What is Section 2(22) E of the Income Tax Act?

Any advance or loan that a company provides to its shareholder is included in a Dividend under the Income Tax Act. The concept of Dividend is applied to all those corporate organisations where the involvement of the public is minimal. This concept of Dividend falls under Section 2(22)E of the Income Tax Act.

Under Section 2(22)E of the Income Tax Act, any revenue or income is seen as a dividend even if it is not distributed by one of the close companies. In this article we will discuss the taxation of dividends under Section 2(22)E of the Income Tax Act and its applicability.

Applicability of Section 2(22)E of the Income Tax Act

According to Section 2(22)E of the Income Tax Act, all the advances and loans that are provided by a company are dividends. The loans or advances are extended to the following listed personnels:

• A shareholder of the company who is a beneficial owner of the shares of the company and has at least 10% voting rights in the company. It should also be noted that the shares held by the shareholder are not liable for a fixed rate of dividend.
• Any situation in which the shareholder of the concerned company has a substantial interest.
• Either for the individual benefit of such a shareholder but to an extent that is specified by the law.

Other than the people listed above, loans that are provided to a holding company by a subsidiary company would also be included under Section 2(22)E of the Income Tax Act as dividend.

Taxation under Section 2(22)E of the Income Tax Act

• The dividend income will be liable for taxation in the year of either distribution or decoration or payment. Also, the shareholders will not be taxed while receiving dividends if the DDT(Dividend Distribution Tax) is not applied or is exempted by the income tax department. Earlier, the dividend was not taxed but the shareholders had to pay a minimal tax rate. But after April 1, 2020, the Dividend Distribution Tax was removed while distributing the dividends. In this way, the companies are exempted from some financial and compliance load.
• Dividend Distribution Tax is the tax that needs to be paid by the company at the time of distributing the dividend to the members. But as per the guidelines of the new Union Budget, the DDT will not be applied from April 1, 2020 onwards. And the tax will be paid by the individual investors on dividends and the burden of taxation of dividend has been shifted to the individuals by the government of India.
• DDT is the tax that is levied in addition to the Income Tax. All the companies that are present in India need to pay Dividend Distribution Tax(DDT). But DDT is not levied on any of the foreign companies. DDT will be levied whenever the amount of dividend is either declared or distributed or paid. It is applied to both final dividends and interim dividends. One does not have to pay DDT if he/she is of either the Special Economic Zone(SEZ) or the pension trusts or the International Financial Services Centre(IFSC).
• It has been decided by the government of India that it will take steps to ensure that DDT is levied on the acquired Dividend at a rate of 30% in case of closely held companies in order to persuade them not to hide the dividend in the form of advances or loans.

Determining factors

The taxability of dividends under Section 2(22)E of the Income Tax Act, depends on the following factors/ conditions:

• In case the receiving company is either public or listed, then the company that is paying can not be a closely held company.
• The loans or advances that are done by the company should not be performed in the ordinary course of business.
• When the company has been assigned as a creditor by the shareholder.
• The dividend will be confirmed to the extent of the total profits that are gained by a company(Total profit means all the commercial profits that a company gains till the date of payment or distribution or liquidation).

Exemptions Under Section 2(22)E of the Income Tax Act

The following are some of the transactions that will be exempted from taxes under the Section 2(22)E of the Income Tax Act:

• Inter-Corporate deposits
• The payments that the company makes in order to buy back its shares
• The process of distributing the shares to the demerged company by the resulting Company
• Successive dividends that a company pays to the limit of set-off for any loans or payments that were treated as dividends earlier. But the dividend will be liable for taxation if it is not set-off.

When the payments are made in the ordinary course of action for loans or advances in a business where the landing of money has a substantial role. But in order to operate such a business, one must possess the RBI License(Except NBFCs).