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Deemed-Dividend-Section-2-(22)-of-Income-Tax-Act

 

Deemed Dividend: Section 2(22) of Income Tax Act

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Deemed Dividend: Section 2(22) of Income Tax Act

Deemed dividend is the dividend which is not actually paid as a dividend but assumed to be dividend for the purpose of taxation under the Income Tax Act.

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, dividend in the form of loans/advances

The amendment shall apply to the transactions undertaken on or after 1st April, 2018. Dividend distributed under section 2(22) (a), 2(22)(b), 2(22)(c), 2(22)(d) or 2(22) (e) will be taxable in the hands of the company under section 115-O (Dividend Distribution Tax). Therefore, it is exempted u/s 10(34), in the hands of Shareholders.

 

1) Section 2(22) (a) Distribution of Assets deemed as Dividend-

Under section 2 (22) (a), any distribution by a company of accumulated profits, whether capitalized or not, even if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company to the extent of accumulated profits, whether capitalized or not shall be deemed to be dividend and attract the dividend distribution tax under section 115-O in the hands of the company.

The Fair Market value of the asset is taken on the date of distribution for the purpose of computing the dividend taxation.

Example 1-

Share Capital (Including Bonus Share of Rs. 3,00,000)          Rs. 13,00,000

Reserve & Surplus                                                              Rs. 3,00,000

Assets                                                                               Rs. 16,00,000

Company distributed assets having book value of Rs. 2,00,000 to its shareholders.

What will be the amount of dividend u/s 2(22) (a), if the market value is Rs. 5,00,000

Answer-

Accumulated Profit        Rs. 3,00,000 (Reserve & Surplus) + Rs. 3,00,000 (Bonus Share) = Rs. 6,00,000

Deemed Dividend u/s 2 (22) (a) - Rs. 5,00,000 (Market value of the assets to the extent of accumulated profit)

 

Example 2-

Share Capital (Including Bonus Share of Rs. 3,00,000)               Rs. 13,00,000

Reserve & Surplus                                                                  Rs. 3,00,000

Assets ;                                                                                 Rs. 16,00,000

Company distributed assets having book value of Rs. 2,00,000 to its shareholders.

What will be the amount of dividend u/s 2(22) (a), if the market value is Rs. 8,00,000

Answer-

Accumulated Profit      Rs. 3,00,000 (Reserve & Surplus) + Rs. 3,00,000 (Bonus Share) = Rs. 6,00,000

Deemed Dividend u/s 2 (22) (a) - Rs. 6,00,000 (Market value of the assets to the extent of accumulated profit)


2) Section 2 (22) (b) Distribution of Debentures, Debenture Stock or Deposit Certificate deemed as Dividend-

Under section 2 (22) (b), any Distribution of Debentures, Debenture Stock or Deposit Certificate, in any form with or without interest by the company to shareholders shall be deemed as Dividend. Distribution of Bonus shares to the Preference shareholders shall also be deemed as a dividend.

The amount shall be deemed as dividend to the extent of company’s accumulated profit, whether capitalized or not.

Example 1-

Share Capital (Including Bonus Share of Rs. 2,00,000)                      Rs. 13,00,000

Reserve & Surplus                                                                          Rs. 2,00,000

Assets                                                                                           Rs. 16,00,000

Company distributed Debentures of Rs. 5,00,000 to its shareholders.

What will be the amount of dividend u/s 2(22) (b).

Answer-

Accumulated Profit         Rs. 2,00,000 (Reserve & Surplus) + Rs. 2,00,000 (Bonus Share) = Rs. 4,00,000

Deemed Dividend u/s 2 (22) (b) - Rs. 4,00,000 (Debenture amount to the extent of accumulated profit)

 

Example 2-

Consider figures of example1,

Company distributed Debentures of Rs. 2,00,000 to its shareholders.

What will be the amount of dividend u/s 2(22) (b).

Answer-

Accumulated Profit         Rs. 2,00,000 (Reserve & Surplus) + Rs. 2,00,000 (Bonus Share) = Rs. 4,00,000

Deemed Dividend u/s 2 (22) (b) - Rs. 2,00,000 (Debenture amount to the extent of accumulated profit)


3) Section 2 (22) (c) Distribution of Assets on Liquidation deemed as Dividend-

Under section 2 (22) (c), it applicable only in case of Equity Share holders, any Distribution of Assets on Liquidation to shareholders shall be deemed as Dividend. The amount shall be deemed as dividend to the extent of company’s accumulated profit, whether capitalized or not.
The Fair Market value of the asset is taken for the purpose of computing the deemed dividend u/s 2 (22) (c).

Example 1-

Share Capital                                                                                   Rs. 13,00,000

Reserve & Surplus                                                                            Rs. 3,00,000

Assets                                                                                             Rs. 16,00,000

Company distributed assets having book value of Rs. 2,00,000 to its shareholders on liquidation.

What will be the amount of dividend u/s 2(22) (c), if the market value is Rs. 5,00,000

Answer-

Accumulated Profit         Rs. 3,00,000 (Reserve & Surplus = Rs. 3,00,000)

Deemed Dividend u/s 2 (22) (c) - Rs. 3,00,000 (Market value of the assets to the extent of accumulated profit)


4) Section 2 (22) (d) Distribution on Reduction of Share Capital deemed as Dividend-

Under section 2 (22) (d), it applicable only in case of Equity Share holders, any Distribution on Reduction of Share Capital shall be deemed as Dividend. The amount shall be deemed as dividend to the extent of company’s accumulated profit, whether capitalized or not.

The Fair Market value of the asset is taken for the purpose of computing the deemed dividend u/s 2 (22) (d).


Example 1-

Share Capital                                                                                                 Rs. 13,00,000

Reserve & Surplus                                                                                          Rs. 3,00,000

Assets                                                                                                           Rs. 16,00,000

Company reduced share capital of Rs. 4,00,000 and distribute to its shareholders as dividend.

Answer-

Accumulated Profit          Rs. 3,00,000 (Reserve & Surplus)   = Rs. 3,00,000

Deemed Dividend u/s 2 (22) (d) - Rs. 3,00,000 (Market value of the assets to the extent of accumulated profit)


5) Section 2 (22) (e) Loans and Advances by a closely held company deemed as Dividend-

Under section 2 (22) (e), any payment made by a company, not being a company in which public is substantially interested (i.e. closely held company), of any sum by way of loan or advances to-

  • A shareholder, being a person who is the beneficial owner of the shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in the profits) holding not less than 10% of the voting power. Or
  • To any concern in which a shareholder is a member or a partner and in which he has a substantial interest. Or
  • Any payment by any such company on behalf, or for the individual benefit, of any such shareholder.

To the extent to which company possesses accumulated profit.

  • Also, loan given by a subsidiary company to the holding company would fall within the ambit of Section 2(22) (e).

 

Deemed Dividend u/s 2(22) (e) shall not include the following -

  • Where the company has given money in the ordinary course of business to its shareholders when the money lending is the substantial part of the company’s business.
  • Any Dividend paid by the company which is set off against the whole or part of the loan which has been deemed as dividend u/s 2(22) (e).
  • Any distribution made in accordance with clause (c) or clause (d) of Sec 2(22) in respect of preference shares.
  • Payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of Sec 77A of the Companies Act, 1956.
  • Any distribution of shares in case of demerger by the resulting company to the shareholders of the demerged company.
  • Inter corporate deposits are not “Loans and advances” and are not assessable to tax as deemed dividend.

Note the following points-

  • In the given section concern means HUF, or a Firm, or a Company, or an AOP/BOI.
  • Substantial Interest in a concern means a person is beneficially entitled to not less than 20% income of such concern or 20% of the voting power in case of company.
  • In order to compute deemed dividend u/s 2(22)(e), accumulated profit shall be taken up to the date on which loan or advance is given to the person specified in such section.
  • Hence, where the accumulated profits exceed the loan amount on the date when such loan or advance is given to the specified person, the whole amount shall be deemed as dividend u/s 2(22)(e).
  • For the purpose of Sec 2(22), accumulated profits get reduced by the amount deemed as dividend u/s 2(22)(e) even if no adjustment is made in the books.
  • If the shareholdedrr repays the loan even on the next day, it does not affect the applicability of dividend deemed u/s 2(22)(e).
  • The applicability shall also not be affected even if the interest charged to the shareholder at the market rate on the loan or advance given to the shareholder.
 



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