-
2017-08-08
In the cat-and-mouse game that is constantly played out between taxpayers and the taxman, one weapon in the taxman's arsenal is the "deeming provision" - changing some term to mean something more (or less) with the intent of conferring an advantage upon the taxman. Taxpayers often contest various aspects of many such deeming provisions, including their validity, scope and intent.
Sec. 2(22)(e) of the Income Tax Act, 1961, is one such contentious deeming provision that has been the focus of much litigation ever since its enactment. The recent Supreme Court decision in Gopal and Sons (HUF) [TS-5002-SC-2017-O] wherein the apex court upheld deemed dividend addition u/s 2(22)(e) on assessee-HUF for AY 2006-07 with respect to loans/ advances received from one concern (in which it beneficially held more than 10% share-capital) though the company had issued shares in the karta's name and not in the HUF’s name. This momentous decision gave the editorial team of Taxsutra Database the idea of compiling significant rulings through the past decades that have sharpened the understanding of Sec. 2(22)(e).
This insight collates rulings on controversies such as Sec. 2(22)(e) addition on HUF - shares held by Karta, Loans advanced by firm (where assessee is a partner) to a company (where assessee is MD-cum-shareholder), Interpretation of terms "any payment" and "real beneficiary", Accumulated profits, Treatment of current profits, & more. We hope that you, our readers, find this compilation of over 40 cases consisting of recent as well as landmark judgments pronounced by ITAT, HC & SC on the vexed issue of taxation of deemed dividends helpful.
| Sr. No. |
Case Name |
Conclusion |
|
Sec. 2(22)(e) addition on HUF - shares held by Karta |
||
|
1. |
Sec. 2(22)(e) addition on HUF - shares held by Karta |
SC upholds deemed dividend addition on HUF despite shares being issued in Karta's name - SC upholds deemed dividend addition u/s 2(22)(e) on assessee-HUF for AY 2006-07 with respect to loan/advances received from one concern (in which it beneficially held more than 10% share capital); Rejects assessee’s stand that since the company had issued shares in the karta’s name and not in HUF’s name, assessee was neither the beneficial nor the registered shareholder, and hence Sec. 2(22)(e) cannot apply...read more |
|
Loans advanced by firm (assessee - partner) to a company (assessee - MD-cum-shareholder) |
||
|
2. |
Loans advanced by firm (assessees - partner) to a company (assessee - MD-cum-shareholder) |
SC dismisses Revenue SLP against HC's ruling in assessee’s case deleting 'deemed dividend' addition - SC dismisses Revenue’s SLP against Delhi HC judgement deleting 'deemed dividend’ addition of Rs.1.8 crores; HC had taken note of key facts that (a) assessee was a managing director-cum-shareholder in a closely-held company, while being a partner in a firm; (b) such firm acted as company's agent and certain amounts were due to company; and (c) firm advanced money (Rs.1.8 cr) to assessee for which sufficient funds existed with the firm...read more |
|
Interpretation of various terms |
||
|
3. |
Interpretation of terms, "any payment" and "real beneficiary" |
ITAT Interprets words 'any payment' u/s 2(22)(e); Deletes addition as assessee not ‘real beneficiary’ - Delhi ITAT deletes deemed dividend addition u/s 2(22)(e) in hands of assessee-individual for AY 2010-11 with respect to transfer of commercial space between two entities in which assessee held shares, notes that assessee's shareholding in transferor company was less than 10%; Referring to words used in Sec. 2(22)(e), viz., ‘any payment’ (which is not defined in the Act), observes that in the ordinary sense, the word 'payment' means payment, reward or benefit in cash in consideration for some goods or services or favours...read more |
|
4. |
Interpretation of 'Dividends' |
"Dividend", in its ordinary connotation, means the sum paid to, or received by, a shareholder proportionate to his shareholding in a company out of the total sum distributed. Dividend distributed by a company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the shareholders’ hands |
|
5. |
Interpretation of term 'distribution' |
The expression, ‘distribution’ connotes something actual and not notional - The dictionary meaning of the expression ‘distribution’ is ‘to give each a share, to give to several persons’. The expression ‘distribution’ connotes something actual and not notional. It can be physical; it can also be constructive. |
|
Repayments of loan during the year/ Period of loan |
||
|
6. |
Loan repaid within the same year |
ITAT upholds deemed dividend addition, rejects loan repayment, non-fulfilment of benefit test pleas - Mumbai ITAT upholds deemed dividend addition u/s 2(22)(e) in hands of assessee-shareholder for AY 2011-12 in respect of loan given by closely-held companies to a concern in which assessee holds substantial interest, relies on Bombay HC ruling in Universal Medicare (P) Ltd. and Mumbai ITAT ruling in Bhaumik Colour (P). Ltd.; Rejects assessee’s stand that since loans were repaid during relevant year itself with interest, addition should not be made...read more |
|
7. |
[TS-6582-ITAT-2016(CHENNAI)-O] Repayments of loan during the year |
Addition of deemed dividend u/s 2(22)(e) upheld; Repayments during year to be considered while arriving at amount taxable u/s 2(22)(e) - Chennai ITAT holds partly in favour of assessee; Holds that withdrawals made by assessee as a director from the companies amount to grant of loan or advance...read more |
|
8. |
‘Payment' of advance or loan |
The statutory fiction created by Sec. 2(22)(e) would come into operation at the time of 'payment' of advance or loan to a shareholder by the company - SC rules in favour of Revenue; Holds that "The loan or advance taken from the company may have been ultimately repaid or adjusted but that will not alter the fact that the assessee, in the eye of law, had received dividend from the company during the relevant accounting period....It was held by this Court in the case of Smt. Tarulata Shyam & Ors. [TS-14-SC-1977-O] that...The legislature had deliberately not made the subsistence of the loan or advance, or its remaining outstanding, on last date of the previous year a pre-requisite for raising the statutory fiction"...read more |
|
9. |
Repayments of loan during the year/ Period of loan |
Loan taken by assessee from a company in which it held 60% shares to be considered as deemed dividend u/s 2(22)(e) after reducing amount of loan repaid by assessee in same year - HC rules in favour of Revenue; Directs Revenue to verify each debit entry since the position as regards each debit will have to be individually considered, because it may or may not be a loan, and treat only the excess amount as deemed dividend u/s 2(22)(e)...read more |
|
Accumulated Profits |
||
|
10. |
[TS-5477-ITAT-2015(KOLKATA)-O] Exempt capital gains not accumulated profits |
ITAT excludes exempt capital gains for reckoning ‘accumulated profit’, deletes deemed dividend addition - ITAT excludes exempt capital gain for reckoning 'accumulated profits' for purpose of deemed dividend u/s 2(22)(e) for AY 2007-08; Rules that “exempted capital gains shall not enter the stream of the expression ‘accumulated profits’ and the company has got only negative accumulated profits after exclusion of exempted capital gains and hence the provisions of Sec. 2(22)(e) of the Act cannot be invoked”...read more |
|
11. |
Accumulated Profits |
"Accumulated profits" signifies firstly, that there must have been profits in earlier years, and secondly, that amounts out of such profits have been accumulated from time to time, with the result that there is some amount of accumulated profits in the company’s possession just before commencement of the accounting year; Mere distribution of bonus shares after capitalising accumulated profits, unless the distribution entails the release by the company to its shareholders of any part of the company’s assets, is not to be a deemed dividend |
|
12. |
Amount taxed u/s.41(2) for purpose of accumulated profits |
Amount taxed u/s 41(2) not part of accumulated profits - Amount received by the company, which was taxed under the then Sec. 41(2) , did not represent ‘accumulated profits’ within meaning of that expression in Sec. 2(22) |
|
13. |
Accumulated Profits |
Accumulated profits get reduced by the amount deemed to be dividend u/s 2(22) — Accumulated profits, whatever they may be, get definitely reduced by amount already deemed to be dividend under any sub-clause of Sec. 2(22), even where no adjustment therefor was made in books of account |
|
14. |
Share Premium Account vis-a-vis Accumulated Profits |
Share premium account could not be taken as part of accumulated profits for the purpose of applying Sec. 2(22)(e) - Delhi ITAT dismisses Revenue's appeal; Holds that "The share premium account cannot be stated to be commercial profits in the true sense of the term, having regard to the provisions of the Companies Act referred to above."...read more |
|
15. |
Development Rebate Reserve vis-a-vis Accumulated Profits |
Development rebate reserve forms part of ‘accumulated profits’ - It was held that Development rebate reserve is not a tied-up reserve as, under the very terms of Sec. 34(3), it can be used for the purposes mentioned therein. The entirety of a development rebate reserve is a free reserve and an accumulated profit. Thus, development rebate reserve forms part and parcel of ‘accumulated profits’ |
|
Loan vs Deposit |
||
|
16. |
Loan vs. Inter-corporate Deposit |
A ‘loan’ is different from a ‘deposit’; latter not covered under Sec. 2(22)(e) ambit - HC holds 'deposit' received by assessee-firm in normal course of business from sister concern not taxable as 'deemed dividend' u/s 2(22)(e); Pursuant to mutual benefit contract, assessee received electricity at concessional rate in lieu of supplying generators to sister concern against security deposit...read more |
|
17. |
[TS-6664-ITAT-2014(Kolkata)-O] Loan vs. Inter-corporate Deposit |
Inter-corporate deposits accepted by assessee from sister concern (subsidiary) cannot be termed as loan or advance for the purpose of Sec. 2(22)(e) - ITAT rules in assessee’s favour; Holds that “assessee has accepted inter corporate deposits from a sister concern and also assessee is engaged in the business of finance, as is clear from the objects mentioned in Memorandum of Association, the provisions of Section 2(22)(e) of the Act will not apply to the facts of this case as the inter corporate deposits cannot be treated as loans or advances in terms of section 2(22)(e)”...read more |
|
Treatment of current profits |
||
|
18. |
Current profits vs capital profits |
No part of any capital profits, except capital gains as assessable under section 12B of the 1922 Act as well as u/s 45 of the 1961 Act, of a company can ordinarily be included in ‘accumulated profits’ for determining dividend u/s 2(22) |
|
19. |
Current Profits |
Current profits could not be included in term ‘accumulated profits’ - Interpreting Sec. 2(6A) of the 1922 Act, which did not contain a definition of the term ‘accumulated profits’ similar to one found in Explanation 2 to Sec. 2(22) of the 1961 Act, it was held that current profits could not be included in the term, ‘accumulated profits’. This was so held even in case of liquidation of a company in respect of its current profits up to the date of liquidation |
|
20. |
Current Profits |
"Current profits", i.e., profits of a company in liquidation arising after the end of the last previous year, and before liquidation commenced, were brought within the net of taxation as dividend |
|
Application of Sec. 194 to deemed dividend u/s 2(22)(e) |
||
|
21. |
Application of Sec. 194 to deemed dividend u/s.2(22)(e) |
Sec. 194 casts obligation for TDS only when payment is made to a shareholder, not applicable to funds advanced to non-shareholders treated as deemed dividend u/s 2(22)(e) - ITAT rules in favour of assessee (company that advanced loans to non-shareholder concerns which was treated as deemed dividend in hands of the concerns); Observes that "Company is not obliged to maintain any register wherein details of such concerns may be maintained to which provisions of Sec. 2(22)(e) apply. Under these circumstances, when payment is made to a non-shareholder, it is impossible for the payer company to ascertain whether it will attract the provisions of Sec. 2(22)(e) of the IT Act, 1961 or not"...read more |
|
22. |
[TS-6255-HC-2016(RAJASTHAN)-O] Application of Sec. 194 to deemed dividend u/s.2(22)(e) |
Tax is not liable to be deducted at source u/s 194 on deemed dividend; Sec. 194 requires TDS only when payment is made to a shareholder - HC holds in favour of assessee; Holds that tax is not liable to be deducted at source u/s 194 on deemed dividend to a concern in which shareholder of assessee company is a member as a partner, and in which he has substantial interest, as per Sec. 2(22)(e)...read more |
|
Deemed dividend taxable in the hands of |
||
|
23. |
Deemed dividend taxable in the hands of |
Sec. 2(22)(e) to tax dividend only in hands of the shareholder and not in the hands of the concern - ITAT rules in favour of assessee; Holds that “The intention behind the provisions of Sec. 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provision as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern.”...read more |
|
24. |
[TS-5916-ITAT-2016(BANGALORE)-O] Deemed dividend taxable in the hands of |
Deemed dividend taxable in shareholder’s hands (i.e., in assessee’s hands) and not in hands of recipient concern – ITAT dismisses assessee’s appeal, notes that amounts withdrawn from the company were for the benefit of concerns in which assessee-shareholder had substantial interest; Holds that Sec. 2(22)(e) is applicable to assessee as all conditions essential for invoking the section are present...read more |
|
Other issues |
||
|
25. |
Substantial part of the business |
In the absence of definition of “substantial part of the business” for the purpose of Sec. 2(22)(e), utilization of 34.98% of funds of business in money lending would constitute substantial part of business to be outside the scope of Sec.2(22)(e) - HC rules in favour of assessee; Upholds ITAT’s order that 34.98% funds utilized in money lending constitutes a substantial part of the business of the company...read more |
|
26. |
Running account; meagre credit balance |
Meagre credit balance doesn’t amount to loans & advances, attracting Sec. 2(22)(e) - Delhi ITAT allows assessee’s appeal for AY 2006-07, deletes addition u/s 2(22)(e) towards deemed dividend; Observes that for applicability of Sec. 2(22)(e), apart from other conditions, amount received by the shareholder should be in nature of loan or advance...read more |
|
27. |
[TS-5567-ITAT-2015(LUCKNOW)-O] Payments in the course of business |
Payments received by assessee from the company are receipts against sale made in course of commercial transactions, therefore, Sec. 2(22)(e) is not applicable - Third Member of Lucknow Bench of ITAT rules partly in favour of assessee; Holds that the impugned payments were not an advance/ loan made to assessee, and hence Sec. 2(22)(e) was not applicable...read more |
|
28. |
Loan to shareholder under 'self-serving' MoU |
Loan to shareholder under 'self-serving' MoU without project visibility, 'deemed dividend' u/s 2(22)(e) - ITAT rules that unsecured loan advanced by a closely-held sister concern to assessee (who is also a beneficial shareholder in lender-company) towards purchase of commercial space under the Memorandum of Understanding ('MoU') taxable as deemed dividend u/s 2(22)(e) for AY 2010-11 in the hands of assessee-shareholder; Notes that lender continued to lend money without any visibility of the project's commencement, which defied rational approach to a business transaction; also notices gross disconnect between MoU terms vis-á-vis actual pattern of flow of funds...read more |
|
29. |
Business interests of lending company |
'Advance’ to sister concern benefitting lending company's business interests, not deemed dividend - HC holds that 'advance' given by a closely-held company to its sister concerns and substantial shareholder (assessees) does not fall within ambit of deemed dividend u/s 2(22)(e); Assessees procured advance to buy agricultural land in names of its directors, and then transfer it back to the company after conversion to non-agricultural land as, under Karnataka laws, company cannot hold agricultural land...read more |
|
30. |
Loans or advances to non-registered shareholder |
Only 'registered' shareholders taxable on deemed dividend u/s 2(22)(e), not loan recipient - HC upholds ITAT order, advance received from fellow subsidiary company (having common family shareholders), not taxable as deemed dividend income u/s 2(22)(e); Assessee receiving loan not a shareholder, and Sec. 2(22)(e) applicable only to a registered shareholder; Deemed dividend fiction cannnot be extended to enlarge concept of shareholders...read more |
|
31. |
Penalty u/s.271(1)(c) for concealment of deemed dividend |
ITAT holds deemed dividend concealment as "intentional", confirms penalty, rejecting 'notional income' argument - ITAT upholds penalty u/s 271(1)(c), conduct of assessee held to clearly establish concealment of facts and filing of inaccurate particulars; Assessee was well within knowledge that advances received from companies in which she was a registered and beneficial shareholder was 'deemed dividend' u/s 2(22)(e)...read more |
|
32. |
[TS-5704-HC-1995(ALLAHABAD)-O] Relevant date to examine applicability of Sec. 2(22)(e) |
For attracting Sec. 2(22)(e), the chief ingredient is that one should be a shareholder on the date the loan was advanced to him. Where such ingredient is not established, the advance could not be taken as deemed dividend u/s 2(22)(e) |
|
33. |
Share application money |
Share application money cannot be treated as loan for purpose of Sec. 2(22)(e) - Amount received in question being share application money, could not be treated as loan or deposit, and thus, not assessable as deemed dividend |
|
34. |
Exemption provided u/s. 10(33) not applicable to 'deemed dividend' u/s. 2(22)(e) |
Exemption provided u/s 10(33) is not applicable to 'deemed dividend' referred to in Sec. 2(22)(e) - ITAT rules in favour of Revenue; Holds that “There is no ambiguity in the provisions of section 10(33), which clearly stipulates that dividends referred to in section 115-O shall be exempt from charge of tax.”; Observes that by virtue of the Explanation at the end of Chapter XII-D, deemed dividend referred to in Sec. 2(22)(e) has been excluded from the ambit of Chapter XII-D (Sec.115-O is part of Chapter XII-D)...read more |
|
35. |
[TS-6447-ITAT-2014(AHMEDABAD)-O] Guarantee given by shareholder-director, whether 'in the course of business' |
Loan to director-shareholder deemed dividend, his capacity as company's guarantor separate - ITAT rules that loan advanced by a closely held company, having accumulated profits, to its director having more than 10% voting power, is taxable as deemed dividend u/s 2(22)(e); Rejects assessee-director’s submission that funds were received under business compulsion in lieu of assessee standing guarantee for company’s loan transaction with bank...read more |
|
36. |
Deemed Dividend vis-á-vis Debenture Account |
Debenture account is in the nature of 'loans & advances' - ITAT examines definition of 'debenture' and rules in assessee's favour; Holds that 'debenture is only a loan account'; States that the lower authorities erred when they consolidated only loan accounts of the assessee with the company ignoring its debenture account therein...read more |
|
37. |
Increase in shareholding subsequent to date of advance |
Increase in shareholding after date of advance does not attract Sec. 2(22)(e) - Delhi HC holds in favour of assessee; Holds that on date when security deposit of Rs.75 lakhs was credited to assessee in the company’s books, the assessee's admitted shareholding was much less than 10%, and thus Sec. 2(22)(e) was not attracted...read more |
|
38. |
Advance by subsidiary |
Sec. 2(22)(e) applies to loans borrowed by a holding company from its 100% subsidiary - Following decision in Sadhana Textiles Mills case, held that Sec. 2(22)(e) applied to assessee-company though it held all shares in the subsidiary company [Star Chemicals Pvt. Ltd. v. CIT, [TS-5181-HC-1993(BOMBAY)-O]] |
|
39. |
A Loan is a benefit; Interest paid on loan treated as deemed dividend is deductible u/s.57 |
Payment of interest does not mean that a loan does not confer any benefit to the borrower; Interest paid on loans, which were treated as deemed dividends u/s 2(22)(e), allowable as a deduction u/s 57(iii) - HC rules partly in favour of Revenue; Rejects assessee's argument that a loan is never a benefit; Holds that a person obtaining money on loan does derive a benefit at least to the extent of the use of the borrowed funds; Explains that it is not correct to construe the section by importing the expression "directly or indirectly" in connection with the expression "by way of advance or loan to a shareholder" appearing in Sec. 2(22)(e)...read more |
|
40. |
Advance payments to another company can be set off against any future payments liable to be made to such company |
HC holds that advance payments made by assessee to another company could be set off against any future payments liable to be made to such company - further holds that Sec. 2(22)(e)(ii) was merely an explanation and could not be construed independently of the parent section, viz.,Sec. 2(22)(e) as, if a transaction was not covered within the ambit of the main section, it could not be brought under the auspices of an Explanation to that section, as an Explanation is not exhaustive, and merely elaborates the ambit of a section within a specified circumstance or example...read more |
|
41. |
Attributes of dividend |
Sec. 2(22)(e) shows that a payment would acquire the attributes of dividend within meaning of the provision if following conditions are fulfilled: (1) company making the payment is one in which the public are not substantially interested; (2) money should be paid by the company to a shareholder holding not less than ten per cent of voting power of the company. It would make no difference if the payment was out of the company’s assets or otherwise; (3) the money should be paid either as an advance or a loan, or it may be any payment which the company may make on behalf of, or for the individual benefit of, any shareholder, or also to any concern in which such shareholder is a member or a partner and in which he is substantially interested; and (4) the limiting factor is that these payments must be to the extent of accumulated profits possessed by such a company |
|
42. |
[TS-6640-ITAT-2013(BANGALORE)-O] Lifting of corporate veil in context of deemed dividend |
Sec. 2(22)(e) does not contemplate lifting of corporate veil; Deletes deemed dividend addition – Sec. 2(22)(e) to be applied as it is, and it does not contemplate looking behind the corporate veil; Rejects Revenue's argument that common shareholder "indirectly" held substantial interest in Borrower Co, as Lending Co had majority shareholding in Borrower Co |
Circulars
|
Sr. No. |
Circular No. |
Conclusion |
|
1. |
With respect to trade advances, CBDT accepts the view settled by Delhi, P&H, Allahabad High Courts that trade advances, which are in the nature of commercial transactions, would not fall with the ambit of ‘deemed dividend’ taxability u/s. 2(22)(e) |
|
|
2. |
Finance Act of 1987 - Amendment to definition of “dividend” |
