Friends, as you all are aware that if any loan or advance is given by any closely held company (Private Company) to:

  1. A shareholder who is having equal to or more than 10% of share capital in that company or;
  2. Any concern (ex. XYZ Pvt. Ltd.) in which such shareholder is having shareholding of equal to or more than 20% or;
  3. Any person who uses such money for the beneficial interest of such shareholder

Then such loan or advance to the extent of accumulated profits shall be considered as deemed dividend.

Now how to Plan under this section

  1. Just gift your shares to any relative (except spouse) just before the date on which loan is to be taken. Because this section is a deeming fiction and shareholding is seen as on the date when loan is granted. By this you shall successfully get the loan amount and this shall not be treated as deemed dividend.
  1. Hold the shares in the name of HUF and take loan in your own name.
  1. Just before the date of loan capitalise the reserves by the means of bonus shares and now loan can be provided. Because section says that “Loan shall be treated as deemed dividend upto the extent of accumulated profits” and when there are no accumulated profits then there shall be no question of deemed dividend.
  1. An another way to save from 2(22)(e)

(Standard Situation Based planning)

Suppose your company is having Reserves & Surplus of Rs. 16,00,000 an

Particulars Mr. P Mr. Q Mr. R Mr. S
% of holding 25% 25% 25% 25%
Other Income NIL NIL NIL NIL
Deductions u/s 80c 1,50,000 1,50,000 1,50,000 1,50,000
Loan by company 4,00,000 4,00,000 4,00,000 4,00,000

Here the dividend shall come in the hands of shareholders but what will happen that due to non-crossing of maximum limit not chargeable to tax, no taxability shall arise here.

It can be understood as:

Particulars Mr. P Mr. Q Mr. R Mr. S
Income from other source

(Deemed Dividend Income)

4,00,000 4,00,000 4,00,000 4,00,000
Deduction u/s 80c 1,50,000 1,50,000 1,50,000 1,50,000
Taxable Income 2,50,000 2,50,000 2,50,000 2,50,000
Tax Amount NIL NIL NIL NIL
NOT CROSSING CEILING LIMIT OF RS. 2,50,000 SO NO TAX EVEN ON DEEMED DIVIDEND

These small planning can be applied for small companies depending upon the situations.

Sanjeev Mittal-  sanjeevm301@gmail.com

More Under Income Tax

Posted Under

Category : Income Tax (28050)
Type : Articles (17778)
Tags : Section 2(22)(e) (61)

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