DEEMED DIVIDEND
U/s 2(22)(e)
————————————————————————————————————
DEEMED
DIVIDEND
A.
INTRODUCTION TO DEEMED DIVIDEND
1.
Section 2(22) of the Income Tax Act, 1961 – Extract from Bare Act
(22)
“dividend” includes—
(a)
any distribution by a company of accumulated profits, whether capitalised or
not, if such distribution entails the release by the company to its
shareholders of all or any part of the assets of the company ;
(b)
any distribution to its shareholders by a company of
debentures, debenture-stock, or deposit certificates in any form, whether with
or without interest, and any distribution to its preference shareholders of
shares by way of bonus, to the extent to which the company possesses
accumulated profits, whether capitalised or not ;
(c)
any distribution made to the shareholders of a company on its liquidation, to
the extent to which the distribution is attributable to the accumulated profits
of the company immediately before its liquidation, whether capitalised or not ;
(d)
any distribution to its shareholders by a company on
the reduction of its capital, to the extent to which the company possesses
accumulated profits which arose after the end of the previous year ending next
before the 1st day of April, 1933, whether such accumulated profits have been
capitalised or not ;
(e)
any payment by a company, not being a company in which the public are
substantially interested, of any sum (whether as representing a part of the
assets of the company or otherwise) made after the 31st day of May, 1987, 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, or 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)] or any payment by any such
company on behalf, or for the individual benefit, of any such shareholder, to
the extent to which the company in either case possesses accumulated profits;
but
“dividend” does not include—
(i)
a distribution made in accordance with sub-clause (c) or sub-clause (d) in
respect of any share issued for full cash consideration, where the holder of
the share is not entitled in the event of liquidation to participate in the
surplus assets ;
(ia)
a distribution made in accordance with sub-clause (c) or sub-clause (d) in so
far as such distribution is attributable to the capitalised profits of the
company representing bonus shares allotted to its equity shareholders after the
31st day of March, 1964, and before the 1st day of April, 1965;
(ii)
any advance or loan made to a shareholder or the said concern by a company
in the ordinary course of its business, where the lending of money is a
substantial part of the business of the company ;
(iii)
any dividend paid by a company which is set off by the company against the
whole or any part of any sum previously paid by it and treated as a dividend
within the meaning of sub-clause (e), to the extent to which it is so set off;
(iv)
any payment made by a company on purchase of its own shares
from a shareholder in accordance with the provisions of section 77A of the
Companies Act, 1956 (1 of 1956);
(v)
any distribution of shares pursuant to a 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).
Explanation
1.—The expression “accumulated profits”, wherever it occurs in this clause,
shall not include capital gains arising before the 1st day of April, 1946, or
after the 31st day of March, 1948, and before the 1st day of April, 1956.
Explanation
2.—The expression “accumulated profits” in sub-clauses (a), (b), (d) and (e),
shall include all profits of the company up to the date of distribution or
payment referred to in those sub-clauses, and in sub-clause (c)
shall include all profits of the company up to the date of liquidation, but
shall not, where the liquidation is consequent on the compulsory acquisition of
its undertaking by the Government or a corporation owned or controlled by the
Government under any law for the time being in force, include any profits of
the company prior to three successive previous years immediately preceding the
previous year in which such acquisition took place.
Explanation
3.—For the purposes of this clause,—
(a)
“concern” means a Hindu undivided family, or a firm or an association of
persons or a body of individuals or a company ;
(b)
a person shall be deemed to have a substantial interest in a concern, other
than a company, if he is, at any time during the previous year, beneficially
entitled to not less than twenty per cent of the income of such concern ;
[Note
: Highlighted and Underlined Text refers to provisions relevant
to Deemed Dividend]
2.
Legislative History of Section 2(22)(e) of the Income Tax Act, 1961.
a.
Section 2(6A) of the Indian Income Tax Act, 1922 corresponding to Section 2(22)
of the Income Tax Act, 1961 was first introduced by the Indian Income Tax
(Amendment) Act 1939.
b.
Clause (e) was added to Section 2(6A) of the Indian Income Tax Act, 1922
corresponding to Section 2(22)(e) of the Income Tax Act, 1961 by the Finance
Act, 1955. By virtue of this amendment, for the first time, the fiction of
treating loans or advances to shareholders as dividend was first introduced in
the Income Tax Law.
c.
The provisions of Section 2(6A) of the Indian Income Tax Act, 1922 were
incorporated in Section 2(22) of the Income Tax Act, 1961 without any
amendments.
d.
The first and only amendment to Section 2(22)(e) was made by Finance Act, 1987
(w.e.f. 01-04-1988) wherein the phrase “Shareholder who has substantial interest”
then appearing was replaced by the phrase “a Shareholder who is a beneficial
owner of shares holding not less than 10% of the voting power”.
e.
The constitutional validity of the provisions of Section 2(22)(e) was upheld by
the Supreme Court in the matter of Navnitlal C. Jhaveri v K K Sen, AAC [1965]
56 ITR 198 (SC).
3.
Dividend, general meaning thereof :
i.
‘Dividend’, in its ordinary connotation, means the sum paid to or received by a
shareholder proportionate to his shareholding in a company out of the total sum
of profit distributed.
ii.
However, The definition of Dividend u/s 2(22) is “Inclusive, Enumerative” to
include certain distribution / payments by the company to its shareholders,
namely :-
(a)
distribution entails the release of all or any part of the assets of the
company ;
(b)
distribution of debentures, debenture-stock or deposit certificates in any
form, whether with or without interest ;
(c)
distribution by a company on its liquidation ;
(d)
distribution by a company on the reduction of its capital ;
(e)
payment by a Closely Held Company by way of advance or loan to a shareholder
who is a beneficial owner of shares holding not less than 10% of the voting
power.
iii.
The phrase “Accumulated Profits, whether capitalized or not”, is uniformly used
under clauses (a), (b), (c), (d) and (e) of section 2(22).
4.
Is it “Deemed Dividend”?
(a)
Ironically, the word “Deemed” is not used even once in the Section
2(22).
(b)
In this Section 2(22), certain payments by the Company to shareholder are
construed as Dividend which would not be dividend under the Ordinary commercial
parlance or ‘The Companies Act, 1956’ and hence the term ‘Deemed Dividend’.
(c)
In Kantilal Manilal v. CIT (1961) 41 ITR 275 (SC), Held that Section 2(22)
creates a fiction by which certain receipts or parts thereof are treated as
dividend for the purpose of levy of Income-tax .
5.
Intention of Legislature behind introduction of Section 2(22)(e).
Section
2(22)(e) of the Income Tax Act, 1961 plainly seeks to bring within the tax net
accumulated profits which are distributed by closely held companies to its
shareholders in the form of loans. The purpose being that persons who manage
such closely held companies should not arrange their affairs in a manner that
they assist the shareholders in avoiding the payment of taxes by having
companies pay or distribute, what would legitimately be dividend in the hands
of shareholders, money in the form of advance or loan. – Read in CIT v. Raj
Kumar (2009) 181 Taxmann 155 (Delhi).
B.
SCOPE OF SECTION 2(22)(e)- AN IN DEPTH ANALYSIS
There
are 5 (five) aspects (conditions) inherent in the provisions of Section
2(22)(e) – all of which must be cumulatively satisfied – for a payment from a
company to the shareholder – to be deemed as dividend u/s 2(22)(e) in a
particular assessment year :-
I.
TYPE OF COMPANY
II.
NATURE OF PAYMENTS
III.
PERSONS COVERED
IV.
AMOUNT (ACCUMULATED PROFITS)
V.
ACCRUAL (IN WHICH ASSESSMENT YEAR)
I.
TYPE OF COMPANY
1.
DEFINITION OF CLOSELY-HELD COMPANY
i.
The phrase ‘closely-held company’ is not explicitly defined under the Income
Tax Act, 1961 but it means a ‘company in which the public is not substantially
interested’.
ii.
Section 2(18) of the Income Tax Act, 1961 defines ‘a company in which the
public is substantially interested’ to include :-
a.
a company owned by the Government or the RBI or
more than forty percent of the shares are owned by Government or the RBI or a
corporation owned by the RBI.
b.
a company registered under section 25 of the
Companies Act, 1956.
c.
a company not having share capital and declared
by the Board to be such company
d.
Mutual Benefit Finance Company – business of
acceptance of deposits from members and notified by the Central Government u/s
620 of the Companies Act, 1956.
e.
a company, whose more than 50% Equity Shares
(not being Preference Shares) held by one or more Co-operative Societies
throughout the previous year.
f.
a company not being a Private Company as defined
in the Companies Act, 1956, whose Equity Shares were listed on the 31 March of
the previous year in a Recognised Stock Exchange.
g.
a ‘Government Company’ not being a ‘Private
Company’ (both terms being defined in the Companies Act, 1956).
iii.
As a corollary to the definition of ‘a company in which the public is
substantially interested’, a ‘closely held company’ will include :-
a.
a Private Company as defined in the Companies Act, 1956 ; and
b.
a Company not being a Private Company as defined in the Companies Act, 1956 and
whose Equity Share are not listed on the 31 March of the previous year in a
Recognised Stock Exchange.
2.
APPLICABILITY ON FOREIGN COMPANIES
i.
Section 2(22)(e) does not distinguish between an Indian or a Foreign Company.
ii.
Section 2(17) defines “company” to include a body corporate incorporated by or
under the laws of a country outside India.
iii.
Sum paid by a Foreign Company to a resident shareholder has been held as
dividend – See Gautam
Sarabhai v. CIT (1964) 52 ITR 921 (GUJ.)
iv.
It is further pertinent to note that a Recognised Stock Exchange has been
defined in the Income Tax Act, 1961 to mean a stock exchange recognised as such
by the Central Government under section 2(f) of the Securities Contracts
Regulation Act, 1957 (SCRA). Further, at present only stock exchanges operating
in India have been recognised by the Central Government. Accordingly, as a
corollary, a Stock Exchange outside India is not Recognised by the Central
Government and a Foreign Company listed outside India or also an Indian Company
listed outside India (and Not listed in India on the 31 March of the previous
year) will be a ‘Closely Held Company’ for the purpose of Section 2(22)(e).
II.
NATURE OF PAYMENTS
(i)
Any payment by way of advance or loan; OR
Exception:
Loan or advance is granted in the ordinary course of its business and lending
of money is a substantial part of the company’s business. (See Section
2(22)(ii))
(ii)
Any payment, on behalf of, or for the individual benefit of such Shareholder.
1.
What is ‘Loan’ or ‘Advance’?
i.
The term “Loan or Advance” has not been defined under the Income Tax Act, 1961.
ii.
According to Black’s Law Dictionary, ‘loan’ means a lending; delivery by one
party to and receipt by another party of sum of money upon agreement, express
or implied, to repay it with or without interest.
iii.
In the matter of G.R. Govinda Rajolu Naidu v CIT (1973) 90 ITR 13 (Mad), HELD:
·
There should be an outgoing or flow of
money from the company to the shareholder;
·
A notional payment by way of book entries
will not be included.
·
On the facts of the case, the amounts due
by the assessee to the company towards the first and second call monies on the
shares held by it in the company – Not Deemed Dividend u/s 2(6A)(e) of the
Indian Income Tax Act, 1922
iv.
The Black’s Law Dictionary defines the term “advance” as “a payment made in
anticipation of a contingent or fixed future liability or obligation”.
Ordinarily, an advance is a payment beforehand and it does not connote the idea
of repayment. It is adjusted when the action, for which the money is advanced,
is completed.
v.
Advances means something which is due to a person but which is paid to him
ahead of the time when it is due to be paid. – CIT v Srinivasan (K.) (1963) 50
ITR 788 (Mad).
vi.
In the matter of CIT v. Raj Kumar (2009) 181 Taxmann 155 (Delhi), Held, The
usual attributes of a loan are that it involves positive act of lending coupled
with the acceptance by the other side of the money as loan – it generally
carries interest and there is an obligation of repayment. The term ‘advance’ is
of wide import & has undoubtedly more than one meaning, depending on the
context in which it is used. In its widest meaning, the term ‘advance’ may or
may not include lending or the obligation of repayment. The Delhi High Court
applied the rule of construction of noscitur a sociis – “the meaning of the
word can be gathered from the context” or “by the company which it keeps.” The
word ‘advance’ which appears in the company of the word ‘loan’ could only mean
such ‘advance’ which carries with it an obligation of repayment. Trade advance
which are in the nature of money transacted to give effect to a commercial
transactions would not fall within the ambit of the provisions of Section
2(22)(e) of the Act.
vii.
Illustrations of Loans or Advances
|
Particulars
|
Citation
|
Included / Excluded from Loans or Advances
|
|
Advances in Kind
|
M.D. Jindal v. CIT [1986] 28
Taxman 509 (Cal.)
|
Included
|
|
Trade Advances
|
CIT v Jamnadas Khimji Kothari (1973) 92 ITR 105 (Bom)
|
Included
|
|
Imprest Balances with Directors
|
ACIT v Harsad V. Doshi (2011) 49 DTR 181 (Trib) (Chennai)
|
Excluded
|
|
Deposits
|
ACIT v Global Agencies Pvt. Ltd. 87 TTJ 1086 (Del)
|
Excluded
|
|
Inter-Corporate Deposits
|
Bombay Oil Industries Ltd. v DCIT (2009) 28 SOT 383 (Mum)
|
Excluded
|
|
Trade Advances
|
CIT v. Raj Kumar (2009) 181 Taxmann 155 (Delhi)
|
Excluded
|
viii.
Examples of Advances
Example
1
In the matter of CIT v P.K. Abubucker (2003) 259 ITR 507 (Mad):
Facts
A company had advanced to a shareholder a sum for construction of a building to
be taken on lease, and the amount so advanced was to be adjusted against future
rent.
Held
Liable to be assessed as Deemed Dividend.
Example
2 In the matter of Dr. Shiv Kant Mishra v Dy
CIT (2009) 118 ITD 347 (Luck):
Facts
A
MoU was entered into between the assessee and the company whereby the company
advanced money to the assessee for purchase of land and, in turn, he was to
transfer by way of lease a portion of land in favour of the company. Factually,
the assessee constructed a residential building for his personal use on the
said land.
Held
Tribunal
held that neither the business of the company was to carry on construction or
deal in real estate nor did the assessee’s case fall in the exception provided
in section 2(22). The Tribunal held that the MoU between the company and the
assessee was a colourable device adopted for transfer of accumulated profits as
loan for an indefinite period. Accordingly, the inclusion of such amount as
deemed dividend in the hands of the assessee was upheld by the Tribunal. Thus,
the decision went in favour of the revenue.
2.
EXCLUSIONS FOR LOANS OR ADVANCE IN THE ORDINARY COURSE OF BUSINESS AND WHERE
LENDING OF MONEY IS A SUBSTANTIAL PART OF BUSINESS
Clause
(ii) of Section 2(22) – “… but “dividend” does not include –
(ii)
any advance or loan made to a shareholder or the said concern by a company in
the ordinary course of its business, where the lending of money is a
substantial part of the business of the company; … ”
Accordingly,
to avail the Exclusion, there are 2 (Two) cumulative conditions:–
(i)
Advance or loan made to shareholder is in the “ordinary course of business”;
and
a.
‘Ordinary course of business’ shall mean that the loan or advance should be
given to such shareholder at the same rate and terms as it is given to other
borrowers. – CIT v V.S. Sivasubramaniam (1998) 231 ITR 656 (Mad)]
b.
Merely because the company did not have any money lending license, lending of
money will not be treated as deemed dividend, if the assessee was lending money
in the ordinary course of its business. -Jhamu V. Sughend v DCIT (2006) 284 ITR
(AT) 82 (Mum).
(ii)
Lending of money is a substantial part of the business of the company;
“substantial
part of business of the company” is not defined under the Income Tax Act, 1961
In
CIT v. Parle Plastics Ltd. (2011) 196 Taxmann 62 (Bom.), Held :-
a.
Stroud’s Judicial Dictionary defines “substantial” as “A word of no fixed
meaning, it is an unsatisfactory medium for carrying the idea of some
ascertainable proportion of the whole”.
b.
“substantial” does not mean “major”
c.
Various factors to be looked into to determine whether the business is
substantial or not, namely :- Turnover, Profits, Capital Employed, Human Resources.
d.
Any business which the company does not regard as small, trivial, or
inconsequential as compared to the whole of the business is substantial
business.
3.
PAYMENTS ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER – EXAMPLES
a.
In the matter of CIT v. L. Alagusundaram Chettiar[1977] 109 ITR 508 (Mad.),
Facts
A managing director of a company, whenever he needed money used to ask an
employee to take a loan from the company and the company would pass it on to
the employee even without executing any pronote. The employee advanced the loan
to the assessee almost immediately and in toto.
Held
The loans made by the company to the employee fell in the category of
“benefit” to the assessee managing director and were, therefore, assessable as
deemed dividends in his hands.
b.
In the matter of Nandlal Kanoria v. CIT [1980] 122 ITR 405 (Cal.),
Facts
The assessee, having substantial interest in a company X, obtained from company
Y two loans of Rs. 75,000 and Rs.2,00,000 on July 30, 1968 and September2,
1968, respectively. Y had made the loans of Rs. 75,000 to the assessee out of
loans received by Y from X on the same date. Further, Y had made the loans of
Rs. 2,00,000 to the assessee out of loans received by Y from X and another
source on the same date.
Held
This amount of Rs. 75,000 was a payment by X for the benefit of the
assessee and fell within the mischief of section 2(22)(e). The same could not
be said of the loan of Rs. 2,00,000, as on the date of making that loan, Y had
received loans not only from X but from another source also and the loan was
made out of blended amount.
III.
TO PERSONS’ COVERED
(i)
Any shareholder who is a beneficial owner of 10% or
more of Voting power of the Company (but the shares shall not be entitled to a
fixed rate of dividend, whether with or without a right to participate in
profits); Or
(ii)
(a) To a concern (includes {HUF, Firm,
AOP or BOI, Company}) in which such shareholder is a partner or a member , AND;
(b)
has substantial interest (when entitled to 20% or more of
the income of such concern).
1.
The Shareholder v. Beneficiary controversy
a.
Shareholder – means a Registered Shareholder – whose name appears in the
Register of Member u/s 150 of The Companies Act, 1956
b.
Beneficiary – whose name does not appear in the Register of Member u/s 150 but
has a beneficial interest in such shares by virtue of Declarations furnished
u/s 187-C of The Companies Act, 1956.
c.
The word shareholder used in section 2(22)(e) can only mean a registered
shareholder. It is difficult to see how a beneficial owner of shares whose name
does not appear in the register of shareholders of the company can be said to
be a “shareholder”. He may be beneficially entitled to the shares but he is
certainly not a “shareholder”. – Rameshwarlal Sanwarmal v CIT (1980) 122 ITR 1
(SC)
d.
In case of non-corporate entities, such as Trusts (Public Charitable or
Private), Hindu Undivided Family, Partnership Firms, etc the shares are held in
the name of Trustees, Karta (Manager) or the Partner, respectively, whereas the
beneficial owner of the Shares is the respective Entity. Section 2(22)(e)
applies only in case The beneficiary and the shareholder are the same person
and not applicable in case The beneficiary is not the Registered Shareholder ;
or The Registered Shareholder is not the beneficiary. Similar views have been
expressed in CIT v. C P Sarathy Mudaliar (1972) 83 ITR 170(SC) ; ACIT v.
Bhaumick Color (P) Ltd. (2009) 118 ITD 1 (MUM.) (SB) ; CIT v. National Travel
Services (2011) 202 Taxmann 327 (Delhi)
2.
VOTING RIGHTS > 10%
a.
Shareholder who is a beneficial owner of 10% of more of the Voting Power of the
Company – on the date of loan or advance.
b.
Section 86(a)(ii) of ‘The Companies Act, 1956’ permits shares with Differential
Rights as to Dividend, Voting or otherwise.
c.
In such case, The Voting Right of the shareholder must be more than 10% of the
Total Possible Votes of all classes of Share Capital (other than Preferred
Share Capital)
d.
Even if the whole or part of dividend on the preferred capital is remaining
unpaid, and by virtue of Section 87(b) of ‘The Companies Act, 1956’, a
preferred shareholder is entitled to vote, these shares are to be excluded if
such shares are entitled to a fixed rate of profit.
3.
PAYMENT TO A CONCERN OF SUCH SHAREHOLDER
i.
A person shall be deemed to have a substantial interest in a concern, at any
time during the previous year,
(a)
other than a company if he is, beneficially entitled to not less than 20%
income of such concern.
(b)
In the case of a company, if he beneficially holds atleast 20% equity capital
of the company.
Explanation
3(b) to Section 2(22).
ii.
If the loan or advance is given to a concern (HUF, Company, Firm, AOP or BOI)
in which the shareholder and beneficiary has a substantial interest, then the
deemed dividend u/s 2(22)(e) will be included in the Total Income of THE
SHAREHOLDER and NOT THE CONCERN. This view has been expressed in ACIT v.
Bhaumick Color (P) Ltd. (2009) 118 ITD 1 (MUM.) (SB) ; CIT v Universal Medical
Pvt. Ltd. (2010) 190 Taxman 144 (Bom) ; CIT v. Ankitech (P) Ltd. (2011) 11
taxmann.com 100 (Delhi) ; CIT v. National Travel Services (2011) 202 Taxmann
327 (Delhi). Further, the Circular No. 495 dated 22-9-1997 issued by CBDT –
making payments to be included in the Total income of the concern is over-ruled
by these decisions.
Rationale:
The Legal fiction created under section 2(22)(e) enlarges definition of
dividend only; legal fiction is not to be extended further for broadening
concept of shareholders.
4.
IF SHAREHOLDER IS NON-RESIDENT?
Section
2(22)(e) does not distinguish between a Resident or Non-resident shareholders.
Further, it is pertinent to note that by virtue of Clause (iv) sub-section (1)
of section 9, “any dividend paid by an Indian company outside India” is ‘Income
deemed to accrue or arise in India’. Therefore, Deemed Dividend u/s 2(22)(e) is
subject to tax in India in the hands of a Non-resident Shareholder subject to
DTAA relief.
IV.
AMOUNT
Amount
of Advance or Loan.
Subject
to maximum of Accumulated Profits .
1.
What are Accumulated Profits?
i.
In the matter of P. K. Badiani v. CIT (1976) 105 ITR 642 (SC), Held,
Accumulated profits mean commercial profits and not assessed income….It does
not mean the aggregate of the assessed income arrived at after disallowing
disbursements and expenditure in fact incurred..
ii.
Exception: In Navnitlal C. Jhaveri v. CIT[1971] 80 ITR 582(Bom), Held,
While calculating accumulated profits, an allowance for depreciation at the
rates provided by the Income-tax Act itself has to be made by way of deduction.
2.
Is Profit (Loss) of Current Year included in the phrase “Accumulated Profits”?
i.
Explanation 2 – The expression “accumulated profits” shall include all profits
of the company up to the date of distribution or payment referred to in sub-clauses
(a), (b), (d) & (e)
ii.
However, the Supreme Court has held, “The profit accruing during the year
cannot be considered as an accumulated profit for the purpose of section
2(22).” Reference is drawn to CIT v. M.V. Murugappan (1970)
77 ITR 818 (SC); CIT v. Ashokbhai Chimanbhai
(1965) 56 ITR 42 (SC) ; E.D. Sassoon & Co. Ltd. v.
CIT (1954) 26 ITR 27 (SC).
iii.
The SC decisions to exclude current year profit (loss) from Accumulated Profits
particularly, comes to aid, when there are a series of payments / repayments of
loan or advance to the shareholder during the particular year – and If current
year profits were included for computation of accumulated profits, then the
profit will have to be determined at every point where a payment is made.
3.
Examples of Accumulated Profits.
|
Particulars
|
Citation
|
Included / Excluded from Accumulated Profits
|
|
General Reserves
|
CIT v. Srinnivasan K. (1963) 50 ITR 788 (Mad.)
|
Included
|
|
Profits generated from Exempt Income or Agricultural
Income
|
Tea Estates India (P.) Ltd. V. CIT (1976) 103 ITR 785 (SC)
; S. Kumaraswami v.ITO [1961] 43 ITR 423 (Mad.)
|
Included
|
|
Capital Gains (other than Exempt)
|
Explanation 1 to Section 2(22)
|
Included
|
|
Investment Allowance Reserve
|
|
Included
|
|
Development Rebate Reserve
|
|
Included
|
|
Securities Premium
|
CIT v. MAIPO India Ltd. (2008) 24 SOT 42 (Delhi)
|
Excluded
|
|
Share Forfeiture Receipts
|
Navnitlal C. Jhaveri v. CIT (1971) 80 ITR 582(Bom)
|
Excluded
|
|
Profit / (Loss) for the Current year
|
CIT v. M V Murugappan (1970) 77 ITR 818 (SC)
|
Excluded
|
|
Balancing Charge u/s 41(2)
|
CIT v. Urmila Ramesh (1998) 96 TAXMAN 533 (SC)
|
Excluded
|
|
Additions made by AO
|
P. K. Badiani v. CIT (1976) 105 ITR 642 (SC)
|
Excluded
|
|
Capital Gains (if Exempt)
|
CIT v. Mangesh J. Sanzgiri, (1979) 119 ITR 962(Bom)
|
Excluded
|
|
Provision for Tax and Dividend
|
CIT v V. Damodaran (1972) 85 ITR 59 (Ker.).
|
Excluded
|
4.
Profit Earlier Deemed As Dividend
In
the matter of CIT v. G. Narasimhan (1979) 118 ITR 60 (Mad), Held, In
determining the Accumulated profits available for the purpose of section 2(22)(e),
the amount treated as deemed dividend under section 2(22)(e) in past have to be
excluded, irrespective of the fact that no adjustment is made in the books of
accounts. Similar view expressed in P. K. Badiani v. CIT (1976) 105 ITR 642
(SC)
5.
Accumulated Profits is not restricted to Share of Shareholder.
The
Amount is not restricted to the respective Shareholder’s share in Accumulated
Profits. This view has been expressed in CIT v. Mayur Madhukant Mehta (1972) 85
ITR 230 (Guj.) ; CIT v. Bhagwat Tewari (1975) 105 ITR 62
(Cal.) ; CIT v. Arati Debi (1978) 111 ITR 277 (Cal.).
V.
ACCRUAL
1.
Accrual in the previous year.
a.
“Deemed Dividend” accrues in the ‘previous year’ in which the payment was made.
(Section 8(a)).
b.
Therefore, only payment(s) made during the “current year” is covered & any
outstanding balances / interest on loans are to be ignored.
c.
The assessing officer may reopen assessment proceedings u/s 147, to bring
“deemed dividend” escaping assessment to tax for the preceding assessment
years.
d.
Any loan(s) which were outstanding beyond the limitation period cannot be
assessed to Income-tax. The limitation period is period for which the assessing
officer cannot issue Notice u/s 147 for reassessment of income.
e.
In CIT, Panaji – Goa v. Parle Plastics Ltd. (2011) 196 Taxmann 62 (Bom.), HELD,
Only that amount of loans & advances, which was actually received by the
assessee by way of loan or advance during the relevant previous year, could be
treated as income by way of ‘deemed dividend’ and the carried forward balance
of the loan of the previous year could not be treated as deemed dividend.
C.
COMPLIANCES BY THE ‘CLOSELY HELD COMPANY’
1.
Corporate Dividend Tax – Not Applicable
Provisions
of Corporate Dividend Tax (Section 115-O) are not attracted in case of “Deemed
Dividend” & as a consequence thereof, exemption u/s 10(32) is not
available. (Explanation to Chapter XII-D of the I. T. Act, 1961 – appears below
Section 115-Q)
2.
TDS under Section 194
i.
The principal officer of an ‘Indian Company or a foreign Company which has made
arrangement for payment of dividends in India’ is liable to deduct income tax
u/s 194 at the rate in force, before making any payment of any sum deemed to be
dividend u/s 2(22)(e) of the I. T. Act, 1961.
ii.
Rule 27 of the Income Tax Rules, 1962 details the “prescribed arrangements for
payment of dividends within India”:-
(1)
The share-register of the company for all shareholders shall be regularly
maintained at its principal place of business within India, in respect of such
assessment year from a date not later than 1st day of April of such year; and
(2)
The general meeting for passing the accounts of the previous year relevant to
the assessment year and for declaring the dividends in respect thereof shall be
held only at a place within India.; and
(3)
The dividends declared, if any, shall be payable only within India to all shareholders.
3.
Consequences of Failure to Deduct Tax under Section 194
i.
No disallowance u/s 40(ia) of the Income Tax Act, 1961
Rationale:
Section 40(ia) of the Income Tax Act, 1961 does not refer to payments referred
to in Section 194 (dividends) ; and to disallow something, it must have been
allowed at first, and Dividend are not allowed as Deduction.
ii.
However, the company may be liable to penalty u/s 271C(1)(a) of an amount equal
to the ‘amount of tax which such person’ failed to deduct.
4.
Disclosure in Audit u/s 44AB, Report Form 3CD
There
is no specific provision in the Audit Report Form No. 3CD prescribed by the
Income Tax Rules, 1962 for reporting of ‘Deemed Dividend’ paid by a Company.
However, Clause 27 of Form No. 3CD requires the auditor to disclose whether the
assessee has complied with the provisions of Chapter XVII-B relating to
Deduction of Tax at Source. Since as per para C2 (supra) Tax is required
to be deducted by the principal officer of an Indian Company u/s 194, the
Auditor is obliged to report of Non-deduction of TDS u/s 194 in the Audit
Report Form No. 3CD.
5.
Set-off to avoid Double Taxation
i.
Subsequently, when the company declares dividend, & any such dividend is
set-off against the advance, then the dividend so adjusted against the advance
(which has been deemed as dividend), will not be again treated as dividend.
(See Section 2(22)(iii))
ii.
If the dividend is not so set off but is paid to the shareholders while the
loan remains outstanding, the benefit of this exception cannot be obtained. –
Walchand & Co. Pvt. Ltd. v CIT (1993) 204 ITR 146 (Bom).
D.
COMPLIANCES BY THE RECEPIENT SHAREHOLDER
1.
Disclosures in Income Tax Return – Head of Income & Rate of Tax
a.
Deemed Dividend is taxed under the head Income from Other Sources.
b.
No special rate of tax is applicable to deemed dividend and it is taxed as
income chargeable to tax at normal rates – slab rates in case of individuals
& HUF’s.
2.
Burden of Proof during Assessment
i.
The burden is on the Revenue to prove that the case is falling within the
mischief of the deeming provision u/s 2(22)(e) of the Income Tax Act, 1961. –
Subrata Roy Sahara v. ACIT Central Circle III, Lucknow (2007) 109 ITD 1 (Luck)
(TM)
ii.
However, if the assessee is claiming any exception, say
a.
Loan or advance is in due course of the business, and lending is substantial
part of the business ; or
b.
Loan or advance is set-off against dividend declared subsequently;
then
the burden is on the assessee to prove that the case is falling within the
exception to the deeming provision u/s 2(22)(e) of the Income Tax Act, 1961.
-Walchand & Co. Ltd. v. CIT (1975) 100 ITR 598 (Bom).
E.
Disclosures in Revised Schedule VI to Companies Act, 1956 by the Reporting
Company – And Its Relevance to Deemed Dividend.
Clause
6A.(g) of General Instructions to preparation of Balance Sheet – requires
disclosure by the Reporting Company in its Balance Sheet shares in the company
held by each shareholder holding more than 5 percent shares specifying the
number of shares held.
Clause
6L. (i)(c) of General Instructions to preparation of Balance Sheet – requires
disclosure by the Reporting Company in its Balance Sheet of Long Term Loans and
advances to related parties (giving details thereof).
Clause
6L.(ii)(iv) of General Instructions to preparation of Balance Sheet – requires
disclosure by the Reporting Company in its Balance Sheet of Long Term Loans and
advances due by directors or other officers of the company or any of them
either severally or jointly with any other persons or amounts due by firms or
private companies respectively in which any director is a partner or a director
or a member should be separately stated.
Clause
6R(i)(a) of General Instructions to preparation of Balance Sheet – requires
disclosure by the Reporting Company in its Balance Sheet of Loans and advances
to related parties (giving details thereof).
Clause 6R.(ii)(iv) of
General Instructions to preparation of Balance Sheet – requires disclosure by
the Reporting Company in its Balance Sheet of Short –Term Loans and advances
due by directors or other officers of the company or any of them either
severally or jointly with any other person or amounts due by firms or private
companies respectively in which any director is a partner or a director or a
member shall be separately stated