|QUERY:||Mr. X, through holding 11% shares in a private limited company, is a minority shareholder and the entire company is run and managed by another group, with whom he is in dispute. Mr. X also is a partner in a partnership firm with 21% share, where again he is in minority and is only a sleeping partner and the firm is run and managed by another group. Without any knowledge of Mr. X, the company gave loan of Rs. 11 crores to the partnership firm, which was repaid on the next day. The company is not in the business of financing. Will there be any tax implication in the hands of Mr. X? Will there be any difference if there is another Mr. Y who has similar holding patterns in both the concerns?|
|ANSWER:||From the facts, it is clear that section 2(22)(e) of the Income-tax Act, 1961 is clearly applicable, irrespective of the fact whether X is managing the company’s business or not. Therefore, any loan given to a partnership firm wherein X has substantial interest i.e. he is beneficially entitled to 20% or more share of the income of the firm, the provision is applicable.
The Supreme Court pointed out in Tarulata Shyam [108 ITR 345] that this sub-clause is attracted at the point of time when the advance, loan or other payment is made in terms of this clause. It is however, immaterial that the amount was repaid even before end of the accounting year, it will make no difference that the loan is for a short period and carried interest.
In view of the above and as per the decision of the Bombay High Court in CIT v. Universal Medicare Pvt. Ltd. [324 ITR 263], it would be taxed in the hands of X.
There is no difference in case of X or Y. If X and Y are partners in the firm, the loan/advance would be assessed equally in their hands.
|EXPERT:||CA. H. N. Motiwalla|
|CATCH WORDS:||deemed dividend, partnership firm|
Opinion Of Eminent Legal Luminaries On Controversial Issues
Will There Be Any Tax Implication In The Hands Of Shares Holder In A Private Limited Company?
Credit: Several of the queries and answers are reproduced with permission from the AIFTP Journal. We thank AIFTP for generously allowing us to host their research material.
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org