Deemed Dividend - Loan/Advance by Closely Held Company [Section 2(22)(e)]
# Section 2(22)(e) — Deemed Dividend: Loan/Advance by Closely Held Company
## Concept
Any loan or advance by a closely held company (private company / unlisted public company) to specified persons is treated as deemed dividend to the extent of Accumulated Profits of the company.
## Specified Recipients
Loan/advance to:
1. A shareholder holding 10% or more voting power (equity share capital), OR
2. Any concern/entity in which such shareholder has substantial interest (i.e., 20% or more share in that concern).
Deemed dividend is taxable in the hands of the shareholder (not the concern, even if loan is to the concern).
## Conditions / Key Points
1. Any payment by the company on behalf of or for individual benefit of such shareholder is also deemed dividend.
2. Repayment of loan/advance is irrelevant — once treated as deemed dividend, it remains so.
3. Shareholder here means any person (individual, HUF, firm, company, etc.) holding ≥10% voting power.
4. Exception: Loan given in the ordinary course of business (e.g., by a money-lending NBFC/company whose substantial business is lending) is NOT deemed dividend.
5. Limit = Accumulated Profits of the company on the date of loan (not entire loan amount).
## Companies Covered
Only "Company in which public is NOT substantially interested" — i.e., Private Company / Unlisted Public Company.
Worked example
### Example 1
Example 1 — Direct Loan to Shareholder: Mr. A holds 15% equity in Parle Pvt. Ltd. The company has accumulated profits of ₹ 5 lakhs and gives Mr. A a loan of ₹ 8 lakhs. Deemed dividend = ₹ 5 lakhs (limited to accumulated profits), taxable in hands of Mr. A. The balance ₹ 3 lakhs is a normal loan (not taxable).
### Example 2
Example 2 — Loan to Concern: Parle Pvt. Ltd. gives ₹ 4 lakhs loan to A & Co. (firm). Mr. A holds 12% in Parle and 25% in A & Co. Accumulated profits of Parle = ₹ 10 lakhs. Both conditions met. Deemed dividend = ₹ 4 lakhs, taxable in hands of Mr. A (not in hands of A & Co.).
### Example 3
Example 3 — Payment on Behalf: If Parle Pvt. Ltd. pays ₹ 2 lakhs directly to Mr. C (a third party) on behalf of Mr. A — taxable as deemed dividend in hands of Mr. A.
⚠️ Common exam mistakes
Applying 2(22)(e) to a public listed company — applies only to closely held companies.
Taxing the loan in the hands of the concern (firm) instead of the shareholder.
Ignoring the cap of accumulated profits and treating the entire loan amount as deemed dividend.
Forgetting that repayment of the loan does NOT undo the taxability of deemed dividend.
Missing the exception for loans by money-lending companies in the ordinary course of business.
Bare-Act text Section 2(22)(e) · Income Tax Act, 1961 · click to expand
Section 2(22)(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), 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 to any concern in which such shareholder is a member or partner and in which he has a substantial interest, or any payment by such company on behalf or for the individual benefit of such shareholder, to the extent the company possesses accumulated profits, shall be treated as dividend.