The legislative intent to bring this provision in the statue related to
taxation of any advance or loan to a share holder, being a person who is the
beneficial owner of shares holding not less than 10% of voting power, in a
closely held company, as deemed dividend in the hands of shareholder.
Shareholder for the purpose of Section 2(22)(e) means being a person who is the
beneficial owner of shares (not being shares entitled to a fix rate of dividend
whether with or without a right to participate in profits). It means only
equity shareholder who has substantial interest in a company in which public is
not substantially interested has to have substantial interest in the lending
company i.e. 10% or more of voting power. As far as voting power is concerned,
in a case where individual is a shareholder not only in his individual capacity
but also a shareholder in the capacity of a ‘Karta’ of HUF, then the voting
power computation would include the total voting power in both the capacities.
The fiction of deemed dividend is not restricted to a beneficial owner of
shares only, but is extended to any concern also, in which such share holder is
a member or a partner and in which
he has a substantial interest. Substantial interest means, that person is
entitled to not less than 20% of the income of such concern.
In order to attract the provisions of Section 2(22)(e), the important
consideration is that, there should be loan/advance by a company to is
shareholder. Every amount paid must make the company a creditor of the
shareholder of that amount. But at the same time, every payment by company to
its shareholder may not be a loan/advance and thereby fall within the ambit
of Section 2(22)(e) i.e. “Deemed Dividend.”
Lets have some glance on various judgement decided in favor of revenue is as
under:-
• P. Sarada Vs CIT(SC) 229 ITR 444:
“The fact that loan or advance was ultimately adjusted at the end of the
year against the credit balance of another shareholder will not alter the
position. Account of another shareholder was not debited on various dates of
withdrawals and hence it cannot be said that the assessee was paid money out of
the funds lying to the credit of the other shareholder.”
• Tarulata Shyam & Ors. Vs CIT(SC) 108 ITR 345:
“Loan advanced to a shareholder was re-paid within 23 days still deemed
dividend under Section 2(22)(e)- If the assessee comes under the letter of law,
he has to be taxed, however great the hardship may appear to the judicial mind
to be.”
• Rajesh P. Ved Vs ACII (ITAT, Mum) 1 ITR (Trib)
275: “Accumulated profits means profits upto the date of payment of
loan – subsequent repayment of loan not to be considered amount credited to
wards remuneration of shareholder cannot be set off against the alleged loan
considered as deemed dividend.”
• CIT Vs P.K. Abubucker (Mad) 259 ITR 507:
“Advance to shareholder for building construction which will be later on
taken on lease by company- As per the agreement, such advance to be set off
against future rent still deemed dividend arises and is taxable.”
• M.D. Jindal vs CIT(Cal) 164 ITR 28:
Building material advanced to shareholder for construction advance to be set
off against purchase consideration when the company buys some flats from
assessee later on- value of advance in kind is also taxable as deemed
dividend.”
• L. Alagusundaram Chettiar vs CIT(SC) 252 ITR
“Company advancing large amount to low-paid employee. Employee advancing
loan to assessee, the Managing Director of the said company. Deemed dividend to
be assessed in the hands of assessee.”
• CIT vs. T.P.S.H. Sokkalal (99) 236 ITR 981 (MAD):
Shares held on behalf of minor children has to be included as the guardian
can exercise voting power in respect of those shares in addition to shares held
by guardian in his individual capacity.
