ordinary meaning of that term may still be regarded as dividend under the act unless the context would require another view. (see 57 ITR 1 (SC). Another legal principle to be noted is that a deeming provision like the one on hand should receive a very strict construction and any doubt or ambiguity should be resolved in favour of the tax payer.(See 136 ITR 805 (Cal). Yet another point is that dividend need not be be in the form of money- it may be property or any rights having monetary value (like the right to get discount?) (see 41 ITR 275, at 278 (SC).

Now the problem needs to be addressed keeping in view the above legal principles. If you look at the facts it will be clear that there are certain distinguishing features in comparison with the ordinary dividend. The companies act contains strict provisions for payment and time limit for the payment etc which cannot be applied to the facts of the case. Another point is that in the case of ordinary dividends the company cannot discriminate between the shareholders regarding the distribution of dividends of its profits to which all are as a matter of right entitled. The taxability of the year of dividend can also be fixed without difficulty in the case of ordinary dividends whereas in the case on hand one will have to wait till the shareholder excercises his right. It is difficult to predict how many members would go for the scheme and at what point of time.

So viewed from that angle my submission is that the deeming provision need not be extented to that level which might not have been intented by the law makers. If the view taken by you is accepted even Tea or buiscuts supplied in the AGM to the members can be treated as deemed dividend since that would also entail release of its assets. law should be interpreted in a reasonable manner and should try to avoid producing absurd results. Here I think it can be taken as a marketing strategy of the company to sell its products and if it was offered to the shareholders it should be viewed more as a matter of incidence of business than as a device to distribute dividends. It is my humble opinion which may not find acceptance by others. Any way I am thankful to Sowmya for raising such an interesting query which sets in motion the thought process which otherwise would remain idle.

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