Deemed Dividend– Section 2(22)( e), Discover Everything you wish to know about Deemed Dividend U/s 2(22)( e). In this short article you can find complete details for Deemed Dividend like Introduction for Deemed Dividend, Conditions should be satisfied to call the payment as a considered dividend etc. Deemed Dividend -Section 2(22)( e) of Income Tax Act1961 Just recently we supply Complete information for Tax Matters of a trust– Part 1.
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Deemed Dividend– Area 2(22)( e)
In the kind of certain loans and advances a company pay to a category of shareholders or for the advantage of this category of investors, or to any concern in which such investor is a member or a partner and in which he has a substantial interest. Hence is called as a considered dividend defined by earnings tax function as under:
” any payment by a business, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the possessions of the business or otherwise) made after the 31 st day of May 1987, by method of advance or loan to an investor, being an individual who is the helpful owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in earnings) holding not less than 10% of the voting power, or to any concern in which such investor is a member or a partner and in which he has a substantial interest (hereafter in this provision described as the stated issue) or any payment by any such company on behalf, or for the specific benefit, of any such shareholder, to the level to which the business in either case has accumulated earnings”
Hence all payments covered under considered dividend is not subject to the dividend distribution tax u/s.
Following conditions should be satisfied to call the payment as a deemed dividend:
( 1) Receiver of the loan or advance or any other payment covered by sec 2 ought to have at least 10% ballot power in the business.
( 2) If the person is a shareholder not only in his specific capability however likewise an investor in the capability of a Karta of an Hindu Undivided Household then the voting power for this purpose includes overall voting power in both the capacities.
( 3) This idea of considered dividend applies to any entity, in which such share holder (receiver) is a member or a partner and in which he has a considerable interest. Significant interest indicates, that person is entitled to not less than 20% of the income of such entity.
( 4) In order to bring in the provisions of section 2 in regard of deemed dividend there must be a loan or advance paid to the individual who is covered by the act. We have to ensure that following conditions are fulfilled in order to call it as a loan or advance eligible for calling it as a deemed dividend:
( a) Payer:
Business ought to be an entity in which public are not interested significantly:
The business which is paying certain amount to its investors ought to be a carefully held company i.e besides “a public business in which large public interest is there”.
( b) Payee:
Receiver must be an investor having a substantial interest in the business on the date on which loan/ advance is provided.
( c) If the loan or advance is offered to any other organization issue then the shareholder must at least have 20% ballot power in that business to call it as a deemed dividend.
( d) Out of accumulated profits:
The amount of loan or advance must be paid of its collected earnings.
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