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.