TAXATION OF DIVIDEND AND DEEMED DIVIDEND

TAXATION ON DIVIDEND & DEEMED DIVIDEND

1. What do you mean by Dividend?

A shareholder’s reward for investing in a company, dividends represent a portion of company’s profits distributed back to its owners. It’s essentially a financial return on your investment.

2. What are the different types of Companies?

The different types of Companies is as follows:

3. Taxability of Dividend

Dividend Income from Domestic Company or Foreign Company taxable in the hands of Shareholder at Normal Tax Rate.

4. What do you mean by Deemed Dividend?

In reality these payments are not Dividend but for the purpose of Income Tax they are treated as dividends. The objective is to plug the loopholes in tax provisions & to check avoidance.

Following transaction are deemed to dividends as per Income Tax.

Section 2(22)(a): Any distribution of assets

Section 2(22)(b): Any distribution of Debentures, Deposit Certificate etc.

Section 2(22)(c): Distribution of assets on Liquidation.

Section 2(22)(d): Reduction of share capital.

Section 2(22)(e): Loans or advances by closely held companies.

5. What is Section 2(22)(a)?

Section 2(22)(a) states that any distribution of Assets by a company to its shareholders to the extent the company possesses accumulated profits whether capitalized or not is to be treated as deemed dividend.

NOTES:

In case of Bonus shares, there is no release of assets hence, issue of bonus shares is not deemed as dividend.

When assets are distributed u/s 2(22)(a), the FMV of the asset on the date of distribution has to be taken for computing the dividend.

6. What is Section 2(22)(b)?

Section 2(22)(b) states that the following are to be treated as deemed dividend.

7. What is Section 2(22)(c)?

Section 2(22)(c) mandates that any distribution of assets by the company on liquidation to the extent to which company possesses accumulated profit whether capitalized or not.

8. What is Section 2(22)(d)?

Section 2(22)(d) mandates that any distribution to its shareholders by the company on reduction of its capital to the extent to which company possesses accumulated profit whether capitalized or not.

9. What is Section 2(22)(e)?

Section 2(22)(e) mandates that any payment by the company, not being a company in which the public are substantially interested of any sum/ payment:

1. By way of advance or loan to a shareholder, who is the beneficial owner of shares holding not less than 10% of the voting power, to the extent to which the company possesses accumulated profits.
2. To any concern in which such shareholder is a member or a partner and in which he has substantial interest, to the extent to which the company possesses accumulated profits.
3. By such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company possesses accumulated profits.

NOTES:

1. Concern means HUF, Firm, Company, AOP/ BOI.
2. Substantial interest means 20% or more voting power/ Profit sharing ratio at any time during the P.Y.
3. If loan is repaid or Company charges market rate of interest, then also loan is treated as deemed dividend.
4. Accumulated profit means profit as per Companies Act (means accounting profit).
5. Section 2(22)(e) is not applicable in case of trade advances means advance which is in the nature of commercial transactions.
6. If loan and advances given to concern then it is treated as deemed dividend in the hands of the concern but as per some court judgments its taxable in the hands of the shareholders.

DIVIDEND SHALL NOT INCLUDES:

Dividend shall not include: -

1. Any advance or loans given by Company in the Ordinary course of its business of money lending, where money lending is “substantial part” of the business. Substantial part of the business has to be understood on case-to-case basis. The relevant factors can be turnover, profits, manpower, capital employed etc.
2. Any dividend paid by a company, which is set off against the loan which has been deemed as dividend u/s 2(22)(e).
3. Shares allotted to shareholder of demerged Company by resulting company under Demerger.
4. Any distribution made u/s 2(22)(c)/2(22)(d) in respect of preference shares.

Difference between 2(22)(a)/(b)/(c)/(d) & 2(22)(e)