Numbers is a nightmare for most of us. But if we clean the walls of our memories, the ones which are specially related to mathematics and its equations, we may be able to see the equation which is very simple and applicable in real life. Yes! It is the same equation: If a = b and b = c, then a = c.
If I am a company and lending to you being a substantial shareholder or I’m lending to a concern in which you (being my shareholder) have substantial interest, the payment in the form of any loan or advance from me to you or the concern shall be assumed to be dividend and shall be charged to tax under the concept of deemed dividend. Let us learn more about this equation.
Deemed Dividend under Section 2(22)(e)
Any payment by a company, not being a company in which public are substantially interested (i.e. closely held company), of any sum (whether representing a part of the assets of the company or otherwise) by way of loan or advance
According to the provisions of the section 8 of the Income Tax Act, 1961, dividend income becomes taxable in the year in which it is declared or distributed or paid. As per the provisions of section 10(34) dividend income is exempt in the hands of the shareholders as it is charged to DDT under section 115-O. However, ‘deemed dividend’ as defined above does not come under the ambit of section 115-O and hence, it is taxable in the hands of the shareholders at the marginal rate of tax.
The Finance Bill 2018 has proposed to levy the Dividend Distribution Tax (DDT) on ‘Deemed Dividend’ under section 115-O of the Income Tax Act, 1961 at the rate of 30% (plus applicable surcharge and cess) in the hands of the closely held companies to prevent hiding dividend in the form of loans/advances.
The amendment shall apply to the transactions undertaken on or after 1st April, 2018.
As discussed in the guide on section 10(34) the dividend income which are subject to DDT under section 115-O are exempted in the hands of the shareholders under section 10(34).
Since, Deemed dividend under section 2(22)(e) is also proposed to brought under the purview of DDT u/s 115-O, therefore, exemption u/s 10(34) shall also be applicable to shareholders and income from such deemed dividend shall be tax free.
Definitions for the Purpose of above Explanation
An enemy of an enemy is a friend. The payment by the way of loan or advance to the substantial shareholder is deemed to be dividend and chargeable to tax. Hence, it is difficult to escape from tax under the Income Tax laws. Reach our experts at TaxForum for better tax planning and expert advice.