Dividends traditionally have been taxable either in the hands of the company as Dividend Distribution Tax or in the hands of the shareholders as 'Income from Other Sources.' However, to avoid paying such tax, many closely held companies resorted to providing loans or advances to shareholders or to the concern in which such shareholders had substantial interest or made payments on behalf of or for the individual benefit of such shareholders. To tax such situations, the concept of deemed dividend was enacted as an anti-avoidance measure. These provisions widened the tax net and covered the above-mentioned payments as income in the form of deemed dividend to the extent of accumulated profits of the closely held company.
