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A closely-held Indian private limited company advanced Rs 25 lakh to a majority-shareholder director (holding 40 per cent of the voting power) in April of the previous year, on the books as a personal loan repayable over three years at 6 per cent per annum. The company has accumulated profits of Rs 18 lakh at the advance date, general reserve of Rs 12 lakh, and pro-rated current-year profit of Rs 6 lakh. The tax audit for the year picks up the advance under Form 3CD Clause 22 (amounts covered under Section 269SS or 269T). The CA advisor flags a Section 2(22)(e) exposure — the loan looks like a shareholder-benefit advance rather than a commercial transaction, the shareholder holds well above the 10 per cent voting-power threshold, and the accumulated profits at the advance date fully absorb the Rs 18 lakh cap. Left unaddressed, the scrutiny cycle produces an addition of Rs 18 lakh as deemed dividend under Section 2(22)(e), tax at the shareholder's slab rate (roughly Rs 5.4 lakh at 30 per cent) plus a Section 270A under-reporting penalty, or — in the recharacterisation risk case — a Section 115BBE plus Section 271AAC exposure that compounds to approximately Rs 15.4 lakh on the same Rs 18 lakh addition. The company had not deducted TDS at 10 per cent under Section 194 at the advance date because the treatment was booked as a loan rather than a distribution.
Section 2(22)(e) treats as dividend any payment by a closely-held company (a company in which the public are not substantially interested — the private company universe) by way of advance or loan to (a) a shareholder holding not less than 10 per cent of the voting power, or (b) any concern in which such shareholder is a member or partner and has substantial interest (20 per cent or more), or (c) any payment by the company on behalf of or for the individual benefit of such shareholder. The addition is capped at the company's accumulated profits computed under Section 2(6C) read with Explanation 2 — general reserve plus pro-rated current-year profit at the advance date, excluding capitalised items such as revaluation reserve and share premium. CBDT Circular No. 19/2017 dated 12 June 2017 carves out trade advances and commercial transactions in the ordinary course of business — an advance for the company's business purposes, an advance receivable in the normal course, an advance to acquire property for the company, and a security deposit against use of assets by the company. The Finance Act 2020 abolished DDT under Section 115-O and abolished the shareholder-side Section 115BBDA — from FY 2020-21, the deemed dividend is taxed in the shareholder's hands at slab rates under Section 56(2)(i), with the company deducting TDS at 10 per cent under Section 194 at the advance date. Section 271AAC carries the 10 per cent penalty exposure on any Section 115BBE recharacterisation.
A shareholder-advance register maintained through the year — every advance to a director, a promoter, a family member of a promoter, a concern in which a promoter has substantial interest (a partnership firm, an LLP, or another company with promoter equity holding of 20 per cent or more) captured with the advance date, quantum, purpose, and category (shareholder-benefit loan, trade advance under Circular 19/2017, security deposit against a lease, or advance for company business). A quarterly accumulated-profits computation under Section 2(6C) read with Explanation 2 to Section 2(22) — general reserve, retained earnings, pro-rated current-year profit up to the quarter-end, excluding capitalised items — with the running cap available for any deemed-dividend addition. A Section 194 TDS deduction workflow at the advance date for every shareholder-benefit loan that does not qualify for the Circular 19/2017 carve-out, at 10 per cent of the advance quantum subject to the Rs 5,000 threshold. A CA scoping memo before Form 3CD sign-off that walks the shareholder-advance register against the Section 2(22)(e) triggers and documents the trade-advance defence for every advance the assessee is not treating as deemed dividend.
The shareholder-advance register is closed at quarter-end with the deemed-dividend exposure classified against the accumulated-profits cap and the Section 194 TDS deducted at each advance date. Form 3CD Clause 22 and Clause 31 disclosures reconcile against the register. The illustrative Rs 25 lakh advance to the majority-shareholder director is treated as Rs 18 lakh deemed dividend under Section 2(22)(e) with TDS of Rs 1.8 lakh deducted at the advance date, the balance Rs 7 lakh continuing as a book loan outside Section 2(22)(e). The shareholder claims TDS credit in the return of income and pays the balance tax at slab rates (roughly Rs 3.6 lakh at 30 per cent net of TDS credit). The recharacterisation risk under Section 68 or Section 69 with Section 115BBE plus Section 271AAC compounded exposure is closed by the documented advance-agreement, the market-rent benchmarking on the security deposit, and the through-the-year deduction of TDS under Section 194.
The private company advanced Rs 25 lakh to a majority-shareholder director in April for a personal property purchase, on the books as a personal loan repayable over three years at 6 per cent per annum. The CA reviewing Form 3CD Clause 22 flags a Section 2(22)(e) exposure — the loan looks like a shareholder-benefit advance rather than a commercial transaction, the director holds 40 per cent of the voting power (well above the 10 per cent threshold), and the company has Rs 18 lakh of accumulated profits at the advance date.
The finance manager wants to understand what the CA means before signing the audit report. Loan on the books, six per cent coupon, repayment schedule — how does the tax authority get to call it a dividend?
The quick answer
Section 2(22)(e) is an anti-avoidance provision that treats a loan or advance by a closely-held (private) company to a substantial shareholder as if it were a dividend distribution — irrespective of the loan character on the books. The trigger has three limbs — an advance to a shareholder holding 10 per cent or more of the voting power, an advance to a concern (partnership firm, LLP, or another company) in which such a shareholder has substantial interest of 20 per cent or more, or a payment by the company on behalf of or for the individual benefit of such a shareholder.
The deemed-dividend addition is capped at the company’s accumulated profits computed under Section 2(6C) read with Explanation 2 to Section 2(22) at the date of the advance. Since the Finance Act 2020 abolition of DDT, the deemed dividend is taxed in the shareholder’s hands at applicable slab rates under Section 56(2)(i), with the distributing company deducting TDS at 10 per cent under Section 194 at the advance date. The trade-advance carve-out under CBDT Circular No. 19/2017 dated 12 June 2017 excludes genuine commercial transactions from the deeming — the evidentiary burden of the commercial-transaction defence sits with the assessee.
Trigger 1 — a closely-held (private) company
Section 2(22)(e) applies only to a company in which the public are not substantially interested — the private company universe. A widely-held public company or a listed company falls outside the deeming. The mid-market controller’s exposure surface is therefore the entire private-limited-company estate, including private subsidiaries of a listed holding company where the immediate distributing entity is itself private.
Group structures where a director is a common shareholder across two or more private companies — a common promoter-family pattern — are particularly exposed. An inter-company loan from Company A (private) to Company B (private, in which the same promoter holds 40 per cent) can be caught under the second limb of Section 2(22)(e) if the promoter’s holding in Company A is above 10 per cent, treating the Company B advance as deemed dividend in the promoter’s hands to the extent of Company A’s accumulated profits. This is the recurring exposure surface behind the related-party disallowance walkthrough — a Section 40A(2)(b) disallowance on one side and a Section 2(22)(e) deemed-dividend on the other, on the same underlying transaction.
Trigger 2 — the 10 per cent voting-power shareholder or 20 per cent concern
The shareholder threshold is 10 per cent of the voting power (not 10 per cent of the equity capital by face value). Preference shares carrying voting rights at the AGM count; preference shares with a fixed rate of dividend and no participation right are explicitly excluded from the shareholder count by the parenthetical in Section 2(22)(e).
The concern threshold is 20 per cent — a partnership firm, an LLP, or another company in which the 10 per cent shareholder has a member’s interest or a partner’s interest of 20 per cent or more. The classic caught pattern is a promoter holding 40 per cent of Company A (advancing money) and 30 per cent of a family LLP (receiving the advance) — the LLP is a concern in which the 40 per cent Company A shareholder has substantial interest, and the advance is deemed dividend in the Company A shareholder’s hands to the extent of Company A’s accumulated profits. The specified domestic transaction (SDT) under Section 92BA walkthrough is the sibling treatment of the transfer-pricing overlay on the same related-party estate.
Trigger 3 — the accumulated-profits ceiling under Section 2(6C)
The deemed-dividend addition is capped at the company’s accumulated profits at the date of the advance — not at the balance-sheet reserves-and-surplus figure. Explanation 2 to Section 2(22) defines accumulated profits to include all profits up to the date of the advance, including pro-rated current-year profit computed up to that date. Capitalised items — revaluation reserve, share premium, unrealised capital gains not credited to the P&L — are excluded. General reserve, retained earnings, and pro-rated current-year profit are included.
Illustrative arithmetic on the Rs 25 lakh April advance — the company’s audited balance sheet at 31 March of the previous year shows general reserve Rs 12 lakh and share premium Rs 4 lakh. The pro-rated current-year profit for April (one month of a Rs 72 lakh full-year projected profit) is roughly Rs 6 lakh. The accumulated-profits figure at the April advance date is Rs 12 lakh general reserve plus Rs 6 lakh pro-rated April profit — Rs 18 lakh — the share premium Rs 4 lakh is capitalised and excluded. The Section 2(22)(e) deemed-dividend cap is Rs 18 lakh, and the balance Rs 7 lakh of the Rs 25 lakh advance remains a book loan outside the deeming.
Trigger 4 — the trade-advance carve-out under Circular 19/2017
CBDT Circular No. 19/2017 dated 12 June 2017 codifies a line of Supreme Court and High Court rulings that trade advances in the nature of commercial transactions do not fall within the deeming under Section 2(22)(e). The circular gives four illustrative examples — an advance made by the company for its business purposes, an advance in the pursuit of business receivable in the normal course, an advance to enable the shareholder company to acquire property for the assessee company, and a security deposit against use of assets by the assessee company.
The evidentiary burden of the commercial-transaction defence sits with the assessee. A shareholder-owned property leased to the company on which the company pays market rent — where the company has advanced a Rs 10 lakh security deposit against the lease — is a routine commercial arrangement outside Section 2(22)(e), provided a written lease agreement, a market-rent benchmarking note (a broker or valuer certificate on comparable rents for similar property in the same locality), and a documented monthly rent-payment schedule are all on file. Without those three documents, the AO will recharacterise the security deposit as a shareholder-benefit loan and pull it into Section 2(22)(e).
The recurring failure pattern in the mid-market file is not the arrangement itself — most lease arrangements between a shareholder-owned property and the company are genuine — but the missing documentation trail. The lease agreement is often verbal, the rent benchmarking is never done, and the rent payment is booked as an ad-hoc journal entry rather than a monthly bank transfer. The AO’s defence-of-recharacterisation is that the audit trail does not support the commercial-transaction claim, and the security deposit accordingly falls back into the deemed-dividend net.
Trigger 5 — DDT abolition and the shareholder-side slab regime
The Finance Act 2020 abolished DDT under Section 115-O with effect from 1 April 2020 (FY 2020-21 onwards). Before the abolition, DDT was payable by the distributing company at an effective rate of approximately 20.56 per cent (15 per cent basic plus applicable surcharge and cess), and the dividend was exempt in the shareholder’s hands under Section 10(34). Section 115BBDA — which taxed dividend income above Rs 10 lakh at a flat 10 per cent in the shareholder’s hands from AY 2017-18 to AY 2020-21 — was correspondingly removed as infructuous.
From FY 2020-21, the deemed dividend under Section 2(22)(e) is taxed in the shareholder’s hands at applicable slab rates under Section 56(2)(i) as income from other sources. For an individual shareholder-director in the 30 per cent slab, the effective tax on a Rs 18 lakh deemed-dividend addition is approximately Rs 5.4 lakh plus surcharge and cess. The distributing company must deduct TDS at 10 per cent under Section 194 on the deemed-dividend quantum at the time of the advance (subject to the Rs 5,000 threshold and the higher 20 per cent no-PAN default under Section 206AA), and the shareholder claims credit for the TDS in the return of income. See the TDS Section 194 dividend reconciliation walkthrough for the deeper treatment of the Section 194 deduction and the deposit-and-return cadence.
Trigger 6 — Section 271AAC recharacterisation exposure
The base tax exposure on a Section 2(22)(e) addition is the shareholder’s slab-rate liability on the deemed-dividend quantum plus the Section 270A under-reporting penalty (50 per cent of tax on the under-reported income, escalating to 200 per cent for misreporting). The upside-case exposure sits under Section 271AAC — if the AO recharacterises the advance as unexplained income under Section 68 (cash credit) or Section 69 (unexplained investment) rather than dividend income under Section 56(2)(i), the Section 115BBE regime applies (flat 60 per cent tax plus 25 per cent surcharge plus 4 per cent cess, effective rate approximately 78 per cent) together with a Section 271AAC 10 per cent penalty on the Section 115BBE tax.
On the illustrative Rs 18 lakh recharacterised addition, the compounded exposure is approximately Rs 14 lakh in tax plus roughly Rs 1.4 lakh in penalty — against a base Section 56(2)(i) plus slab exposure of roughly Rs 5.4 lakh on the same quantum. The recharacterisation risk is not academic — a poorly documented shareholder advance without a signed loan agreement, an interest coupon at arm’s length, a repayment schedule, and TDS deducted under Section 194 at the advance date will typically fail the substance-over-form defence at the CIT(A) stage. The sibling walkthrough of what happens when the AO says a cash credit is unexplained is the deeper treatment of the Section 68 recharacterisation route and the Section 115BBE arithmetic.
The one to escalate first — the shareholder-benefit loan without TDS
The single-highest-exposure category in the shareholder-advance register is a shareholder-benefit loan (director’s home purchase, family expenditure, personal investment) already made and outstanding at year-end with no Section 194 TDS deducted at the advance date. Once the tax audit picks up the advance under Form 3CD Clause 22, and once the AO’s Section 2(22)(e) proposal follows, the assessee is defending an addition without a TDS deduction on the record — which materially raises the Section 271AAC recharacterisation risk because the substance-over-form narrative (loan on the books, commercial arrangement) is undermined by the absence of the very TDS-deduction workflow that the Section 194 amendment post-Finance Act 2020 was designed to trigger.
The remedial workflow is to identify every such advance at Q1 or Q2 rather than at year-end, compute the accumulated-profits cap under Section 2(6C) at the advance date, deduct TDS at 10 per cent under Section 194, deposit the TDS by the 7th of the following month, and file the quarterly Form 26Q return in the applicable Section 194 line. The advance then defends as a deemed dividend correctly treated at the time — inside the Section 56(2)(i) slab regime — rather than as an undisclosed advance recharacterised as unexplained income at scrutiny.
When the manual shareholder-advance register outgrows itself
A small private company with a single promoter, two or three related-party transactions in a year, and no group-structure complexity can hold the Section 2(22)(e) exposure on a one-page shareholder-advance register — advance date, quantum, category (shareholder loan, trade advance, security deposit), Circular 19/2017 defence note, accumulated-profits cap, TDS deducted under Section 194. The CA reviews the register at year-end alongside the Form 3CD Clause 22 walkthrough.
A mid-market group with two or three private-limited entities, a family LLP, common promoter shareholding across the estate, recurring inter-company advances for working-capital smoothing, and multiple shareholder-owned properties on lease is running a rolling classification exercise that a spreadsheet cannot hold reliably. The exposure is not a single-year miss — it is the compounding of undocumented shareholder-benefit advances across two or three AYs that surfaces on a scrutiny selection with the Section 271AAC recharacterisation escalation applied.
At that scale, moving the shareholder-advance register, the quarterly accumulated-profits computation, the Circular 19/2017 defence documentation, and the Section 194 TDS deduction workflow onto continuously refreshed detection — where Terra Insight’s reconciliation software for India treats the related-party transaction estate as a first-class monthly output rather than a year-end retrofit — is what keeps the Section 2(22)(e) exposure inside a defensible audit trail. Below that scale, the one-page shareholder-advance register plus a disciplined CA scoping memo before Form 3CD sign-off is the right tool.
Go deeper
- Why is my related-party payment being disallowed — the Section 40A(2)(b) walkthrough
- What is a specified domestic transaction (SDT) under Section 92BA — the transfer-pricing overlay
- What happens when the AO says my cash credit is unexplained — the Section 68 and Section 115BBE treatment
- TDS Section 194 dividend reconciliation for Indian companies
- Reconciliation software for India
Frequently Asked Questions
What actually is deemed dividend under Section 2(22)(e), and why is a loan being called a dividend?
Section 2(22)(e) is an anti-avoidance provision that treats certain loans and advances by a closely-held (private) company to its substantial shareholders as if they were a dividend distribution. The policy concern is straightforward — before 1987, a controlling shareholder of a private company could bypass dividend tax by drawing profits out as a repayable loan on the books, holding the loan indefinitely, and never paying tax on what was economically a distribution. The 1987 amendment closed the gap by deeming any such advance to a 10 per cent voting-power shareholder (or to a concern with 20 per cent substantial interest of that shareholder, or on the shareholder’s behalf) as a dividend in the shareholder’s hands, capped at the company’s accumulated profits at the date of the advance. The loan character on the books is irrelevant to the deeming — the substance-over-form test is what governs Section 2(22)(e).
The company advanced Rs 25 lakh to a director who owns 40 per cent of the shares. Is the entire Rs 25 lakh taxable, or only part?
The deemed-dividend addition is capped at the company’s accumulated profits computed under Section 2(6C) read with Explanation 2 to Section 2(22) at the date of the advance — not at the balance-sheet reserves-and-surplus figure. If the company has accumulated profits of Rs 18 lakh at the advance date (general reserve plus pro-rated current-year profit, excluding capitalised items such as revaluation reserve and share premium), the Section 2(22)(e) addition is Rs 18 lakh and the balance Rs 7 lakh remains a book loan outside Section 2(22)(e). If the company has accumulated profits of Rs 40 lakh, the full Rs 25 lakh advance is caught. The mid-market controller preparing the tax audit working paper needs to compute the accumulated-profits balance at each advance date through the year — a spot check at 31 March against the closing reserves is not the correct measurement because pro-rated current-year profit up to the advance date is included.
The company gave the shareholder-owned property a Rs 10 lakh security deposit against a lease arrangement. Is that deemed dividend?
No, provided the deposit is a genuine commercial transaction in the ordinary course of business and the CBDT Circular No. 19/2017 dated 12 June 2017 test is satisfied. The circular gives four illustrative examples of trade advances outside Section 2(22)(e) — an advance for the company’s business purposes, an advance receivable in the normal course, an advance to enable the shareholder company to acquire property for the assessee company, and a security deposit against use of assets by the assessee company. A genuine security deposit against a lease that the company actually occupies and pays market rent for falls within the fourth example. The evidentiary burden sits on the assessee — a lease agreement, a market-rent benchmarking note (fair-market-rent comparable from a broker or a valuer), and the actual rent-payment schedule are the three documents the AO will look for. Without those, the AO will recharacterise the security deposit as a shareholder-benefit loan and pull it into Section 2(22)(e).
The Finance Act 2020 abolished DDT. How does the company pay tax on the deemed dividend now?
The distributing company no longer pays DDT under Section 115-O — that regime ended on 31 March 2020 and applies only to dividends declared or distributed before 1 April 2020. From FY 2020-21 onwards, the shareholder pays income tax on the deemed dividend at applicable slab rates under Section 56(2)(i) as income from other sources. Section 115BBDA — which taxed dividend income above Rs 10 lakh at a flat 10 per cent in the shareholder’s hands from AY 2017-18 to AY 2020-21 — was correspondingly removed, so there is no separate rate for high-quantum dividends any more. The distributing company must deduct TDS at 10 per cent under Section 194 on the deemed-dividend quantum at the time of the advance (subject to the Rs 5,000 threshold and the higher 20 per cent no-PAN default under Section 206AA), and the shareholder claims credit for the TDS in the return of income and pays the balance tax at slab rates. For a shareholder-director in the 30 per cent slab, the effective tax on a Rs 18 lakh deemed dividend is roughly Rs 5.4 lakh plus surcharge and cess.
What is the penalty exposure if the AO catches an undisclosed deemed dividend during scrutiny?
The base exposure is under Section 270A — an under-reporting penalty of 50 per cent of the tax on the under-reported income, escalating to 200 per cent for misreporting. The upside-case exposure sits under Section 271AAC — if the AO recharacterises the advance as unexplained income under Section 68 (cash credit) or Section 69 (unexplained investment) rather than dividend income under Section 56(2)(i), the Section 115BBE flat 60 per cent tax plus 25 per cent surcharge plus 4 per cent cess (effective rate approximately 78 per cent) applies together with a Section 271AAC 10 per cent penalty on the Section 115BBE tax. On a Rs 18 lakh recharacterised addition, the compounded exposure is approximately Rs 14 lakh in tax plus roughly Rs 1.4 lakh in penalty, against a base Section 56(2)(i) plus slab exposure of roughly Rs 5.4 lakh in tax on the same quantum. The recharacterisation risk is not academic — a poorly documented shareholder advance without a signed loan agreement, an interest coupon at arm’s length, a repayment schedule, and TDS deducted under Section 194 at the advance date will typically fail the substance-over-form defence at the CIT(A) stage.
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- ▸ Section 2(22)(e), Income-tax Act 1961 — Dividend includes 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, 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. The three limbs — direct advance to a 10 per cent shareholder, advance to a concern in which the shareholder has substantial interest (20 per cent or more), and payment on behalf of the shareholder — are each independently caught, and the accumulated-profits ceiling caps the deemed-dividend addition at whatever quantum of profit the company has retained on the balance sheet at the date of the advance.
- ▸ Section 2(6C), Income-tax Act 1961 read with Section 2(22) Explanation 2 — For the purposes of Section 2(22), the expression accumulated profits shall include all profits of the company up to the date of distribution or payment, and shall include all profits of the company up to the date of liquidation. Capitalised profits are excluded. Current-year profits earned up to the date of the advance are included by pro-rating. The accumulated-profits computation is not the same as reserves-and-surplus on the balance sheet — items such as revaluation reserve, share premium, and unrealised capital gains are excluded, while general reserve, retained earnings, and pro-rated current-year profit are included. The deemed-dividend addition is capped at this figure: an advance of Rs 25 lakh against an accumulated-profits balance of Rs 18 lakh is taxable as deemed dividend only to the extent of Rs 18 lakh, with the balance Rs 7 lakh remaining a book loan outside Section 2(22)(e).
- ▸ CBDT Circular No. 19/2017 dated 12 June 2017 — It has been observed that some Courts have held that trade advances in the nature of commercial transactions would not fall within the ambit of the word advance in Section 2(22)(e) of the Act. Such views have attained finality. Accordingly, it is a settled position that trade advances, which are in the nature of commercial transactions, would not fall within the ambit of the word advance in Section 2(22)(e) of the Act, and consequently would not constitute deemed dividend. The circular gives four illustrative examples of trade advances that remain outside Section 2(22)(e) — advance made by a company for its business purposes, advance in the pursuit of business receivable in the normal course, advance to enable the shareholder company to acquire property for the assessee company, and security deposit against use of assets by the assessee company. Any advance that does not fit the commercial-transaction test — a shareholder-benefit loan for personal use, a director's home purchase loan, a family-purpose advance — remains fully caught by Section 2(22)(e).
- ▸ Finance Act 2020 — abolition of Dividend Distribution Tax (DDT) — The Finance Act 2020 abolished the Dividend Distribution Tax under Section 115-O with effect from 1 April 2020 (FY 2020-21 onwards). Prior to abolition, DDT was payable by the distributing company at an effective rate of approximately 20.56 per cent (15 per cent basic plus applicable surcharge and cess), and the dividend was exempt in the shareholder's hands under Section 10(34). From FY 2020-21, the company pays no DDT and the shareholder pays income tax on the dividend at applicable slab rates as income from other sources under Section 56(2)(i). Section 115BBDA — which taxed dividend income above Rs 10 lakh at 10 per cent in the shareholder's hands from AY 2017-18 to AY 2020-21 — became infructuous and was correspondingly removed. The deemed-dividend under Section 2(22)(e) is now taxed in the shareholder's hands at slab rates for individuals (up to 30 per cent plus surcharge and cess) and at the corporate rate for companies, in each case with no DDT on the distributing company.
- ▸ Section 194, Income-tax Act 1961 — The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India, shall, before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of Section 2, deduct from the amount of such dividend, income-tax at the rate of ten per cent. Since the DDT abolition in Finance Act 2020, Section 194 explicitly extends to deemed dividend under Section 2(22)(e) — the distributing company must deduct TDS at 10 per cent on the deemed-dividend quantum at the time of the advance, subject to the Rs 5,000 threshold and the higher 20 per cent no-PAN default under Section 206AA.
- ▸ Section 271AAC, Income-tax Act 1961 — The Assessing Officer may direct that the assessee shall pay by way of penalty, in addition to tax payable under Section 115BBE, a sum computed at the rate of ten per cent of the tax payable under clause (i) of sub-section (1) of Section 115BBE. Where a Section 2(22)(e) addition is recharacterised by the Assessing Officer during scrutiny as unexplained income under Section 68 (cash credit) or Section 69 (unexplained investment) rather than dividend income under Section 56(2)(i), the Section 115BBE regime (flat 60 per cent tax plus 25 per cent surcharge plus 4 per cent cess, effective rate approximately 78 per cent) applies together with the Section 271AAC 10 per cent penalty. This is the compounding exposure behind a poorly documented shareholder advance — the base deemed-dividend rate at slab is materially lower than the recharacterised Section 115BBE plus Section 271AAC treatment.