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Deemed Dividend

DEEMED DIVIDEND

Dividend means “Any amount distributed by the company to its shareholders from the accumulated profits earned by it”. However, under Income Tax Act, 1961 dividend includes deemed dividend.

Section 2(22) deals with the concept of dividend. As per Section 2 (22) “dividend” includes following payments or distribution to the extent of accumulated profits of the company: –

  • Any distribution if such distribution entails the release of all or any part of the assets of the company ;
  • Any distribution of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of bonus shares ;
  • Any distribution made on liquidation of a company except where the shareholder is not entitled to participate in the surplus asset in the event of liquidation and shares were issued to him for full cash consideration.
  • Any distribution on the reduction of capital of a company except where the shareholder is not entitled to participate in the surplus asset in the event of liquidation and shares were issued to him for full cash consideration.
  • Any payments in the form of loans or advances made by a closely-held company (i.e. a company in which public are not substantially interested) to its shareholder who is the beneficial owner of shares holding not less than 10% of voting power in such company or to any concern in which such shareholder is a member or a partner and which he has a substantial interest or any payment made by on behalf of such shareholder for his/her individual benefit. However, such payment would not amount to dividend, if such payment is made in the ordinary course of business and money lending is substantial part of the company’s business.

But following amounts are been excluded from the definition of dividend: –

  • Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956;
  • Any distribution of shares made in accordance with the scheme of demerger by the resulting company to the shareholders of the demerged company whether or not there is a reduction of capital in the demerged company.
  • Any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off.

CONCLUSION: – In case if a distribution falls within the scope of clause (a) to Clause (d) then it shall attract “Dividend Distribution Tax” which will be pay by the company and such dividend will be exempt in the hands of shareholders. And in case of clause (e), it will be treated as deemed dividend and will be chargeable to tax in the hands of shareholders. Company need not to pay any DDT on it but have to deduct TDS under section 194.

DEEMED DIVIDEND

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