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Sec 2(22)(e) of income tax act

29 November 2017

a closely held company gives loan to a partnership firm in which director's spouse having substantial interest will it be treated as deemed dividend?

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10 Replies

Tarun Kumar Madaan (Practitioner) (4660 Points)
Replied 29 November 2017

Not covered directly but may be fall under "any payment by any such company on behalf, or for the individual benefit, of any such shareholder". Depending upon the facts of the case.

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Neha Mittal (240 Points)
Replied 29 November 2017

Nothing has gone in director's account also director is not partner in the firm. so I think it should not be. say what? @ tarunkumar

Tarun Kumar Madaan (Practitioner) (4660 Points)
Replied 29 November 2017

Three limbs of Section

Payment by way of advance or loan:

to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power
to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)]
any payment by any such company on behalf, or for the individual benefit, of any such shareholder

Definitely not falling in first TWO but might be covered in third scenario depending upon the facts of the case.

Refer: CIT Vs. L. Alagusundaram Chettiar[1977] 109 ITR 508 (Mad.)

Neha Mittal (240 Points)
Replied 29 November 2017

I read the case but not similar to my case. I think it should be treated as deemed dividend bcz nothing has transferred to director's account or his spouse account and funds are completely used by firm. @ tarunkumar

Tarun Kumar Madaan (Practitioner) (4660 Points)
Replied 29 November 2017

Yes, If no funds are transferred to shareholder and only used by the firm in which his spouse is partner. It should not be treated as deemed dividend.

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Neha Mittal (240 Points)
Replied 29 November 2017

thank you @ tarunkumar