2.6. [ SEC. 2(22)(e) ] : PAYMENT BY WAY OF ADVANCE OR LOAN TO SHAREHOLDERS
(1) . any payment by a company, not being a company in which the public are substantially, [ i.e. closely held company] (2) . any sum made after the 31st day of May, 1987 (3.) by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares holding not less than 10% of the voting power,
(4) to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter referred to as concern)
"person who has a substantial interest in the company", in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without aright to participate in profits, carrying not less than 20% of the voting power; at any time during the relevant PY. [ Sec. 2(32)].
(5) any payment by any such company on behalf, or for the individual benefit, of any such shareholder (6) o the extent to which the company in either case possesses accumulated profits;
But Dividend does not include …
(i) any advance or loan made to a shareholder 58[or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;
(ii) 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.
What is Capitalized Accumulated Profit : Where the accumulated profit is capitalized by issue of Bonus Shares.
This section is applicable only to closely held company
It may be noted that this section uses the word payment instead of distribution.
On analyzing it may be said that any borrowing by a registered shareholder who is having substantial interest, such borrowing shall be treated as dividend.
“Concern” means a Hindu Undivided Family, or a Firm or a Association Person or a Body of Individuals or a Company.
Ascertainment of accumulated Profit is done at the time of each and every loan.
The company is not liable to pay dividend distribution tax where payment is made u/s 2(22)(e) also the payment u/s 2(22)(e) is not exempt u/s 10(34) . The Company is also liable to deduct Tax at Source u/s 194.
Repayment of Loan shall not have any impact on applicability of section 2(22)(e).
For the purpose of Sec. 2(22)(e), accumulated profits get reduced by the amount deemed as dividend u/s 2(22)(e) even if no adjustment is made in the books of account.