Deemed Dividendu/s.2(22)( e) Nihar Jambusaria

Section 2(22)(e) Pari materia’ with section 2(6A)(e) of the Indian Income-tax Act, 1922 The word “Deemed” is not used even once in Section 2(22). As held in the case of Kantilal Manilal v. CIT [1961] 41 ITR 275 (SC) "Dividend" in its ordinary meaning is a distributive share of the profits or income of a company given to its shareholders. When the Legislature by section 2(6A) sought to define the expression "dividend" it added to the normal meaning of the expression several other categories of receipts which may not otherwise be included therein. By the definition in section 2(6A), "dividend" means dividend as normally understood and includes in its connotation several other receipts set out in the definition.

Section 2(22)(e) As held in the case of CIT v. Raj Kumar [2009] 181 Taxman 155 (Delhi), purpose behind the introduction of Section 2(22)(e) is - It seeks to tax the 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 these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan.

Section 2(22)(e) Amount deemed as income Any payment 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 a company not being a company in which the public are substantially interested, Payer Nature of payment By way of advance or loan

Section 2(22)(e) Payee 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, Limit To the extent to which the company in either case possesses accumulated profits.

Exclusions 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. 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

Points to note Upto AY 2018-19, deemed dividend u/s 2(22)(e) will be taxable in the hands of shareholders. Any transactions covered u/s 2(22)(e) effected on or after 1st April 2018 i.e. AY 2019-20 onwards, the following amendments shall apply i.e. - 1 Section 115-O would be attracted in case of “Deemed Dividend” u/s 2(22)(e) and DDT would apply at the rate of 42.87% (grossed up) + surcharge and cess. 2 Deemed Dividend u/s 2(22)(e) shall be exempt u/s 10(34) in the hands of shareholder. 3 Tax would not be deducted at source u/s 194-Dividends.

CIT v. Parle Plastics Ltd. [2011] 196 TAXMAN 62 (Bom.) Payment CIT v. Parle Plastics Ltd. [2011] 196 TAXMAN 62 (Bom.) ‘any payment’ occurring in ‘section 2(22)(e) contemplates actual payment. Interest on such loan or advance could not be regarded as payment within meaning of sub-clause (e) of section 2(22).

Payment vs. Distribution CIT v. P.V. John [1990] 52 TAXMAN 221 (KER.) The expressions 'distribution' and 'payment' connote different meanings. Distribution is division amongst several persons. It connotes an idea of apportionment among more than one person. In the case of 'distribution' the recipients would be more, than one, while in the case of 'payment' the recipient may be a single person. Sub-clauses (a) to (d) refer to distribution by company and sub-clause (e) includes in the definition of 'dividend' any payment by a company in which the public are not substantially interested.

The rule of construction, ‘noscitur a sociis’ would apply. Advance CIT v. Raj Kumar [2009] 181 Taxman 155 (Delhi) The rule of construction, ‘noscitur a sociis’ would apply. ‘Advance', which appears in company of word 'loan' in section 2(22)(e), can only mean such advance which carries with it an obligation of repayment. Trade advance, which is in nature of money transacted to give effect to a commercial transaction, cannot be treated as 'deemed dividend‘ u/s 2(22)(e)

Loan / Advance Bagmane Constructions (P.) Ltd. V. CIT [2015] 57 taxmann.com 120 (Karnataka) Payment as trade advance as a consideration for goods received or for purchase of a capital asset which indirectly would benefit company advancing loan, such advance would not fall within ambit of provisions of section 2(22)(e). Hence, no dividend u/s 2(22)(e). A company gave loan to its subsidiary to buy land which was of agricultural status and hold the same in form of capital asset and then transfer back to company after obtaining conversion order. Loan or advance given to shareholders or to a concern would constitute deemed dividend if intention of such advance or loan is to avoid payment of dividend distribution tax under section 115-O.

Loan / Advance Malayala Manorama Co. Ltd (89 taxmann.com 252 (Kerala HC) Alpex Exports (P.) Ltd. (49 taxman..com 389 (Del HC) Trade advances received as part of regular business transactions cannot be treated as loan or advances, hence, would not fall within ambit of provisions of section 2(22)(e) Merely because shares were issued belatedly in subsequent year, share application money cannot be treated as loan or deposits or advance for invoking provisions of section 2(22)(e).

Payee - Shareholder & Beneficiary Section 2(22)(e) applies upto A.Y. 2018-19 only in case the beneficiary and the shareholder are the same person. W.e.f. A.Y. 2019-20, DDT will be payable by the company. It is not applicable in case – The beneficiary is not the Registered Shareholder ; or The Registered Shareholder is not the beneficiary. Case laws: ACIT v. Bhaumick Color (P) Ltd. (2009) 118 ITD 1 (MUM.), CIT v. National Travel Services (2011) 202Taxmann327(Del); CIT V. Standipack (20 taxmann.com 19 (Del HC) In case of non-corporate entities, such as Trusts, HUF, 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.

Payee - Shareholder & Beneficiary Loan was given to Manish (assesse). Shares registered in name of HUF and minor children of assesse cant be counted though he is a beneficial shareholder. - Manish Karwa v. ACIT [2014] 45 taxmann.com 351 (Indore - Trib.) Manish HUF Minor Son Minor Daughter 6.04% 0.14% 9.68% 0.4% Company However, Supreme Court in the case of Gopal And Sons (HUF) [(2016)77 taxmann.com 17 (SC)] held that even if HUF is not a registered shareholder in lending company, once payment is received by HUF and Karta, who is shareholder in lending company, has substantial interest in HUF, payment made to HUF shall constitute deemed dividend in HUF's hand.

Payee - Shareholder & Beneficiary CIT v. Jignesh P. Shah [2015] 54 taxmann.com 293 (Bom.). - No deemed dividend u/s 2(22)(e) Jignesh 50% Company “L” Loan 100% Company “N”

Payee - Payment to concern of shareholder In the case of loan or advance given to a concern (HUF, Company, Firm, AOP or BOI) in which the shareholder and beneficiary has a substantial interest, provisions of section 2(22)(e) shall apply to the shareholder and not the concern. While determining the substantial interest of a shareholder for invoking provisions of section 2(22)(e), holdings of relatives not to be counted. - ACIT v. Maharishi Ayurveda Products (P.) Ltd [2015] 58 taxmann.com 11 (Delhi - Trib.)

Exclusions - Loan or advance in the ordinary course of business Two cumulative conditions – I Advance or loan made to shareholder is in the “ordinary course of business”; and II Lending of money is a substantial part of the business of the company; CIT v. Parle Plastics Ltd. [2011] 196 TAXMAN 62 (Bom.) The expression ’substantial part’ does not connote an idea of being the ‘major part’ or the part that constitutes majority of the whole. Various factors to be looked into to determine whether the business is substantial or not, namely, turnover, profits, capital employed, human resources, etc.

Exclusions - Loan or advance in the ordinary course of business DCIT V. Kishori Lal Agrawal (49 taxmann.com 35 (Lucknow ITAT) – Since loans were advanced only to assessee and not to others, lending companies could not be said to have substantial part of business in money lending and thus loans and advances given to assessee were deemed dividend in light of provisions of section 2(22) (e).

Exclusions - Set-off to avoid double taxation “where amount of loan advance had been fully repaid before dividend was declared by company, it was not possible to invoke exclusion provision in sub-clause (iii) of section 2(6A)(e) of 1922 Act and shareholder would not be entitled to relief merely upon general principle of construction against double taxation” – [Walchand & Co. Pvt. Ltd. v CIT (1993) 204 ITR 146 (Bom)] 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.

Exclusions - Set-off to avoid double taxation E.g. Loan then dividend Directly dividend Loan 1,00,000 - Dividend (set off against loan) Tax payable Company – DDT Nil 20,995 Personal tax Nil (Basic exemption limit not exceeded)

Accumulated Profits Explanation 2 to Section 2(22) – 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) Exclusion The profit accruing during the year cannot be considered as an accumulated profit for the purpose of section 2(22) - CIT v. M.V. Murugappan (1970) 77 ITR 818 (SC) Share premium cannot be regarded as commercial profit having regard to Companies Act - DCIT vs. MAIPO INDIA LTD ITA No. 2266/Del/2005 Deemed dividend assessable in any of the earlier years has to be reduced from the accumulated profits, even if it was not assessed in that year. - P. Satyaprasad v ITO (31 taxmann.com 267) Amount of accumulated profit has to be determined on date on which loans were given by company and not at end of year - - P. Satyaprasad v ITO (31 taxmann.com 267)

Accumulated Profits Inclusion Profits generated from Exempt Income or Agricultural Income - Tea Estates India Pvt. Ltd. v. CIT (1976) 103 ITR 785 (SC)