A closely held company (where the public is not substantially interested) is subject to stricter tax provisions to prevent tax avoidance and misuse of corporate structures. Below are the key special provisions under the Income Tax Act, 1961:
1. Deemed Dividend under Section 2(22)(e)
- Applicability: If a closely held company gives loans/advancesto:
- A shareholderholding ≥10% voting power or
- A concern(HUF, firm, AOP, etc.) where such a shareholder has substantial interest (≥20% benefit).
- Taxability: The loan is treated as a deemed dividend(taxable in the shareholder’s hands) to the extent of the company’s accumulated profits.
- Exceptions:
- Loans for business purposes(if the recipient is engaged in a genuine business).
- Loans by banks/financial institutionsin ordinary business.
2. Restrictions on Loss Carry-Forward (Section 79)
- Rule: Losses cannot be carried forward if ≥51% shareholdingchanges (except in cases of amalgamation/demerger).
- Purpose: Prevents misuse of loss-making companies for tax evasion.
3. Tax on Distributed Profits (Section 115-O, now repealed)
- Earlier, Dividend Distribution Tax (DDT)was levied on closely held companies.
- Current Rule (Post-2020): Dividends are taxable in shareholders’ hands, and companies must deduct TDS @10%if dividend > ₹5,000.
4. Minimum Alternate Tax (MAT) under Section 115JB
- Applicability: Closely held companies must pay MAT @15%(plus surcharge & cess) on book profits if taxable income is lower.
- Exemptions: Startups and companies opting for new tax regime (Section 115BAA/115BAB)are exempt from MAT.
5. Transfer Pricing (Sections 92–92F)
- Applicability: If the company transacts with related parties(e.g., shareholders or sister concerns), it must maintain arm’s length pricing
- Penalties: Non-compliance attracts adjustments + penalties.
6. Higher Scrutiny on Shareholder Transactions
- Loans to Directors (Section 185): Prohibited unless complying with Companies Act, 2013.
- Benami Shareholding: Strict penalties if shares are held benamifor tax evasion.
7. Accumulated Profits & Dividend Stripping
- Accumulated Profits Definition: Includes reserves but excludes capital gains.
- Anti-Avoidance: Companies cannot distribute profits as loansto avoid dividend taxation
