Here’s a special post for some students who are preparing for professional exams. I am also from this community and therefore I though I should guide some of the new students on how they can memorize and understand some of the topics of Income Tax. In this post we will discuss on how you can memorize and at the same time understand the sections which deal with deemed dividend. Tax on all such deemed dividend shall be paid u/s 115 – O of the Income Tax Act.
The deemed dividend sections include 2(22)(a),(b),(c),(d),(e).
In this post we will understand how to memorize the sections alongwith some of the important or common points.
We will understand section 2(22)(a) to (d) together and section 2(22)(e) seperately.
Points to remember in section 2(22)(a) to (d):
- In all above sections the profit to be taken includes accumulated profit, whether capitalized or not.
- Capitalized or not means whether it is converted into bonus shares or capital in any other form.
- Accumulated profit in all sections is to be seen till the date of liquidation, distribution respectively.
- It is to be seen only to the extent of shareholding of the respective shareholder.
- On all the above deemed dividend DDT (dividend distribution tax) u/s 115-O is to be paid.
How to memorize this section’s??
2(22)(a) – Here you can understand that (a) stands for asset so 2(22)(a) means distribution of Asset by company, so when company distribute asset to shareholders it will be considered as dividend to the extent of accumulated profit whether capitalized or not.
2(22)(b) – Here (b) can can be used to remember Bonus to preference shareholders and Bonds or debenture to any shareholders. The calculations of amount of dividend is same as above.
2(22)(c) – This can be remembered as (c) for Closure of business. The accumulated profit in case of compulsory acquisition by government is to be taken only till 3 years prior to date of acquisition and not before that.
2(22)(d) – One can remember this (d) as Reduction of capital. In this section reduction of capital by way of buy back is not considered as we have specified section 115QA for that.
Now let’s understand 2(22)(e):
- It only applies to closely held company.
- It applies when a company provides advance to any of if shareholder directly/ indirectly or paying any expenses on behalf or for the benefit of the shareholder, holding 10% or more of the shares of the company.
- It doesn’t matter if the loan has been repaid, even then it will be considered deemed dividend.
- It is taxable in the hands of shareholder and not company.
- It will be taxable even if the advance is given indirectly.
- Section 2(22)(e) will not be applicable if advancing loan is a substantial part of companies business and loan was advanced in the course of business.
- In this section only accumulated profit is to be seen and not capitalized profit as in other section.
- It to be taken fully and not the extent of shareholding of shareholder.
I Hope this helps many of the students in their exams. Do share it with your fellow students and give your feedback.
If the students have any tax related query they can submit the same under Ask an expert option and I will surely try to explain them the topic in easy and practical manner.
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