Someone Asked on a Yahoo Group- Answered by me on 12/11/06
There are two directors/members in a private ltd co .A having 99% shareholding and B having 1% shareholding. now the companies has iven by cheques advances to wives of A & B during F.Y.2003-04. The commissioner wants to disallowed and add both advances as deemed dividend u/s 2(22)(e). my contention is their wives neither director nor shareholders andhence no deemed dividend. he is saying funds surely given by them to directors and it has cometo theco again. *is his contention right and considered deemed dividend! A --99% and B-1% Shareholding.Please enlighten me with your expert opinion and in support of case laws if possible.
The deeming provision 2(22)(e) applies only if the company advances money or in money's worth to " a person or concern related to him " if he has more than 10% shareholding .
In your problem, one person has only 1% , so advance to his wife is out of Deeming provision.
As far as the other person having 99% shareholding is concerned, let us revisit the provision
Section 2(22)(e) states
"any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan
1. to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power,
2.or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)]
3. or any payment by any such company on behalf, or for the individual benefit, of any such shareholder,
to the extent to which the company in either case possesses accumulated profits;"
The commissioner perhaps wants to utilise the last i.e 3 rd one by interpreting that money advanced to WIFE of the shareholders is for his own benefit .That is a matter of fact. If you can present before him or any legal authority that the money advanced was not for personal benefit of either the shareholder or the WIFE , he can not take the money advanced as deemed dividend.
Also note that section 2(22)(e) nowhere mentions the word "Relative" , as such this should also be emphasized in our argument.
Remember another important point, its not that all money advanced shall be taken as deemed dividend. Its important to check if there is accumulated reserve with the company , only upto that amount , if all conditions are , satisfied can be termed as Deemed dividend.
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