Deemed Dividend Under Section 2(22)(e) in Budget 2018 Deemed Dividend Under Section 2(22)(e) in Budget 2018

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The Tax Publishers Deemed Dividend Under Section 2(22)(e) in Budget 2018 Srivatsan Ranganathan The learned author, while analysing Section 2(22)(e) of the Income Tax Act, makes certain interesting observations like, the shift of taxation to dividend distribution tax is expected to bring in greater restraint on misusing/abusing Section 2(22(e). It opens more onerous obligation in the hands of the private company before distribution of such loans, etc. He closes this write-up with an analysis of a Hyderabad Tribunal Bench decision dated 31-1-2018. Section 2(22)(e) has an extended definition of 'dividend' in the form of a deeming fiction, thereby deeming loans or borrowings given by a closely-held company to its shareholders having voting power of 10% or more or to the beneficial undertakings holding substantial interest of over 20% to be treated as dividend. Dividend as such is taxable in the hands of the company as dividend distribution tax. Since this was a provision to curb cornering of money in the guise of loans/borrowings from a closely- held company by its shareholders or key stake holders through their controlling entities, the section deemed the taxation in the hands of the share holders. So, cases of deemed dividend under Section 2(22)(e) had to meet normal TDS obligations under the Act due to exclusion out of dividend distribution tax under Section 115-O which is confirmed through Explanation to Section 115Q. This means that depending on the status of the loan recipient the tax rates ought to get applied, i.e., for an individual it will be on the basis of individual slabs and so on thus. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Deemed Dividend Under Section 2(22)(e) in Budget 2018

Srivatsan Ranganathan

The learned author, while analysing Section 2(22)(e) of the Income Tax Act, makes certain interesting observations like, the shift of taxation to dividend distribution tax is expected to bring in greater restraint on misusing/abusing Section 2(22(e). It opens more onerous obligation in the hands of the private company before distribution of such loans, etc. He closes this write-up with an analysis of a Hyderabad Tribunal Bench decision dated 31-1-2018.

Section 2(22)(e) has an extended definition of 'dividend' in the form of a deeming fiction, thereby deeming loans or borrowings given by a closely-held company to its shareholders having voting power of 10% or more or to the beneficial undertakings holding substantial interest of over 20% to be treated as dividend. Dividend as such is taxable in the hands of the company as dividend distribution tax. Since this was a provision to curb cornering of money in the guise of loans/borrowings from a closely- held company by its shareholders or key stake holders through their controlling entities, the section deemed the taxation in the hands of the share holders. So, cases of deemed dividend under Section 2(22)(e) had to meet normal TDS obligations under the Act due to exclusion out of dividend distribution tax under Section 115-O which is confirmed through Explanation to Section 115Q. This means that depending on the status of the loan recipient the tax rates ought to get applied, i.e., for an individual it will be on the basis of individual slabs and so on thus.