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Deemed Divident

akhila bandaru (employee) (58 Points)

05 October 2008

Can anyone help me understand the provision of deemed dividend from the chapter Income from Other Sources. What constitutes deemed divident and what doesnt is my confusion. This book I am reading is confusing me further.

Thanks in advance. Expecting a reply very soon.

Akhila

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4 Replies

Sunali (Learner) (1317 Points)
Replied 05 October 2008

Hi Akhila..

As per the section 2(22), the flollowing payments by a company are deemed as dividends to the extent of accumulated profits of the company..

a. any distribution entailing the release of the company's assets.

b. any distribution of debentures, debenture-stock, deposit certificates and bonus to preference shareholders.

c. distribution on liquidation of a company.

d. distribution on reduction of capital...and.

e. any payment by way of advance or loan to the following:

a shareholder(being a beneficial owner) holding not less than 10% of the voting power.
any concern in which shareholdr is a member or a partner or in which he has substantial interest.

howver....any subsequent dividend to the extent it is set off against any loan or advance(deemed dividend U/s 2(22)(e)) is not treated as dividend.

Apart from the above....the following are also out of the purview of deemed dividend...

any payment made by a company on purchase of its own shares i.e. Buy Back of Shares.
any distribution of shares made in accordance with the scheme of demerger by the resulting company to the shareholders of the demerged company whether or not there is a reduction of capital in the demerged company...

thats all....Gud Luck

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CA RAMESH KUMAR AHUJA (CA, DISA, LLB) (5452 Points)
Replied 06 October 2008

The amount of payment as mentioned above can be treated as deemed dividend u/s 2(22)(e) of the Income Tax Act if the company is having accumulated profits available for distribution of dividends to the tune of such payment or loan and advances. In that case the amount will be taxable in the hands of shareholder u/s 56 of the Income Tax Act. Also, the company will have to deduct Tax at Source u/s 194. Further, dividend distribution tax u/s 115O is not payable in such a case.

CA Himanshu Awasthi (Manager (Advances)) (520 Points)
Replied 06 October 2008

Sunali Ji & Ramesh Sir has cleared this topic in the best way. I think there shouldn't be any further doubt.

akhila bandaru (employee) (58 Points)
Replied 07 October 2008

Sunali and Ramesh,

Thanks for the response. Appreciate that.

I also have another question about MAT. The procedure given is to calculate book profit under 115JB and then calculate profit under the Income Act and then take the difference.

My question is why should we add back expenses like Depreciation, Income Tax, Wealth Tax etc and why should we delete brought forward losses etc. I am quite confused. Should I by-heart this provision ? Is there any other way to understand this provision ? Please help.

Thanks in advance

Akhila