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Concept of deemed dividend and tax thereon must be discontinued as it appears not effective.

Income Tax - By: - CA DEV KUMAR KOTHARI - Dated:- 9-2-2018 - The Finance Bill 2018: Present provisions: Section 2(22)(e),115O and 115 Q of the Income-tax Act,1961 Easy compliance and ease of doing business: When policy of the government is to accept return of income in most of cases and to provide ease of doing business, the concept of deemed dividend is against both. It is highly complex and one cannot be sure whether the provision of deemed dividend is applicable or not. Furthermore, in view o .....

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in will be difficult to maintain and financial operations will be difficult. Closely held companies: The concept of deemed dividend is applicable only in case of closely held companies which are private or limited companies in which controlling stake is held by family members, relatives, friends and associates etc. who have joined and held some stake in company. These companies are in nature of special purpose vehicles to carry business by making association of such persons who hold shares in co .....

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rent account or mutual accommodation. The department raises disputes in many cases including in respect of business advances. The amount received by shareholder from company is on capital account and is refundable, it is his liability. It is not of revenue or income nature in hands of shareholder. Change in circumstances and practices: Concept of deemed dividend must end because there are several changes in various related aspects. For example: Concept of deemed dividend had importance when rate .....

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strictions on remuneration which company could pay to shareholder who worked as director of company. Now restrictions have been relaxed and companies are in position to pay higher remuneration to its directors who are also shareholders. More distribution- with changes in times companies who earn well, and accumulate surpluses are declaring higher dividend as compared earlier. Tax is levied on company when company declare dividend to shareholders. What is deemed dividend: When a closely held comp .....

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ect to litigation and very difficult work. Budget proposal: The effect of proposals in the budget in this regard is that if provision of deemed dividend is invoked, company shall pay tax on such deemed dividend @ 30% and applicable other levies. Earlier such deemed dividend was taxed in hands of shareholder in normal computation and at applicable rate of tax. Reasons for proposal: As per memorandum The taxability of deemed dividend in the hands of recipient has posed serious problem of the colle .....

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or company to find out beneficial owners. A shareholder may hold shares as unregistered in his name, or in name of nominees. The company will only be able to check registered shareholders and any shareholder if a declaration has been filed by shareholder about beneficial holding. In view of above, the honourable Finance Minister must check: How much deemed dividend has been taxed in last five years and tax has been collected thereon. How many disputes have taken place in which revenue won the ca .....

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of accumulated surplus as apparent from audited accounts. Amount of accumulated surplus after making adjustments for notes on accounts for un-provided expenses and liabilities. Amount already deemed as dividend to be deducted. Amount of accumulated surplus till date of giving loan or advance All above and many other issues are highly contentious and time consuming to check and find correct position. Therefore, neither difficulties nor litigation is likely to be reduced simply by making companie .....

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ore, it is requested to the honourable Finance Minister to drop the proposal and also to delete S. 2.22.e. The proposed provisions are reproduced below with highlights added: From THE FINANCE BILL, 2018 38. Amendment of section 115-O. In section 115-O of the Income-tax Act,- (a) in sub-section (1), the following proviso shall be inserted, namely:- Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this sub-section shall have effect as if for the words .....

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relating to tax on distributed profits of domestic companies. It is proposed to insert a proviso to sub-section (1) of the said section so as to provide for levy of tax at the rate of thirty per cent. on distributed profits in the nature of dividend under sub-clause (e) of clause (22) of section 2. It is further proposed to insert a proviso to sub-section (1B) of the said section 115-O so as to exclude the amount of dividend under sub-clause (e) of clause (22) of section 2 from the applicabilit .....

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