This article explores the nuances of deemed dividends, covering their definition, applicable transactions, and taxation implications. Using a question-and-answer format, we aim to demystify the complexities surrounding deemed dividends, shedding light on their significance within the Indian tax framework.
Q.1 What is a dividend, and how do shareholders receive it?
Ans – A dividend is a distribution of a portion of a company’s profits to its shareholders. Shareholders typically receive dividends in the form of cash or additional shares as a return on their investment.
Q.2 What does Section 194 of the Income Tax Act, 1961, cover regarding dividends?
Ans – Section 194 outlines provisions related to the deduction of TDS (Tax Deducted at Source) on dividends. It mandates that any person, including a company, responsible for paying dividends must deduct TDS before making the payment to the recipient (shareholder) if the total amount of dividend exceeds Rs. 5,000 in a financial year.
Q.3 What does “deemed” mean in the context of taxes?
Ans – “Deemed” means considered as. In tax laws, it is used when something is seen as true or having a specific status, even if not clearly stated. For example, “deemed dividends” are treated as dividends for tax purposes, even if not officially declared.
Imagine you are in a club, and the club has some rules about sharing snacks. Now, let’s say the club gives you some snacks, but instead of calling them “snacks,” they use the word “deemed snacks.” This means, even if they don’t officially say these are snacks, they’re treating them like snacks for the rules.
Similarly, in taxes, when a company gives certain benefits or money to its owners (shareholders), even if they don’t officially call it “dividends,” the tax rules might still consider it as if they did. So, it’s like calling it a “deemed dividend” because, for tax purposes, it’s treated as if it were a dividend. This helps make sure everyone follows the rules and pays the right amount of taxes.
Q.4 What transactions are treated as deemed dividends under Section 2(22) of the Income Tax Act, 1961?
Ans – Various transactions are treated as deemed dividends, including:
A- Loan or Advance to Shareholders – If a company provides a loan or advance to a shareholder, any payment made by the company in the form of interest on such a loan is considered a deemed dividend.
This includes any loan or advance made to a concern in which the shareholder has a substantial interest.
B- Expenditure for the Benefits of Shareholders – If a company incurs an expenditure for the benefit of its shareholders or their associates, such as payment of personal expenses, the amount is treated as deemed dividend.
C- Distribution of Assets to Shareholders – Any distribution of assets by a company to its shareholders, whether in cash or kind, is considered a deemed dividend.
D- Transfer of Shares at Less Than Market Value – If a company transfers its shares to its shareholders at a price lower than the fair market value, the difference is deemed to be a dividend.
Q.5 How is the taxation of deemed dividends governed in India?
Ans – The taxation of deemed dividends is governed by Section 115-O of the Income Tax Act. According to this section, deemed dividends are subject to Dividend Distribution Tax (DDT) at the hands of the company making the payment. The DDT is levied at a specified rate on the aggregate of the deemed dividends declared, distributed, or paid during the financial year.
Conclusion:
The rule of “deemed dividends” ensures that if a company provides money or benefits to its shareholders in ways other than regular dividends, tax authorities treat it as a dividend. This rule prevents people from trying to get around dividend taxes by receiving company payments in different forms.
This rule is in place so that people can’t try to be clever and get money from a company in a tricky way just to avoid paying the right amount of taxes. It’s a way to make sure everyone is playing fair with their taxes.
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We are open for comments and suggestions. The above article has been prepared as by Ms. Priyanka Gaud (priyanka.gaud@abacussolutions.co.in) and reviewed by Mr. Suyash Tripathi (suyash.tripathi@abacussolutions.co.in)
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