Section 2(22)(e) Deemed dividend Case Laws

By | October 23, 2015

Section 2(22)(e)-Whether deemed dividend is attracted in case of common shareholders ?

Held – No

CIT vs Gopal Clothing Company Pvt Ltd.(Delhi High Court)(ITA 333/2006 )

Section 2(22)(e)Merely because the shareholders are common between the borrowing and lending company, the amount received are not taxable as dividend if the receiver
company didn’t have the requisite shareholding. Following its earlier decision of Ankitech Private Limited, (2011) 242 CTR 129 (Delhi), the High Court held that: “The first aspect, i.e., whether or not the respondent assessee had the requisite
voting rights and shareholding of common shareholders can be taken into consideration for applying Section 2(22)(e) of the Act stands decided by this Court in CIT ITA No. 333/2006Page 4 of 6 versus Ankitech Private Limited, (2011) 242 CTR 129 (Delhi). In the said decision, it has beenheld that to attract the provisions of Section 2(22)(e) of the Act, payment must be made to the person, who is a registered holder of shares and the shareholder alone. Even after the amendment with effect from 1988 and introduction of the words “a person who is the beneficial owner of shares” cannot be construed to in a way
alter the position that the shareholder has to be the registered shareholder. The amendment imposes an additional condition that the registered shareholder must also be the beneficial shareholder of the companythat has furnished loan/advance. The fact that the shareholders of the assessee company were also shareholders of the company which had given “loan/advances” is not suffice and does not meet the requirement of Section 2(22)(e). The voting rights of the shareholder, i.e., the assessee can and should betaken into consideration.”

The same principle has been earlier followed in the following judgments:

(i) ACIT vs Bhaumik Colour 313 ITR 146 (Mum)(SB)
(ii) Universal Medicare 324 ITR 363 (Bombay High Court)
(iii) Hotel Hilltop 313 ITR 116 (Rajasthan High Court)

Section 2(22)(e)- )-Whether deemed dividend is attracted when partners held 10% share in lender company ?

CIT vs. Bharti Overseas Trading Co. ITA 401/2011 (Delhi High Court)

Where the partners of partnership firm held 10% shares in a company from which the firm received loan/advance, the same was held to be taxable as dividend u/s 2(22(e). The court followed its earlier ruling on the subject in case of Commissioner of Income Tax vs. National Travel Service (2011) 14 14 (Delhi)

S. 2(22)(e) does not apply to “non-gratuitous” advances to substantial shareholder ?

Pardip Kumar Malhotra vs. Commissioner of Income Tax West Bengal V (Calcutta High Court)(ITA 219 of 2003).
In this case, the assessee, a substantial shareholder in a closely held company, let out his flat to the company and also permitted it to place it on mortgage. In consideration, the company passed a resolution authorizing the assessee to obtain from the company an interest-free deposit up to Rs.50 lakhs. He also received an amount by way of “security deposit”. The AO assessed the said “advances/ deposits” as “deemed dividend” u/s 2(22)(e). The CIT (A) deleted the addition though the Tribunal upheld it.

On appeal by the assessee,

HELD reversing the Tribunal:

The phrase “by way of advance or loan” s. 2(22)(e) must be construed to mean  those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares. If such loan or advance is given to such share holder as a consequence of any further consideration received from the shareholder, then such advance or loan cannot
be said to be “deemed dividend” u/s 2(22)(e). Thus, while gratuitous loan or advance given by a company to a substantial shareholder comes within the purview of s. 2(22)(e), a case where the loan or advance is given in return to  an advantage conferred upon the company by the share holder does not. On facts, as the advance was in lieu of the company being permitted to mortgage the assessee’s flat, it was not “gratuitous” and so not assessable as “deemed dividend” (Creative Dyeing 318 ITR 476 (Del) &NagindasKapadia 177 ITR 393 (Bom) followed).

Section 2(22)(e)-Whether loan given to a shareholder who has given personal guarantee and collateral security to third party to enable company to avail of credit facilities is assessable as dividend. ?
ACIT vs. G. Sreevidya (ITAT Chennai ITA 1270/Mds/2011)
“By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense if it is to be construed the amount forwarded by the company to the
assessee was not in the shape of advances or loans. The arrangement between the assessee and the company was merely for the sake of convenience arising out of business expediency. In the facts and circumstances of the case, it is not appropriate to hold that the amount withdrawn by the assessee partakes the character of deemed dividend under the provisions of section 2(22)(e) of the Act. It is a well settled law that loan or advance given to a shareholder by a company in which public is not substantially interested and which had accumulated profits, the amount advanced as loan to such shareholder is deemed to be dividend as
per the provisions of section 2(22)(e) of the Act. However, the facts and circumstances of each case have to be scrutinized before applying the ratio of the cases holding above well settled law.”

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