Page 18 - DCOM508_CORPORATE_TAX_PLANNING

Unit 1: Income Tax: Basic Framework

(e) Advance or loan by a closely held company to its shareholder: Any payment by a company Notes
in which the public are not substantially interested of any sum by way of advance

or loan to any shareholder who is the beneficial owner of 10% or more of the equity
capital of the company will be deemed to be dividend to the extent of the accumulated
profits. If the loan is not covered by the accumulated profits, it is not deemed to be

dividend [section 2(22)(e)].

Notes There are two exceptions to this rule:
1. If the loan is granted in the ordinary course of its business and lending of money is
a substantial part of the company’s business, the loan or advance to a shareholder is
not deemed to be dividend.

2. Where a loan had been treated as dividend and subsequently the company declares
and distributes dividend to all its shareholders including the borrowing sharehold-
er, and the dividend so paid is set off by the company against the previous borrow-
ing, the adjusted amount will not again be treated as a dividend.

(5) India [Section 2(25A)]: The term ‘India’ means:
(i) the territory of India as per article 1 of the Constitution,
(ii) its territorial waters, seabed and subsoil underlying such waters,

(iii) continental shelf,
(iv) exclusive economic zone, or
(v) any other specified maritime zone and the air space above its territory and territorial

waters.

Specified maritime zone means the maritime zone as referred to in the Territorial Waters,
Continental Shelf, Exclusive Economic Zone and the Maritime Zones Act, 1976.

(6) Assessment Year: The term has been defined under section 2(9). This means a period of
12 months commencing on 1st April every year. The year in which tax is paid is called
the assessment year while the year in respect of the income of which the tax is levied is
called the previous year. Income of previous year of an assessee is taxed during the next
following assessment year at the rates prescribed by the relevant Finance Act

Example: For the assessment year 2013-14, the relevant previous year is 2012-13 (1.4.2012
to 31.3.2013).

(7) Previous Year [Section 3]: It means the financial year immediately preceding the assessment
year. The income earned during the previous year is taxed in the assessment year.
Business or profession newly set up during the fi nancial year: In such a case, the previous year
shall be the period beginning on the date of setting up of the business or profession and ending
with 31st March of the said fi nancial year.

If a source of income comes into existence in the said financial year, then the previous year will
commence from the date on which the source of income newly comes into existence and will end
with 31st March of the fi nancial year.

Example: For the assessment year 2011-12, the immediately preceding financial year (i.e.,
2010-11) is the previous year.

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