Loans as deemed dividend
An interesting issue that arises here is whether the deemed dividend (ie the loan or advance) should be taxed in the hands of the concern to whom the loan is given (borrowing concern) or in the hands of the shareholder (on account of whose common shareholding, the loan is considered as deemed dividend). The issue assumes particular importance, since this category of dividend is not exempt from tax.
One view is that the loan or advance is taxable as deemed dividend in the hands of the borrowing concern.
This is based on the rationale that under the relevant provisions of deemed dividend, it is the ‘payment’ made to the related concern which is regarded as deemed dividend.
The Hyderabad Tribunal in the case of Hyderabad Chemical Products (72 ITD 323) has proceeded to tax the borrowing concern for the deemed dividend although there is no specific analysis on this aspect.
In fact, the CBDT circular no 495 dated September 22,