Mr Mehta
It's true that even a genuine transaction is covered under the draconion provisions of Sec 2 (22)(e) & hence, the payer company is required to pay tax.
However, despite of this, if it has happend in your case, following wayouts, although, some are advisable & some are mens ria wayouts & hence are not advisable, but, still are produced below at your option to escape/compensate the beat of the effects of this severe provision: -
Option 1: -
Declare ACTUAL dividend.
The effect of this would be that the compnay would not be required to pay tax on this amount as the amount to the extenct it had already taxed earlier as deemed dividend under sec 2(22)(e), would not make compnay liable to pay dividend again on this amount.Thus, a company can provide some benefit to its shareholder against taxes paid.
Option 2: -
Alter Partnesrship Deed.
Change the partnership deed IN BACK DATE (in previous Financial Year), if possible, in such a manner so as to make the partner a NON SUBSTANTIAL holder in the partnership firm, thereby, avoiding the question of deemed dividend in the hands of a firm in which shareholder have substantial interest.
(Pls note that changing Partnership deed in the back date but in the CURRENT YEAR WOULD NOT WORK)
Option3 : -
Forfeit Shares: -
- Pass a resolution in the BOD meeting IN BACK DATE in previous F.Y. demanding call money (if shares are not fully paid) & forfeit shares by showing non payment of call money by the shareholder (being Defaulting shareholder).This practice would be easy to do as no reporting of change in share holding patteren need to be given to stock exchange, being a clsoely held company.
- Make necessary entries in the register of Members to this effect.
- Pay penalty under Companies Act (it would be very less as compared to hit under sec 2(22(e) )for wrong reporting in Annual Return (as you are changing shareholding pattern in the back date)
(Pls note that forfeiting the shares in the back date but in the CURRENT YEAR WOULD NOT WORK)
PLS NOTE that, I am NOT RECOMMENDING the adoption of these wayouts to follow as these are not considered good practices by an honest taxpayer, but, still I have produced these here, just to discuss as a part of professional learning ,discussion & knowledge enhancment.