Clause 36A explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Clause 36A reports amounts received in the nature of deemed dividend under section 2(22)(e) — a loan or advance by a closely held company to a 10% beneficial shareholder or to a concern in which he has substantial interest, capped at accumulated profits.
From the ICAI Guidance Note on Tax Audit (Revised 2026), the concluding edition under the Income-tax Act, 1961. For tax years under the Income-tax Act, 2025 the corresponding deeming provision must be identified afresh, and the particulars move to Form No. 26 under rule 47 of the Income-tax Rules, 2026.
The five conditions behind clause 36A
Paragraph 70.1: section 2(22) defines "dividend" inclusively, and sub-clause (e) deems certain payments to be dividend. All five conditions must be met before anything is reportable at clause 36A:
- Payment should be by a company in which the public are not substantially interested — a closely held company;
- Payment should be by way of advance or loan, or a payment by the company on behalf of, or for the benefit of, any specified shareholder;
- Specified shareholder means a person who is the beneficial owner of shares holding not less than 10% of the voting power. For the 10% test, what is relevant is the percentage of stand-alone shareholding of that shareholder — the shareholding of his relatives is not to be considered. The auditor should consider the shareholding status as on the date on which the loan or advance is received;
- Payment should be to the shareholder or to any concern in which the shareholder is a member or a partner and in which he has substantial interest; and
- The company making the payment should have accumulated profits, at least to the extent of the loan, advance or payment. The amount of dividend is restricted to the extent to which the company possesses accumulated profits.
Paragraph 70.2: accumulated profits are computed up to the date of payment, after considering Explanations 1, 2 and 2A below section 2(22). Explanation 3 defines "concern" to include a HUF, firm, association of persons, body of individuals or company; a person is deemed to have a substantial interest in a concern other than a company if he is, at any time during the previous year, beneficially entitled to not less than 20% of the income of that concern. Section 2(32) defines a person having a substantial interest in a company as the beneficial owner of shares — not being shares entitled to a fixed rate of dividend — carrying not less than 20% of the voting power.
10% makes a person a specified shareholder of the paying company. 20% gives him a substantial interest in the receiving concern. Both must be satisfied before clause 36A is engaged where the loan goes to a concern rather than to the shareholder himself — and the first is tested on stand-alone holding at the date of receipt, the second at any time during the previous year.
Who is taxed, and whose clause 36A reports it
Paragraph 70.3: even if the loan or advance is made by the closely held company to the concern, it is chargeable to tax in the hands of the shareholder and not in the hands of the concern — CIT v. Madhur Housing & Development Co. (340 ITR 14) confirming the Delhi High Court in CIT v. Ankitech (P) Ltd. 340 ITR 14 (Delhi), and CIT v. Universal Medicare Pvt. Ltd. 324 ITR 263 (Bom).
The unresolved question
In National Travel Services v. CIT, Delhi-VIII, the Supreme Court noted conflicting judicial interpretations. Ankitech had held that "shareholder" referred exclusively to a registered shareholder even after the statutory amendment. The Supreme Court found that view inconsistent with both the legislative intent and the plain language of the amended provision, emphasising that for section 2(22)(e) the focus should be on the beneficial owner holding not less than 10% of the voting power, and referred the matter to the Chief Justice for a three-judge bench. The appeal was ultimately dismissed on withdrawal under the Vivad Se Vishwas Scheme, so:
"the legal question remains unresolved: whether a partnership firm, holding shares through its partner, can be treated as a 'shareholder' or 'beneficial shareholder' for the purpose of computing deemed income under Section 2(22)(e)."
Where the registered shareholder is not the beneficial owner, the tax auditor should obtain an undertaking to that effect and mention it in his observations in Form 3CA or 3CB, and should ascertain whether the requisite forms under the Companies Act, 2013 have been filed.
What the auditor obtains before answering clause 36A
Paragraph 70.3: the tax auditor should obtain from the assessee:
- a certificate containing a list of closely held companies in which he is a beneficial owner of shares carrying not less than 10% of the voting power;
- a list of concerns in which he has substantial interest; and
- a certificate giving particulars of any loans or advances received by any concern in which he has substantial interest, from any closely held company in which he is a beneficial owner of shares carrying not less than 10% voting power.
These certificates are necessary since the tax auditor may not be able to verify the above from the books of account of the assessee — and the auditor should include appropriate remarks of his inability to independently verify the information and his reliance on the certificates, in clause (3) of Form No. 3CA or clause (5) of Form No. 3CB.
Paragraph 70.4 adds an independent source: verify Form No. 26AS, AIS or TIS to see whether the closely held company has deducted tax at source under section 194 from any payment to the assessee or the concern. This will indicate the view taken by the company making the payment, which the auditor may consider before concluding.
What falls outside clause 36A
| Situation | Position |
|---|---|
| Trade advances in the nature of commercial transactions | Outside section 2(22)(e) — CBDT Circular No. 19/2017 dated 12 June 2017; business or trade advances from closely held companies need not be reported at clause 36A |
| Advance or loan by a company in the ordinary course of business where lending of money is a substantial part of the business | Not dividend under section 2(22) |
| Payment on behalf of or for the individual benefit of the assessee already treated as part of remuneration, for example as managing director | Not again chargeable under section 2(22)(e) and not required to be reported |
| Loan to a person who is not a shareholder | Outside — "for attracting section 2(22)(e), it is necessary that the assessee receiving a loan or advance should be a shareholder" |
| Amount exceeding accumulated profits on the date of payment | The excess is not deemed dividend |
| Amount already considered as income under any clause of section 2(22) earlier | Accumulated profits are reduced by that amount |
Two practical problems, and the Guidance Note's answers
- Payments for the individual benefit of the assessee. Paragraph 70.5: there may not be any record available for the auditor to verify such a payment. In that case the auditor may make appropriate remarks in clause (3) of Form 3CA or clause (5) of Form 3CB.
- Accumulated profits on the date of payment. Paragraph 70.6: the auditor may not be able to determine the accumulated profits of the paying company as on the date of payment, for various reasons. He may arrive at the accumulated profits by appropriating the profit for the year on a time basis — and should then include appropriate remarks about the methodology adopted.
Paragraph 70.8 covers the running current account: where the assessee or the concern has a current account of the closely held company with various transactions in it, the auditor will have to consider whether all the transactions are normal business transactions or are in the nature of loans or advances, and take a considered view having regard to the judicial decisions and CBDT circulars. Where reliance is placed on a judicial decision, a reference to it may be given as an observation.
What is actually reported in clause 36A
Paragraph 70.9: under sub-clause (a) it must be stated whether the assessee has received any amount in the nature of dividend as referred to in section 2(22)(e) — "Yes" or "No". If yes, sub-clause (b) requires each such amount received that is considered as dividend under section 2(22)(e), and the date of receipt. The auditor has to verify the details and is recommended to maintain appropriate working papers.
Worked example
| Facts | Reporting at clause 36A |
|---|---|
| Assessee holds 14% of the voting power of a closely held company; receives a Rs 30,00,000 loan; the company's accumulated profits on that date are Rs 45,00,000 | Yes — Rs 30,00,000 with the date of receipt |
| Same facts, accumulated profits Rs 18,00,000 | Rs 18,00,000 only |
| Assessee holds 7% personally; his brother holds 9% | Not a specified shareholder — relatives' holdings are not aggregated |
| Loan to a firm in which the assessee is a partner entitled to 30% of income, the assessee holding 12% in the paying company | Chargeable in the assessee's hands, not the firm's |
| Trade advance against supplies from the closely held company | Not reported — Circular No. 19/2017 |
| Payment made by the company that was taxed as part of the assessee's managing director remuneration | Not reported |
Audit checklist
- Obtain the three certificates paragraph 70.3 lists, and disclose reliance on them in the report.
- Test the 10% stand-alone beneficial holding at the date of receipt, ignoring relatives.
- Test 20% substantial interest in the receiving concern at any time during the year.
- Cap the amount at accumulated profits on the date of payment, reduced by amounts previously taxed under section 2(22).
- Where accumulated profits cannot be determined, apportion the year's profit on a time basis and disclose the methodology.
- Check Form 26AS, AIS or TIS for a section 194 deduction by the paying company.
- Exclude trade advances, ordinary-course lending by a money-lending company, and payments already taxed as remuneration.
- Analyse a running current account transaction by transaction.
- Where the registered shareholder is not the beneficial owner, obtain an undertaking and observe on it.
Common mistakes
- Aggregating relatives' shareholdings for the 10% test.
- Taxing the concern instead of the shareholder.
- Reporting the whole loan without capping it at accumulated profits.
- Reporting trade advances contrary to Circular No. 19/2017.
- Relying on certificates silently, without the Para 3 or Para 5 remark.