Loan Given To Shareholder For Consideration Beneficial To The Company Is Not A Deemed Dividend: ITAT

The two-member bench of Astha Chandra (Judicial Member) and Anil Chaturvedi (Accountant Member) has observed that a gratuitous loan or advance given by a company to the classes of shareholders would come within the purview of a deemed dividend under section 2(22) of the Income Tax Act.

The appellant/assessee is an individual who electronically filed her return of income for the AY 2014–15, declaring total income. The case was selected for scrutiny. The assessment was framed under section 143 (3), determining the total income at Rs. 82,11,655.

During the course of assessment proceedings, the AO noticed that the assessee had purchased a property for Rs. 3,60,00,000 for the purpose of expanding Ganesh Hospital Pvt. Ltd., of which the assessee was a promoter. The AO noted that the assessee had made an aggregate payment of Rs.73,70,000 to Chander Prakash Bagai for the purchase of an adjacent old residential house in her own name, but the payment was made through the bank account of Ganesh Hospital Pvt. Ltd.

The assessee submitted before the AO that the hospital wanted to purchase an adjacent residential house for its own use, but due to the area being residential, the assessee was forced to purchase the house in her own name. However, since the property was for the purpose of the company, the payment was made through Ganesh Hospital Pvt. Ltd. It was thus contended that the transaction does not attract the provisions of section 2 (22) (e). The submissions of the assessee were not found acceptable by the AO. The AO noted that the assessee did not furnish any proof to support the claim that they tried to get the property converted for commercial use. The AO was of the view that the transaction attracted the provision of Section 2 (22) (e).

The AO, after giving the credit of the balance of the assessee with the company at the time of making payment, held the balance amount to be deemed a dividend taxable as income under section 2 (22) (e) and made its addition.

The assessee was aggrieved by the order of the AO and carried the matter before the CIT (A). The CIT (A) dismissed the appeal of the assessee.

The assessee submitted that the assessee is maintaining a running current account with the company whereby the assessee gives personal funds to the company without interest from time to time to support the company financially.

Section 2 (22) (e) stipulates that any payment by a company of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of the shares, holding not less than 10% voting power, shall be deemed as a dividend in the hands of the shareholder. Section 2(22)(e) creates a fiction in which certain types of payments made to the persons specified therein are to be treated as deemed dividend income.

The CESTAT held that the CIT (A) was not justified in upholding the addition made by AO by invoking the provisions of section 2 (22) (e) of the Income Tax Act.

Case Title: Archana Sharma Versus DCIT

Citation: ITA No.1268/Del/2018

Dated: 26.07.2022

Counsel For Appellant: Advocate Akhilesh Kumar

Counsel For Respondent: Sr. DR Rajinder Jha

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