Parimal, Managing Director of Heavens Engg. Pvt. Ltd. holds 70% of its paid up capital of ₹20 Lakh. The balance as on 31st March 2017 in General Reserve was ₹6 Lakh. The company on 1st July 2017 gave an interest-free loa

The company had advanced a loan to an employee who in turn had advanced the same to the Managing Director of the company holding 70% of its capital. By virtue of the provisions of section 2(22)(e) of the Income Tax Act, 1961, the same shall be treated "as deemed dividend" as the payment made by a company, in which public is not substantially interested, on behalf of, or for individual benefit of any such share holder (who holds not less than 10% of the voting power), to the extent to which the company possesses accumulated profits. In this case, the company has reserve of ₹6 lakhs on March 31st of the preceding year and the amount of loan advanced on 1st July is ₹5 lakhs. Therefore, the payment is to be treated as deemed dividend. The amount of interest free loan of ₹5 lakhs given by the company to the supervisor who in turn had given the same to Mr. Parimal, shall be construed as the amount given for the benefit of Mr. Parimal and is treated as deemed dividend chargeable to tax in the hands of Mr. Parimal.