Overview on Dividend Distribution Tax on Deemed Dividend (2024)

As per Section 2(22)e, where a closely held company gives a loan or extends an advance payment to the respective staff:

• A shareholder who holds at least 10% of the voting rights and is the beneficial owner of the shares. But, it is important that the shares held do not have the right to a fixed-rate dividend.
• When such shareholder has a significant interest in any business concern.
• For the individual benefit of such shareholders.
• To a specific extent on behalf of such shareholders.

Section 2(22) of the Income-tax Act, 1961 – Deemed dividend -Loans or advances to shareholders

FACTS

One ‘H’ was a shareholder of ‘P’ Ltd. which held shares in Assessee Company. ‘H’ had borrowed amounts from the assessee company.

The Assessing Officer sought to bring the assessee company to tax under section 2(22)(e) holding that ‘H’ had more than 10 percent stake in the assessee company and conditions spelled out in section 2(22)(e) were satisfied.

A assessee contended that said ‘H’ could not be considered as a shareholder in the assessee company. The other contention was that said ‘H’ could not be considered even as a beneficial shareholder of the assessee company.

Appeal, the Commissioner (Appeals), as well as the Tribunal, held that section 2(22)(e) would not be applicable.

On appeal, it was held that:

The individual ‘H’ was not a shareholder of the present assessee but rather the shareholder of another concern that held shares in Assessee Company.

With respect to section 2(22)(e), the mandatory need to fulfill both pre-conditions which are conjunctive and not dis-conjunctive i.e.the shareholder must be

(a) Registered shareholder; and

(b) A Beneficial shareholder.

In the absence of any finding that ‘H’ owned the shares or was the beneficial owner in terms of such provision – on both counts – the findings being adverse to the revenue, no question of law arises.

Provision of section 2(22)(e) would not be applicable

Finance Act 2018 levied Dividend Distribution Tax @ 30% under section 115-O, on deemed dividend under section 2(22)(e), in the hands of payer company.

It sought to levy this tax on closely-held companies as they usually hide dividends by making them look like loans or advances.

At the same time, however, an exemption under section 10(34) is granted to the beneficiary in respect of the said dividend deemed to have been paid.

There are few requirements that come into play at the time of the determination of the tax on the dividend. Here they are:

• The paying company cannot be a company in which the public is not substantially interested, while the receiving company may be listed or made public.
• Corporate loans or advances should not be in the normal course of business.
• Shareholder must be assigned to the company as its creditor.
• The accumulated profits of the company shall be the sole consideration of the dividend received.
• All commercial profits of a company up to the date of distribution/payment/liquidation shall be considered accumulated profits.

But, there are exceptions, which payments are not considered as deemed dividend. Like below :

• When a money lending company is giving a loan.
• The loans are extended to the shareholder.
• Prior to 1 April 2018, the Dividend Distribution Tax was not levied on companies that paid dividends on such payments.
• Even so, Budget 2018 changed it and required these companies to pay DDT at 30%, along with the applicable surcharge and cess.

When the company generates profits, payments like these are deemed as dividend u/s 2(22)(e). But loans handed out by a subsidiary company to its parent company are also subjected to this section.

DDT Tax is levied on dividend income in either the declaration or the payment or distribution of it in the year. As per the provision, recipients are not taxed for dividends as it receives Tax exemption.

But deemed dividends do not receive that exemption. Shareholders do have to pay a nominal income tax at the rate applicable.

With effect from FY 2020-21, The company pays a dividend on equity shares should deduct Tax deducted at Souces U/s 194.

The TDS deduction is @10% on the No of dividends, only if a resident shareholder’s total dividend in a FY Cross Rs Five thousand,

In Summary:

• To avoid Dividend Distribution Tax on any loan or advance given by a company, the Below main points shall be kept in mind while reviewing the application of the income tax provisions u/s 2(22)(e):
• Under Section 2(22)(e) applicable only on Loan & advance given by acompany
• For application U/s 2(22)(e) there shall be a payment by way ofloan or advance.

• Shareholding in lender company & substantial interest in borrower Co to be checked at the time of advancement of loan
• Under Section 2(22)(e) of income tax meaning of “Shareholder”, is the beneficial owner of shares
• Income tax act under section 2(22)(e) is not applicable in case ofcommercial transactions
• Explained in Section 2(22)(e) it is mentioned that amount received for providing a corporate guarantee, not deemed dividend u/s 2(22)(e)

• Section 2(22)(e) will not applicability to an advance or loan made to a shareholder or a concern (in which shareholder has a substantial interest) by a company in the Normal course of its business, where the lending of money is a substantial part of the businessof the company
• As per the Change in the Finance Act 2018 Dividend Distribution Tax @ Thirty percent levied on Deemed Dividend u/s 2(22)(e) & section 10(34) exempts in the hands of shareholders. In such a case No TDS is deductible.

Also, read ;

Taxation on Income from Equity and Debt Mutual Fund

Basic of Bitcoin Taxation in India