Taxability of advance against dividend in closely held companies

In the case of private companies loans are taxed as dividend. But can one take advance against dividend?

Loans and advances given by all closely-held companies, that is, in the case of private sector companies whose shares were not listed in a recognised stock exchange on the last date of the relevant previous year, are taxable as dividend in the hands of dominant shareholders, that is, shareholders who have got at least 10 per cent stake in the company.

But this is subject to the condition that at the time of giving of loan the company had accumulated profits. If there were accumulated profits at the time such shareholder took loan, there of course would be a tax on such deemed dividend but the loan can be set off against his actual dividend entitlement when it is declared.

For example, if such a shareholder takes a loan of Rs 2 crore and the company thereafter sets off the loan against his dividend entitlement of Rs 3 crore, the position would be as follows:

deemed dividend taxable in his hands, Rs 2 crore; and

actual dividend on which dividend distribution tax is payable, Rs 1 crore.

But this is not a complete consolation because while DDT rate is 17 per cent, the maximum marginal rate for individuals is 34 per cent.


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