Issue: Whether gift or amount paid by a closely held company to relative of shareholder will be treated as deemed dividend?
In this article we are going to analyse a situation in which a company has gifted Rs. 50,000/- to one of shareholders’s son and AO has consider the gift as deemed dividend.
PROBLEM: Mr. X is a shareholder of M/s. X Ltd. , a closely held company. The other shareholders in the company are Mrs. X and father of Mr. X. Seventy five(75%) of the shares of X Ltd., are held by Mr. X. During the relevant previous year 2020-21, the company gifts Rs. 50,000/- to son of Mr. X. The Assessing Officer, while completing the assessment of the X Ltd.,wants to treat it as payments made on behalf of or for the benefit of the assessee and, therefore ,considers the same under Section 2(22)(e ) as deemed dividend in the hands of Mr. X. Discuss whether contention of the AO is tenable in law.
LET’S CONSIDER PROVISIONS OF SECTION 2(22) OF THE ACT, 1961
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Section 2(22) in The Income- Tax Act, 1995 (22) ” dividend” includes- (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; (b) any distribution to its shareholders by a company of debentures, debenture- stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933 , whether such accumulated profits have been capitalised or not; (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987 , by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. |
ANSWER; from above it is clear that for attracting provisions of Section 2(22)(e ) below mentioned three conditions have to be fulfilled;
- Company should not be a company in which public are substantially interested as per section 2(18);
- The shareholder should own benefit of at least 10% of the equity capital; and
- The company should possess accumulated profits at the time of making payment.
If above three conditions are satisfied then the provisions of Section 2(22)(e ) become applicable and payment made by company will be considered as deemed dividend in the hands of Mr. X.
The above conditions cover three types of payments
- Any payment of any sum by way of advance or loan to a shareholder;
- Any payment on behalf of a shareholder;
- Payment for the individual benefits of a shareholder
Please note That; if payment made by X Ltd., to son of Mr. X. , for an on belief of Mr. X or for the individual benefit of Mr. X ,then Rs. 50,000/- will be considered as deemed dividend.
As decided by various courts the fiction created for particular purpose cannot extended beyond the purpose for which it is intended. Legal fictions are created for definite purpose and are limited to the purpose for which the are created and should not be extended.
In the given case ,there is no case that the payment has been made to discharge any liability of Mr. X in the Company. Apart from Mr. X ,his wife and father are also shareholder of X Ltd. There is no material evidence to show that the payment was made on behalf and for thee benefit of Mr. X , on the basis of relationship alone we should not consider that the payment was made on behalf of Mr. X a shareholder. The other shareholders are also in relationship of the payee. In this case the provisions of Section 2(22)(e ) are not applicable.
CONCLUSION; from above it is cleared that for applicability of provisions of Section 2(22)(e ) of the Act,1961 is is important to proof tat the payment was made on behalf of and for the individual benefit of shareholder. Mere relationship between the company and the payee is not sufficient to brought payment under provision of Section 2(22)(e ) of the Act, 1961.
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DISCLAIMER; above write up is an attempt to share information and knowledge with our readers. The view expressed here are the personal views of the author and same should not be considered as a professional advice. It is advisable to consult with your tax consultant before acting on any part of this article.
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