Person who has a Substantial Interest in the Company Under Person

In the context of income tax laws in India, it is essential to understand the concept of a person who has a substantial interest in a company. This concept holds significant importance as it determines the tax implications for individuals who hold such interests in a company. In this article, we will delve into the legal provisions governing the definition of a person with substantial interest in a company under the Income Tax Act, 1961, along with its implications.

Definition of “Person with Substantial Interest”

Under the Income Tax Act, 1961, the term “person with substantial interest” is defined under Section 2(32). As per the provision, an individual is considered to have a substantial interest in a company if the following conditions are met:

The individual, alone or together with his relatives, holds beneficially or otherwise, shares carrying not less than twenty per cent of the voting power in the company.
The individual, alone or together with his relatives, holds beneficially or otherwise, shares carrying not less than twenty per cent of the equity share capital of the company.

Implications for Income Tax

Individuals who are classified as persons with substantial interest in a company are subject to specific tax implications under the Income Tax Act. The provisions related to such individuals are primarily aimed at preventing tax avoidance or evasion through the use of closely held companies. By identifying individuals with substantial interest, the tax authorities can ensure that income generated through such companies is appropriately taxed in the hands of the concerned individuals.

Taxation of Dividends

One of the key implications of being classified as a person with substantial interest in a company is the taxation of dividends. As per the Income Tax Act, dividends received by such individuals are subject to tax at a higher rate compared to other taxpayers. This provision is intended to prevent the accumulation of income in closely held companies and ensure that the individuals with substantial interest are taxed at a higher rate on the dividends received from the company.

Deemed Dividend

The concept of deemed dividend is also relevant in the context of individuals with substantial interest in a company. Under the Income Tax Act, certain payments or benefits provided by a closely held company to its shareholders or their relatives are deemed to be dividends. This includes loans, advances, or assets provided at concessional rates. Such deemed dividends are taxed in the hands of the individual with substantial interest, thereby preventing the diversion of income through these means.

Transfer of Assets

Another important aspect to consider for individuals with substantial interest in a company is the tax implications related to the transfer of assets. The provisions under the Income Tax Act ensure that any transfer of assets between the individual and the closely held company is subject to taxation to prevent the avoidance of tax through such transfers. The transfer of assets at undervalued prices or without adequate consideration is also closely scrutinized under these provisions.

Clubbing of Income

In cases where income is diverted to a spouse, minor child, or any other relative by an individual with substantial interest in a company, the provisions related to clubbing of income come into play. Under these provisions, the income generated from such transactions is clubbed with the income of the individual with substantial interest and taxed accordingly. This prevents the splitting of income among family members to lower the overall tax liability.

Reporting Requirements

Individuals with substantial interest in a company are also subject to specific reporting requirements under the Income Tax Act. They are required to disclose details of their shareholding and interests in closely held companies in their income tax returns. Failing to comply with these reporting requirements can lead to penalties and consequences under the tax laws.

In recent years, the concept of share buyback has gained prominence as a means for companies to return surplus cash to their shareholders. For individuals with substantial interest in a company, the tax implications of share buybacks can be significant. The gains arising from share buybacks are subject to taxation, and the specific provisions related to buyback taxation need to be carefully evaluated by such individuals.

Conclusion

In conclusion, the concept of a person with substantial interest in a company under the Income Tax Act, 1961, holds substantial importance from a tax perspective. The provisions related to such individuals are aimed at preventing tax avoidance and ensuring that income generated through closely held companies is appropriately taxed in the hands of the concerned individuals. It is essential for individuals falling under this category to be aware of the legal implications and comply with the reporting requirements to avoid any potential tax liabilities or penalties.

Person who has a Substantial Interest in the Company Under Person