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,
OR
(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)].
OR
(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.
Note :
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This section is applicable only to closely held company
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It may be noted that this section uses the word payment instead of distribution.
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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.
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“Concern” means a Hindu Undivided Family, or a Firm or a Association Person or a Body of Individuals or a Company.
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Ascertainment of accumulated Profit is done at the time of each and every loan.
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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.
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Repayment of Loan shall not have any impact on applicability of section 2(22)(e).
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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.
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