ROMANCING WITH INTERPRETATION OF DEEMED DIVIDEND WITH RECENT CASE LAW

ROMANCING WITH INTERPRETATION OF DEEMED DIVIDEND

Section 2 (22)

Section 2(22) has 5 clauses (a), (b), (c), (d) and (e) which specify various types of distributions and payments as dividend. Clauses (a), (b), (c) and (d) mainly cover cases of distributions which entail release of assets or create liabilities. While clause (e) covers cases of payments by way of loans or advances and which is the clause mainly dealing with deemed dividend as it is commonly understood and has been dealt with in this article

Section 2(22) starts with the words ” Dividend includes ………..”Thus the definition ofdividend is inclusive and not exhaustive

Section 2(22) of Income-tax Act, 1961 defines “dividend” and is the main section for taxation of Dividend. Unless a payment or distribution is covered by this definition, it can not be taxed as “dividend”. Once an amount is covered as dividend it will be also considered as income as Section 2(24) (ii) of the Act includes ‘dividend’ within the definition of ‘Income’.

Sec. 2 (22) (e)

Section 2(22)(e) has been held to be constitutionally valid in Navnitlal C. Javeri v. K.K.Sen, AAC [1965]56 ITR 198 (SC)

As it is clear, clause (e) applies only to companies in which public are not substantially interested i.e. to companies which are commonly known as closely held companies. Section 2(18) of the Act defines a “Company in which public are substantially interested”. Section 2(22)(e) does not apply to listed companies, government companies, section 25 companies, companies having no share capital and declared by Board, mutual benefit finance companies declared by Central Government to be a Nidhi or Mutual Benefit society, companies in which one or more co-operative societies hold at least 50% voting shares throughout the year, etc.

Does it mean only payment by cash/cheque or will it cover loan in kind also? Whether a goods loan will be covered? In M.D. Jindal v. CIT [1986] 28 Taxman 509 (Cal.) it was held that Section 2(22)(e) is applicable even if a loan is given in kind. Thus a loan of goods or other assets will also be covered by the clause and it is not necessary that the loan or advance must be given in cash only

The shareholder may be even a corporate entity. Loan given by a subsidiary company to a holding company will be covered by clause (e)

Whether an overdraft taken by a major shareholder from the company will be covered as deemed dividend? An overdraft taken by a shareholder from the company is treated as loan and taxable as dividend if conditions of section 2(22)(e) are satisfied—CIT v. K..Srinivasan [1963] 50 ITR 788 (Mad.).

In Walchand & co. Ltd. V. CIT,(1975)100 ITR 598(Bom) it was held that the onus to prove these facts lies on the assessee