Deemed Dividend and TAX LIABILITY ON DIVIDEND

Dividend generally means the sum paid to or received by the shareholder out of the
total distributed profits of the company in proportion to his shareholding in that
company. This kind of income is taxable income under income tax act and comes
under the ambit of income from other sources.
Whereas the word deemed has not been defined anywhere.
However, income tax act deals with deemed dividend under section 2(22) (a) to
2(22) (e), which talks about the income which is considered as dividends.
The following provisions of section 2(22) of income tax act define the term
deemed dividend:
(a) Any distribution by the company of the accumulated profits, whether
capitalized or not, and if such distribution entails the release by the company to
any of its shareholders of all or any part of the assets of such company;

A company issued redeemable preference shares of Rs. 3 lacs to its equity

shareholders as bonus shares on May 1, 2013 by capitalizing general reserve. X,
one of the shareholders, received preference shares of Rs. 30,000 as bonus
shares. These were redeemed on November 30, 2019.

(b) Any such distribution to shareholders by the company of debentures,

debentures stock, or deposit certificates in any form, which can be with or without
interest, and any distribution to its preference shareholders of shares by way of
bonus, to extend to which company possesses accumulated profits;
A company has issued Debenture stock of RS 15,00,000 to its preference
shareholders and on the date the company has accumulated profits of Rs 6,00,000.
SO how much will be deemed dividend?
(c) Any such distribution by the company made to its shareholders by way of
liquidation, to the extent to which company accumulates profits immediately
before its liquidation;
Accumulated Profit – Rs 10,00,000 at the time of liquidation
Rs 50,00,000
(d) Any such distribution by the company to its shareholders by reduction of its
capital, to such extent to which company possesses accumulated profits, which
arose after the end of previous year;
50,00,000 by 10,00,000 accumulated profit Rs 5,00,000.
(e) 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 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, 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) 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;

It is important to note here that the beneficiary of deemed

dividend should be the shareholder of the company, the
Hon’ble Supreme Court while hearing multiple appeals also
conclusively held that the provisions of the deemed dividend
will not apply to the borrower of the company and shall only
attract to the shareholder of the company.
We can simplify the above provisions for constituting dividend under
the following heads:

 Distribution made by a company out of all the accumulated

profits (earnings).
 Distribution made by a company out of debentures, debenture
stock or deposit certificates.
 Distribution made by a company out of the liquidation of
company’s asset.
 Distribution made by a company out of reduced capital to
extend to which company posses accumulated profit.
 Any other payment made by the company (which represents
part of assets of the company or otherwise) to shareholder
either by way of advance or loan and where such shareholder
is the beneficial owner of shares of the company.

ut dividend does not include the following:

 In the event of liquidation, the shareholder will not be entitled to participate in surplus
assets arising out of the liquidation process, it is excluded from liquidation.
 If a company’s substantial part of the business is money lending, then any advance or
loan given to shareholder by the concerned company in the ordinary course of business
would not be a taxable dividend.
 Any such dividend is not a taxable dividend where the company against any loan sets
off the amount or advance to such extent, which was earlier, treated as dividend within
the meaning of subclause (e).
 Where any such payment is made by the company for buyback of its own share from
shareholder according to section 68 of the Companies Act 2013.
 Any Distribution of shares made by the company to shareholder out of demerger of the
company (whether or not there is any reduction in capital or not).
 Amendments to Deemed Dividend Tax
 The finance bill of 2018 proposed to levy tax on Deemed
Dividend as Dividend Distribution Tax (DDT) under section
115-O of Income Tax Act, 1961 at rate of 30% from
companies to prevent hiding of dividends in form of
loans/advances.