Applicability of Sec 2(22)(e)

[S SHANMUGASUNDARAM]

Company ABC Ltd is advanced loan to Company XYZ Ltd. In company ABC Ltd one of the share holder Mr.X having 10.42% share holding and also Mr. X being a share holder of XYZ Ltd having 0.30% Kindly clarify wheather the loan given by ABC Ltd to XYZ Ltd will attract Sec 2(22)(e) of Income Tax Act, 1961. Note: ABC Ltd is holding 99.40% shares of XYZ Ltd.

[B L Bhojwani]

As per section 2(22)(e),  any payment by a company of any sum (whether as representing part of the assets of the company or otherwise) by way of advance or loan to a shareholder will, to the extent the company possesses accumulated profits, will be deemed dividend. This will be, inter alia, subject to the condition that the payment should be to :

(a)  a beneficial owner of equity shares holding at least 10% of the voting power;

OR

(b) a concern in which, the above equity shareholder being beneficial owner of atleast 10% of the voting power, is a member or a partner and having a substantial interest.

Substantial interest here means in case of a company beneficial holding of at least 20% of the voting power and in case of a concern other than company, which can be a Hindu undivided family, or a firm or an association of persons or a body of individuals, beneficial interest of 20% in the income of such concern.

The loan has been given by ABC Ltd. to XYZ Ltd. Although the shareholding of Mr. X in ABC Ltd. exceeds 10%, he does not have substantial interest in XYZ Ltd. Therefore, the rigour of section 2(22)(e) will not be attracted in his case.

As per the relevant Section , the person should have either 10% interest in the company,or 20%substantial holding in the concern to which the loan or advance is advanced. Since neither of the criteria is hit, Sec.2(22)(e) stands unattracted.

AI Summary

Deemed dividend rules: loan to related concern not treated as dividend where shareholder lacks required beneficial or substantial interest.
A company's loan or advance will be a deemed dividend from accumulated profits if made to a beneficial equity shareholder holding at least ten percent voting power, or to a concern where such shareholder holds a substantial interest (twenty percent); where those ownership thresholds are not met, the advance is not treated as deemed dividend.