I am in the business of manufacturing customized furniture. I am also a Managing Director and hold 65% of the paid up shares in a Private Limited Company. A substantial part of my business is obtained from the Private Limited Company. The Private Limited Company passes advances received from its customers to me so I can execute the job-work. The Assessing Officer holds that such advances received by me from the Private Limited Company is in nature of loan and accordingly is deemed dividend within the meaning of Section 2(22)e of the Income Tax Act, 1961. Is this correct?
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Ssk Advisory
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Greetings from Ssk Advisory. We are happy to resolve your query.
In your case, the Private Limited Company is a company in which public are not substantially interested, you also hold more than 10% of the equity shares or voting rights in the company. The loan given to you is not the course of your business or the business of the company. Thus Section 2(22)(e) becomes applicable and Rs. 100000/- loan received by you is taxable as deemed dividend at normal rates of tax.
It is immaterial if you have repaid the loan.
Hope we have been able to solve your query. Please comment below in case of any other queries or questions.
I have received Rs. 100000/- as a loan from a Private Limited Company in which I hold 15% of equity shares. The profits of the company is Rs. 10,00,000. I have also repaid the loan. The loan is not connected to the business of the company and I took the loan from the company for my personal use. How will this transaction affect my total income?
Greetings from Ssk Advisory. We are happy to resolve your query.
In your case, you hold 65% of the paid up capital in the Private Limited Company. The Private Limited Company has passed advances received from its customers to you for execution of job-work.
Since, the Private Limited Company is not a company in which public are substantially interested, the provisions of Section 2(22)(e) are required to be examined.
Section 2(22)(e) applies to companies (not being a company in which public are substantially interested). When such company makes payment by way of an advance or a loan to a shareholder who is holding at-least 10% of share capital, then such payment is deemed to be dividend in the hands of shareholder.
In CIT v. Rajkumar (2009) 318 ITR 462 (Del), it was held that trade advance given to the shareholder is in nature of money transacted to give effect to a commercial transaction which would not amount to deemed dividend under Section 2(22)(e).
Thus, if you have received the payment for execution of work in course of commercial business transaction, it cannot be treated as dividend under section 2(22)(e) as per CIT v. Rajkumar (2009) 318 ITR 462 (Del).
CBDT in Circular 19/2017 dated 12.06.2017 has clarified that it is a settled position that trade advances which are in the nature of commercial transactions, would not fall within the word "advance" in Section 2(22)(e).
Hope we have been able to solve your query. Please comment below in case of any other queries or questions.