DEEMED DIVIDEND U/S 2(22)

DEEMED DIVIDEND U/S 2(22)

A dividend is a distribution of profits by a company to its shareholders. It is that profit which company decides to not retained but to distribute among the shareholders of company.

Deemed dividend for taxation of dividend includes, normal dividend as well as deemed dividend. As per Section to 2(22) of Income Tax Act, 1961 following distribution by a company to its shareholders are deemed as dividend.

Section 2(22)(a): Distribution on Release of Company's Asset:

Any distribution by a company to its shareholders which leads to release of company’s assets whether in part or full is considered as deemed dividend to the extent of accumulated profits whether capitalized or not.

Let’s understand this section with the help of an illustration;

                                    Balance sheet of ____ Ltd.

Liability Amount Asset Amount
Share Capital (Includes Bonus Shares of Rs 2 Lac) 7,00,000 Assets 10,00,000
Reserves and Surplus 2,00,000 _ _
Other Liabilities 1,00,000 _ _
Total 10,00,000 Total 10,00,000

Company distributed assets having Book Value of Rs. 1,00,000 to its shareholders. Calculate the Deemed Dividend u/s 2(22)(a) having Market Value

1. 3,00,000

2. 4,00,000

3. 6,00,000

Solution:

Accumulated Profit of the Company (Whether Capitalized or Not)

– Reserves and Surplus + Bonus Shares

– 2,00,000 + 2,00,000 = 4,00,000

Deemed Dividend u/s 2(22)(a) shall be as follows –

Market Value Deemed Dividend
3,00,000 3,00,000
4,00,000 4,00,000
6,00,000 4,00,000

Note: Dividend deemed u/s 2(22)(a) shall be taxable in the hands of the company hence it is exempt in the hands of shareholders u/s 10(34).

Section 2(22)(b): Distribution of Debt Item to Shareholders and Bonus to Preference Shareholders:

Any distribution of Equity or Debt item by way of Bonus to preference shareholders is deemed as dividend to extent of accumulated profits whether capitalised or not.

Any distribution of Debt Item by way of Bonus to equity shareholders is deemed as dividend to the extent of accumulated profit whether capitalised or not.

Note:

1) Debt Item includes debenture, debenture stock or deposit certificate in any form.

2) Bonus shares given to equity shareholders are not treated as a dividend.

Section 2(22)(c): Distribution on Liquidation of Company:

Any resolution made to the shareholders of a company on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether it is capitalised or not, is considered as deemed dividend.

Let’s understand this section with the help of an illustration:

                                      Balance Sheet of ____ Ltd.

Liability Amount Asset Amount
Share Capital (Includes bonus shares of Rs. 70000) 3,00,000 Assets 5,00,000
Reserves and Surplus 2,00,000
Total 5,00,000 Total 5,00,000

Solution:

Accumulated Profit of the Company (Whether Capitalised or Not)

– Reserves and Surplus + Bonus Shares

– 70,000 + 2,00,000 = 2,70,000

As per the above illustration, on liquidation the Company distributes total Assets of Rs 5,00,000 to its shareholders Rs. 2,70,000 will be considered as Deemed Dividend.

Note:  any distribution made out of the profits of the company after the date of liquidation cannot considered as dividend. It is the repayment towards the capital.  Accumulated profits include all profits of the company up to the date of liquidation whether capitalised or not.  But where liquidation is consequent to the compulsory acquisition of an undertaking by the government or by any Corporation owned or controlled by the government, the accumulated profit does not include any profits of the company prior to the three successive previous years immediately preceding the previous year in which the acquisition to play subject to certain exceptions.

Section 2(22)(d): Distribution on Reduction of Share Capital:

Any distribution by company to each shareholder at the time of reduction of share capital is deemed as dividend to the extent of accumulated profits whether capitalised or not.

Let’s understand this section with the help of an illustration:

                                             Balance Sheet of ____Ltd.

Liability Amount Asset Amount
Share Capital (30,000 shares of Rs. 10 each) 3,00,000 Assets 5,00,000
Reserves and Surplus 2,00,000
Total 5,00,000 Total 5,00,000

Solution:

The Company reduces its share capital from Rs. 10 to Rs. 2 per share by returning Rs. 8 per share. Hence, the company distributes Rs. 2,40,000 (i.e. 30,000*8 per share) to shareholders out of which Rs. 2,00,000 i.e. the amount of reserves will be considered as Deemed Dividend.

Section 2(22)(e): Loans and Advance by a Closely Held Company:

In the following cases any loan or advance given by a closely held company is deemed as dividend to the extent of accumulated profits whether capitalised or not to,

1) Loan or Advance given to shareholder holding not less than 10% of voting power.

2) Loan or Advance given to any concern in which such shareholder has a substantial interest of not less than 20% of stake.

3) Loan or Advance given to any person for the benefits of such shareholder.

Note:

Any loans or advance given in the ordinary course of its business of money lending shall not be deemed as dividend under section 2 (22) (e).

Show Comments