Case Laws on Deemed dividend -Section 2(22)(e) of Income Tax Act

By | July 11, 2016
(Last Updated On: January 25, 2017)

Case Laws on Deemed dividend -Section 2(22)(e) of Income Tax Act

Variuos Case Laws on Deemed dividend -Section 2(22)(e) of Income Tax Act are summaried as follow :

S. 2(22)(e) : Deemed dividend – SLP dismissed against the decision of the Delhi High Court in the case of CIT v. Subrata Roy(2015) 375 ITR 207  (Delhi)(HC)
The Honourable Apex Court has dismissed the special leave petition filed against the order of the Delhi High Court in the case of CIT vs. Subrata Roy wherein it was held that in the case where the amount was advanced by the firm, in which the assessee is a partner, to the assessee, it cannot be said to have been advanced by the company in which the assessee is a shareholder. A certain sum of money was due by the firm to the company. It was the case of the Assessing Officer that the firm was used as a conduit to advance the loan to the shareholder by the company from out of the outstanding receivable from the firm. It was held by the High Court that the sum cannot be said to have been advanced by the company, when it was proved by the assessee that the firm had sufficient funds on its own to advance the money and therefore, the provisions of section 2(22)(e) is not attracted. (AY. 1992-93)
CIT v. Subrata Roy Sahara (2016) 236 Taxman 396 (SC)

S. 2(22)(e):Deemed dividend – Assessee-company was not a shareholder of lending-company, section 2(22)(e) would not apply merely because two shareholders of lending-company had a beneficial ownership of shares in assessee company – SLP Admitted
Assessee-company had received a sum by way of loan or advance from SIPL. As two shareholders of SIPL had a beneficial ownership of shares of assessee, Assessing Officer held that payment by way of loan or advance was a dividend under section 2(22) (e). The High Court held that since recipient of loan, namely, assessee, was not a shareholder of SIPL, provisions of section 2(22)(e) would not apply. SLP admitted by the Supreme Court.(AY. 2006-07)
CIT v. N.S.N. Jewellers (P.) Ltd.  (2016)237 Taxman 246 (SC)

S. 2(22)(e):Deemed dividend- Loan – beneficial ownership of more than 10 per cent shares in a closely held company- Assessable as deemed dividend . [ S. 153A ]
Assessee, who was a shareholder and director in a closely held company having beneficial ownership of more than 10 per cent shares, had taken certain loan from company.  In assessment proceedings assessee submitted that loan was taken for purpose of purchase of land for company and, therefore, could not be treated as deemed dividend.  However, assessee failed to prove by furnishing relevant details in form of agreements or details of amount spent for purpose for which it was drawn and he kept on changing his arguments at each stage of proceedings. Tribunal held  that  loan taken by assessee was rightly considered as deemed dividend . ( AY. 2007-08 to 2009-10 )
M. Amareswara Rao  v.Dy.CIT (2016) 157 ITD 657 (Visakha)(Trib)

S. 2(22)(e): Deemed dividend – Not applicable to Loans or Deposits from public company.
On appeal by revenue,the Tribunal while deciding the issue in favour of the assessee, held that since S Ltd. was a public limited company and registered with RBI since 1998 in the category of loan investment company and engaged in activities of share sale, financing activities, etc. the loan or advance or inter-corporate deposit given to the assessee did not fall within section 2(22)(e) and moreover, it was a non-banking financial company which was excluded from the deeming provision. (AY.2008-09)
Dy.CIT v. Sindhu Realtors Pvt. Ltd. (2016) 45 ITR 448 (Delhi)(Trib.)

S. (22)(e): Deemed dividend-Loans and advances to share holders-  Loans received by the company   would be treated as deemed dividend in hands of P and S in proportion to their shareholdings .
Assessees P and S were directors in two sister companies namely AI and AE.Shareholdings of both directors in AE was 50 per cent whereas in AI it was 53.85 per cent for P and 46.11 per cent for S .  AI had received Rs. 10 lakh as loan from AE.  AO held that loan received from was to be treated as deemed dividend in the hnds of individual directors and since P and S  were equal beneficiary of shares to tune of 50 percent each in AI the company which had received the loan . On appeal CIT(A)  affirmed the order ofAO. On appeal the assessees contended that no mechanism had been provided in Act regarding computation of deemed dividend in hands of directors and in absence of any such mechanism, charging provisions would fail and no additions could be made .  Tribunal held that if by reasonable construction of relevant section, income could be deduced, then merely on ground that specific provision had not been provided, it could not be held that computation provisions failed;  therefore, percentage of shareholdings in concern to which loan was given would be determining factor of deemed dividend in case of shareholder and accordingly, 53.85 per cent, i.e., Rs. 5,38,850 should have been assessed as dividend in hands of P and 46.11 per cent, i.e. Rs. 4,61,100, in hands of S. (AY. 2007-08)
Puneet Bhagat v. ITO (2016) 157 ITD 353(SMC)(Delhi)(Trib.)

S. 2(22)(e) : Deemed dividend – Business Transactions – Accounts produced by assessee shows that it has several transactions with the company relating to purchase and sale of goods, job work charges, rent paid and received – transaction are business transactions in ordinary course of business – could not be treated as deemed dividend
Held that copy of account shows that the assessee has number of transactions related to purchase & sale of goods, job work charges, rent received & paid. Also, there was debit balance in the books of assessee and there was a closing credit balance. Thereby, these are business transactions during the ordinary course of business. Said cannot be construed as deemed dividend u/s 2(22)(e). (AY. 1999-00, 2005-06)
K G Petrochem Ltd v. ACIT (2016) 176 TTJ 1(UO) (Jaipur)(Trib)

S. 2(22)(e):Deemed dividend- Loan account is different from a current account on which provisions of s. 2(22)(e) are not applicable.
There was a running current account between the Assessee and the private limited company in which she was a director. At the end of the year, the balance was squared off and there was no closing balance. The AO held that the monies lent by the company to the Assessee were loans and advances within the meaning of s. 2(22)(e). The ITAT deleted the addition made by the AO and held that the current account between the Assessee and the Director was a mutual account which was reciprocal demands between the parties and did not benefit the Assessee alone. It was thus held that s. 2(22)(e) cannot be invoked on current account transactions. (AY. 2009-10)
ITO v. Gayatri Chakraborty  (Smt.) (2016) 45 ITR 197 (Kol.)(Trib.)

S. 2(22)(e):Deemed dividend- Not applicable to loans from NBFCs and companies which are listed on a stock exchange.
The Assessee had received inter-corporate deposit from another company which was an NBFC and was listed in the Delhi Stock Exchange. The AO treated the same as deemed dividend and added the same to the income of the Assessee. On appeal, the ITAT held that the said loan could not be considered as deemed dividend since deeming provisions were to be read strictly and NBFCs and listed companies were excluded from the said provision. (AY .2008-09)
DCIT v. Sindhu Realtors Pvt. Ltd. (2016) 45 ITR  448 (Delhi)(Trib)
DCIT v. Sindhu Holdings Ltd (2016) 176 TTJ 41(UO) (Delhi)( Trib)         
S. 2(22)(e): Deemed dividend- Son and daughter had over dawn from the company where the assesse was a share holder having 41 percent of shares- Additin cannot be  made as deemed dividend.
Allowing the appeal of assesse the Tribunal held that ; Where assessee was a shareholder in a company holding 41 per cent of shares and during year he and his son and daughter had overdrawn certain amount from said company and Assessing Officer treating said amount as deemed dividend under section 2(22)(e) added same in income of assessee, since both son and daughter were not shareholders in company and during year company got only negative accumulated profits, provisions of section 2(22)(e) could not be invoked. ( AY. 2007-08 )
Manoj Murarka v. ACIT ( 2016) 156  ITD 793 (Kol.)(Trib.)                                                     

S. 2(22)(d) : Deemed dividend-  Buyback cannot be assessed as deemed dividend – The capital gains on buy-back are exempt under the India-Mauritius DTAA-[Art. 10, Companies Act, S.77, 100, 105, 391]
A buyback cannot be regarded as a “colourable transaction” and cannot be assessed as “deemed dividend” . The capital gains on buy-back are exempt under the India-Mauritius DTAA. ( ITA No. 3726/Mum/2015, dt. 12.02.2015)(AY-2011-12)
Goldman Sachs (India)(Securities Pvt. Ltd.v. ITO(Mum.)(Trib.);

S.2(22)(d):Deemed dividend-Redemption of preference shares does not constitute “deemed dividend”. [S.2(47), Companies  Act, S.80(3), 100 ]
Redemption of preference shares does not constitute “deemed dividend”.(ITA No. 4669/Mum/2014. Dt. 06.04.2016)(AY. 2005-06)
Uday K. Pradhan v. ITO (Mum.)(Trib.)

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