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August 16, 2022

Loan given to a shareholder is not a deemed dividend

by CA Shivam Jaiswal in Income Tax

Loan given to a shareholder is not a deemed dividend

Facts and Issues of the case

Assessee is an individual who electronically filed her return of income for A.Y. 2014-15 declaring total income at Rs.18,06,090/-.

During the course of assessment proceedings, AO noticed that assessee had purchased a property for Rs.3,60,00,000/- for the purpose  of expansion of Ganesh Hospital Pvt. Ltd.  of which the assessee was a promoter. AO noted that assessee had made aggregate payment of Rs.73,70,000/- to Shri Chander Prakash Bagai for purchase of adjacent old residential house in her own name but the payment was made through the bank account of Ganesh Hospital Pvt. Ltd. Before AO, assessee submitted that the hospital wanted to purchase adjacent residential house for  its own use but due to the area being residential,  assessee  was forced to purchase the house in her own name, but 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 s. 2(22)(e) of the Act. The submissions of the assessee were not found acceptable to AO. AO noted that assessee did not furnish  any proof to support the claim that they had tried to get property converted for commercial use. AO was of the view that transaction attracted the provision of Section 2(22)(e) of the Act.

Observations by the Court

We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the addition made u/s 2(22)(e) of the Act.

Section 2(22)(e) of the Act stipulates that any payment by a company, not being a company in which the public is substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) 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 dividend in the hands of the shareholder. Section 2(22)(e) creates a fiction providing certain circumstances under which certain kinds of payments made to the persons specified therein are to be treated as deemed dividend income.

In the present case,  it is the  contention of the  assessee  that the company had agreed to buy the adjacent old residential house for Rs.3.60 crores for the purpose of the  expansion of its  hospital and for which an advance payment of Rs.90 lacs was made to the vendor. Thereafter, as the  company  could  not  get  the  required loan from the banks in its  name  for  making  the  balance  payment of the  consideration and there  was every likelihood of the advance of Rs. 90 lacs that was given to the seller for the  purchase  of property being forfeited, loan was obtained in individual name of the assessee and the property was purchased.  The  property  that has been purchased is  also  reflected  in  the  books  of  account  of the hospital. Before us, Revenue has not placed any material on record to demonstrate that the impugned transaction was a smoke screen to cover a benefit obtained by the assessee from the company in which the assessee is a shareholder. Further, Revenue has also not placed any contrary material on record to the controvert the submissions of the  AR.

In such a situation and in the light of the judicial decisions cited herein above, we are of the view that the amount advanced to the assessee was not a gratuitous loan but the transaction was entered to protect the advance money of Rs. 90 lacs from being forfeited and that the business expediency for entering the transaction has been proved by the assessee.

Conclusion

A loan or advance given to a shareholder which is beneficial to the company cannot be considered as deemed dividend.

Archana-Sharma-Vs-DCIT-ITAT-Delhi

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