TaxTMI 
TaxTMI 
Loans & Advances by closely held company deemed as Dividend - (New) Section 2(40)(e) / (Old) Section 2(22)(e)
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....ot less than 10% of the voting power; or • (ii) as an advance or loan to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (herein referred to as the said concern); or • (iii) made on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; Essential Conditions for Applicability (A) The company must be a closely held company • The provision applies only to a company in which the public are NOT substantially interested. (B) There must be accumulated profits • Deemed dividend is limited to the extent of accumulated profits. â....
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.... (iii) any advance or loan between two group entities, where,-- (A) one of the group entities is a "Finance Company" or a "Finance Unit"; (B) the other group entity to the transaction is located in a country or territory outside India; and (C) the parent entity or the principal entity of such group is listed on the stock exchange in a country or territory outside India, for the purposes of items (B) and (C), the country or territory outside India shall be specified by the Central Government, by notification. Meaning of Important Term • (I) "Finance Company" and "Finance Unit" shall have the same meaning as respectively assigned to them in regulation 2(1)(e) and (f) of the International F....
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....i. holding not less than 10% of voting power or iii. to any concern in which such shareholder is a member or a partner and in which he has a substantial interest or iv. to any person on behalf of or for the individual benefit of such a shareholder to the extent to which the company possesses accumulated profits. Notes: • Following conditions must be satisfied on the date on which loan/ advance is given, to attract section 2(22)(e): • Beneficial owner of shares • Holding 10% or more voting power • Member/ Partner in concern Concern means a HUF, or a firm or a company or an AOP/ BOI. Substantial Interest means 20% voting power/ share in profit at any tim....
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....o shareholders and income from such deemed dividend shall be tax free. The provisions contained under section 115O and Section 10(34) has been ceased from 01.04.2020. Important Notification & Circular • Trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of under section 2(22)(e) of the Income Tax Act, 1961 [ Circular no. 17/2019 dated 12.06.2017 ] Important Case laws • The SC held that Section 2(22)(e) of the Income Tax Act, 1961 (as amended in 1988) regarding deemed dividend applies when a loan is made to a shareholder who is a beneficial owner of shares holding not less than 10% voting power, regardless of whether they are a register....
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....at the end of the previous year. there is no finding of excess withdrawals or one way payments for the assessee's sole benefit. Accordingly the transactions cannot be treated as deemed dividend under the Section in question. [ Commissioner of Income Tax, Kolkata-1, Kolkata Versus Gayatri Chakraborty 2018 (6) TMI 1235 - Calcutta High Court ] • Advances were made by a company to a sister concern and adjusted against the dues for job work done by the sister concern. It was held that amounts advanced for business transactions do not to fall within the definition of deemed dividend under section 2(22) (e) of the Act. [ CIT vs. Creative Dyeing & Printing Pvt. Ltd.2009 (9) TMI 43 - Delhi High Court &n....
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....bsp; 2020 (7) TMI 666 - Madras High court ] • An advance or loan by a private company to a shareholder, not exceeding the company's accumulated profits, is to be treated as a deemed dividend even if the advance or loan is repaid in full before the end of the relevant previous year. [ Smt. Tarulata Shyam And Others Versus Commissioner of Income-Tax, West Bengal 1977 (4) TMI 3 - Supreme Court ] • The shares acquired by the minor sons out of alleged foreign gifts (which were not shown to be genuine) were effectively the assessee's shares held in benami names and therefore must be clubbed with his direct holdings for the purpose of determining substantial interest under section 2(22)(e). [ Mohan Anand....