Clause 36A - Disclosure of Dividend in Nature of Loan or Advance (Section 2(22)(e))
Clause 36A - Disclosure of Dividend in Nature of Loan or Advance (Section 2(22)(e))
This clause entails the following requirements:
Reporting whether the assessee received any amounts akin to dividends under section 2(22)(e). If so, furnish relevant details.
Key insights concerning section 2(22)(e) should be understood to effectively report under this clause:
Payment Source: The payment must originate from a closely held company, which encompasses companies with limited public interest, including unlisted public companies.
Nature of Payment: The payment should be in the form of an advance or loan or should cater to the shareholder's individual benefit or on their behalf.
Shareholder Criteria: The recipient shareholder should be either:
- An individual who is the registered or beneficial owner of shares carrying no less than 10% of the voting power.
- A concern (such as a company, firm, or HUF) in which the shareholder holds a substantial interest of 20% or more. Notably, this assessment considers the individual shareholder and not their relatives.
Dividend Deemed: Dividend is deemed insofar as the company possesses accumulated profits on the date of disbursing the loan or advance.
Limited Dividend Taxable: Taxable dividend under section 2(22)(e) is constrained by the accumulated profits existing on the payment date. If a prior amount has been taxed under any section of 2(22), including clause (e), accumulated profits must be adjusted by the taxed sum.
Loan from Closely Held Company: Till Assessment Year 2018-19, loans or advances from closely held companies to concerns were taxable in the hands of shareholders. However, this reverted due to section 115-O's non-applicability from April 1, 2020.
Exclusions: S. 2(22)(e) excludes loans or advances made in the ordinary course of business by companies where lending is a substantial part of their business. The "substantial part" threshold is often interpreted as 20% or more of funds deployed in lending.
Commercial Transactions Exemption: Commercial trade advances generally do not fall under section 2(22)(e). Circular No. 19/2017 issued by CBDT acknowledges this. Such cases needn't be reported as dividend under this clause.
Inter-Corporate Deposits Distinction: Inter-corporate deposits are not considered loans in some cases.
Commercial Exigency Consideration: There are instances where loans due to commercial expediency have been upheld favorably for the assessee.
Auditor's Responsibilities:
Data Compilation: The auditor must obtain a list of loans or advances received during the year to evaluate their applicability to section 2(22)(e). If no such transactions occurred during the year, no reporting is necessary under this clause.
Shareholder Analysis: For loans or advances received, the auditor must acquire the list of shareholders from the assessee to apply the 10% / 20% test as discussed earlier.
Company Financial Statements: Obtain financial statements from the lending company to ascertain its accumulated profits.
Adequate Disclosure: If the accumulated profits of the closely held company making the payment cannot be ascertained due to various reasons, the auditor should clarify this in clause (3) of Form No. 3CA or clause (5) of Form 3CB. Mention the methodology used or challenges faced, if necessary.
Assessee Certification: Acquire a certificate from the assessee listing closely held companies where they possess shares with at least 10% voting power and concerns with substantial interest.
Concern Certification: Obtain a certificate from the assessee outlining loans or advances received by concerns where they hold substantial interest from closely held companies in which they possess at least 10% voting power.
Judicial References: If the auditor relies on judicial decisions, reference them in observations within clause (3) of Form No. 3CA or clause (5) of Form 3CB, if applicable.
This clause serves to ensure comprehensive reporting of dividends resembling loans or advances. Given the dynamic nature of tax regulations, it's advised to stay updated on the latest forms and regulations. Consulting a qualified tax professional or Chartered Accountant is recommended to ensure compliance with the most current requirements.