It depends, and the two questions have different answers. A loan to a shareholder who is the beneficial owner of shares carrying not less than ten per cent of the voting power is caught, and so is a loan to a concern in which that shareholder is a member or partner with a substantial interest — but only up to the company's accumulated profits on the date of payment. Who pays is settled the other way: the fiction taxes the shareholder, not the recipient concern, which is the holding in Ankitech. The mechanics have moved twice — the amount was taxed in the shareholder's own hands until 31 March 2018, carried dividend distribution tax at 30 per cent on payments made between 1 April 2018 and 31 March 2020, and from dividends paid on or after 1 April 2020 it is back on the shareholder's own return.
Section 2(22) does not create a charge. It enlarges the meaning of the word 'dividend' wherever that word appears in the Act, and sub-clause (e) is the limb that catches money moving out of a closely held company to the people who control it without a dividend being declared. Everything in this note is about that sub-clause, in the form it has carried since the Finance Act, 1987 substituted it with effect from 1 April 1988 — the earlier form spoke simply of an advance or loan 'to a shareholder, being a person who has a substantial interest in the company', and the present form replaced that with the ten per cent voting power test and added the concern limb. Read the note in the order it is set out, because the questions are separable and the defences differ. First, what the sub-clause covers: three distinct payments, each conditioned on the payer being a company in which the public are not substantially interested. Second, the two percentage tests, which are different tests measured on different things. Third, who must be the shareholder — registered, beneficial, or both. Fourth, the accumulated profits ceiling, which is a limit on quantum and not a condition of liability. Fifth, the amalgamation rule that can raise that ceiling. Sixth, the unsettled question of capitalised profits. Seventh, whose income it is. One thing to fix before any of that: the date of the payment. The consequences of a s.2(22)(e) finding have changed twice, and the note on who pays sets the three regimes out.
Sub-clause (e) reads: "any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits". Three payments, then, and it is worth separating them because the defences differ: a loan or advance to the qualifying shareholder himself; a loan or advance to a concern in which he is a member or partner and has a substantial interest; and a payment by the company on behalf of, or for the individual benefit of, that shareholder. Everything is conditioned on the payer being a company in which the public are not substantially interested, on the payment post-dating 31 May 1987, and on the company possessing accumulated profits.
The two percentages are different tests and they are easy to confuse. On the payer side the shareholder must be "the beneficial owner of shares ... holding not less than ten per cent of the voting power" — ten per cent, of voting power, not of capital, and beneficial ownership is required by the words of the sub-clause itself. On the recipient side, Explanation 3 to clause (22) says: "For the purposes of this clause,—(a) 'concern' means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern". Twenty per cent, and of income, and tested at any time during the previous year rather than on the date of the loan. Note the limiting words at the end of the definition of substantial interest in Explanation 3(b): it defines it for a concern "other than a company". Where the recipient concern is itself a company, the corresponding twenty per cent test is the one in s.2(32): "'person who has a substantial interest in the company', in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power". No source relied on for this note says in terms that s.2(32) supplies the test for a company concern under s.2(22)(e); that is the reading of the two definitions together, and it should be checked before it is argued.
Registered and beneficial. The sub-clause on its face requires beneficial ownership. The received formulation in the case law is stricter — the shareholder must be both the registered holder and the beneficial owner — and it is where nominee and family holdings come apart. Gopal and Sons (HUF) v CIT is the corpus entry on the point: the share certificates stood in the Karta's name and the HUF argued that it could not in law be a registered shareholder, so the twin requirement failed. The Supreme Court did not have to decide that abstract question. On the record the company's annual returns filed with the Registrar of Companies showed the HUF itself as registered and beneficial shareholder; and in any event the concern limb caught the payment, because the HUF was a concern within Explanation 3(a) and the Karta was a member of it with the twenty per cent entitlement Explanation 3(b) requires. The practical lesson is narrow and useful: the register, not the certificate, is the document that decides this, and pull the ROC filings before running a registered-holder defence.
Accumulated profits is a ceiling, not a condition of liability, and it is measured on the date of payment. The closing words of the sub-clause are "to the extent to which the company in either case possesses accumulated profits", so an advance of a crore out of reserves of ten lakh is a deemed dividend of ten lakh and nothing more. Explanation 2 to clause (22) settles the current-year question: "The expression 'accumulated profits' in sub-clauses (a),(b),(d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation". Profits earned in the running year up to the date the money went out are therefore in the pot, which is why the date of each drawing matters and why a running account has to be tested drawing by drawing rather than on the year-end balance. Explanation 1 carves out a narrow historical class: "The expression 'accumulated profits', wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956."
One provision moves the ceiling upwards and is easy to miss, because it sits in clause (22) rather than in the sub-clause. Explanation 2A was inserted in clause (22) by the Finance Act 2018. Its words are not reproduced here from the Act, because no reproduction of the Act carrying it has been read; what is given instead is the description in the Board's own explanatory notes to that Finance Act, which record that the new Explanation provides "that in the case of an amalgamated company, accumulated profits, whether capitalised or not, or losses as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation." Those notes also record that the amendment "takes effect from 1st April, 2018 and will, accordingly, apply in relation to assessment year 2018-19 and subsequent assessment years" — so it governs from AY 2018-19. It matters here because it can give a company with no distributable reserves of its own a ceiling built out of the amalgamating company's reserves, and that ceiling is exactly the figure an advance is measured against. A group that has absorbed a cash-rich company can therefore find advances to its promoters deemed dividend to an extent that its own balance sheet does not suggest. Two cautions follow. Where there has been an amalgamation, compute the ceiling from the current Act and not from any secondary reproduction of the section, because the Explanation is recent enough that stale reproductions omit it. And read the Explanation itself before arguing about capitalised profits, since it is one of the places in the clause where the phrase "whether capitalised or not" appears.
On capitalised profits the position is commonly stated as an exclusion for sub-clause (e). The reasoning is expressio unius: sub-clauses (a), (b), (c) and (d) all speak of accumulated profits "whether capitalised or not" — (d) in the longer form "whether such accumulated profits have been capitalised or not" — and sub-clause (e) alone omits the phrase, its closing words being only "to the extent to which the company in either case possesses accumulated profits", which is how the text reproduced above reads. Explanation 2A uses the phrase twice. That is a stronger argument than it is usually given credit for, because (e) is the only one of the five sub-clauses that leaves the words out. It is still not stated here as settled, and the reason is that the commentary genuinely divides. At least one published note on s.2(22)(e) takes the contrary view outright, that capitalised profits are within "accumulated profits" and that Explanation 1 is the only carve-out. No decision either way is cited on this page. So the exclusion is left unresolved: run the argument if the facts need it, but check the current commentary and the bare Act before you put it in a reply as though it were common ground.
The fiction taxes the shareholder, not the recipient concern. That is CIT v Ankitech P Ltd, the corpus entry, and it needs to be stated precisely because the sloppy version of it loses. The Delhi High Court did not hold that a payment to a sister concern falls outside s.2(22)(e). It held that the payment answered the description of deemed dividend but could not be assessed on the recipient concern, because that concern was neither the registered nor the beneficial shareholder of the payer, and the legal fiction which enlarges the meaning of 'dividend' does not travel further so as to enlarge who is a 'shareholder'. The department's answer is the one the Court itself pointed to: assess the same sum in the hands of the common shareholder who has ten per cent of the payer and a substantial interest in the borrower. Expect that as a protective assessment, and check whether it has already been made before you win the point in the concern's own appeal. The courts have not left Ankitech entirely undisturbed, and the history is a sequence rather than a conflict. Ankitech was affirmed by the Supreme Court in CIT v Madhur Housing and Development Co [2018] 401 ITR 152 (SC). The Delhi High Court took a contrary view in National Travel Services, and that case went to the Supreme Court but was never decided there: the appeal was dismissed as withdrawn, the taxpayer having opted for the Vivad se Vishwas scheme. So Ankitech, as affirmed in Madhur Housing, stands, with a contrary High Court view on the record and nothing from the Supreme Court on it either way. Reports that a two-judge Bench of the Supreme Court doubted Ankitech in that appeal and referred it to a larger Bench are in wide circulation. No such order has been established, and nothing is said about it above. Cite Ankitech with that history rather than as untouched, and check the position on National Travel Services before relying on it either way.
Two carve-outs sit in the section itself, in the list of things 'dividend' does not include. The first is the money-lending exclusion: "(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company". Both halves have to be satisfied — the loan must be in the ordinary course, and lending must be a substantial part of the business, not an incidental activity minuted into the objects clause. The second is the set-off: "(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off". That is the relief against double taxation of the same money: once the advance has been taxed as a deemed dividend, a later real dividend applied in repayment of it is not taxed again to the extent it is set off. It requires the set-off actually to be made and recorded, so a board resolution declaring a dividend and adjusting it against the outstanding advance is the document that earns the exclusion.
Now the commercial-expediency argument, which is on much firmer ground than the bare statutory text suggests, because the Board has conceded it. The argument is that "advance or loan" in sub-clause (e) means money given gratuitously out of accumulated profits, and does not reach a payment made in the course of a commercial dealing — a trade advance against goods to be supplied or services to be rendered, a security deposit for premises or equipment, money moving between group companies for a genuine business reason. CBDT Circular No. 19/2017 dated 12 June 2017, F.No. 279/Misc./140/2015/ITJ, "Settled View on section 2(22)(e) of the Income Tax Act, trade advances", accepts it. The Board records that "some Courts in the recent past have held that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22) (e) of the Act" and that "Such views have attained finality", and concludes: "In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' in section 2(22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon."
The circular gives three worked illustrations, each a decided case, and they are the three fact patterns worth matching your own against. Advances by a company to a sister concern "adjusted against the dues for job work done by the sister concern", where "amounts advanced for business transactions do not to fall within the definition of deemed dividend" (CIT v Creative Dyeing & Printing Pvt Ltd, Delhi High Court). An advance by a company to its shareholder "to install plant and machinery at the shareholder's premises to enable him to do job work for the company so that the company could fulfil an export order", where "as the assessee proved business expediency, the advance was not covered by section 2(22)(e)" (CIT v Amrik Singh, Punjab and Haryana High Court). And a floating security deposit given against the use of a sister concern's electricity generators, held to be "a business transaction arising in the normal course of business between two concerns" (CIT, Agra v Atul Engineering Udyog, Allahabad High Court). The reasoning underneath all three is the Delhi High Court's in CIT v Raj Kumar, reported at 318 ITR 462 and at (2009) 181 Taxmann 155 (Delhi), which construed "advance" by noscitur a sociis: "the word 'advance', which appears in company of word 'loan' in section 2(22)(e), can only mean such advance which carries with it an obligation of repayment; hence, a trade advance, which is in nature of money transacted to give effect to a commercial transaction, cannot be treated as 'deemed dividend'".
Two limits on how far that carries you, and they matter. A circular binds the income-tax authorities and not the courts; the assessee may hold the officer to it because it is beneficial, but it does not decide an appeal. And its subject is trade advances in the nature of commercial transactions, not related-party payments at large: it does not say that a running current account between group companies is outside the sub-clause merely because the parties keep one. The exclusions actually printed in the section are still only (ii) and (iii), and neither of them is a commercial-transaction exclusion, so this remains an argument about the meaning of the words "advance or loan" rather than a statutory exception — which is exactly why it turns on findings of fact. The corpus's own Ankitech entry records in terms that the material behind it carried no treatment of the trading-account or commercial-transaction exception, so Ankitech is no authority for it either. Build the record the argument needs: reciprocal movement of funds in both directions, a commercial reason contemporaneously documented, interest charged or a supply contract behind the advance, and the accounting treated as trade and not as a loan account. One sourcing note — the Board's own copy of Circular 19/2017 has not been obtained, so the wording quoted above is taken from reproductions of the circular that agree with each other word for word.
Who pays, and at what rate, has changed twice, and the assessment year decides the consequence more often than the finding does. Until 31 March 2018 a s.2(22)(e) deemed dividend bore no dividend distribution tax and was taxed in the qualifying shareholder's own hands. Chapter XII-D carried an Explanation providing that dividend distribution tax was not payable by the company on a dividend under sub-clause (e), and the Finance Act 2018 deleted it. The deletion applied to payments made on or after 1 April 2018 — the first previous year affected is FY 2018-19, assessment year 2019-20 — and from then the charge moved to the company, at thirty per cent rather than the usual fifteen, without grossing up, the grossing-up provision in s.115-O(1B) being made inapplicable to it. The 2018 position is stated here from Bill-stage material rather than from the enacted text, so check the enacted provision if the year matters. That window closed with the Finance Act 2020, which abolished dividend distribution tax and returned dividend to the classical system: an amount distributed by way of dividend on or after 1 April 2020 is no longer subjected to tax under s.115-O in the company's hands but is taxable in the shareholder's. A dividend paid on or after 1 April 2020 falls in FY 2020-21, so the first assessment year on the classical system is AY 2021-22. The other half of that repeal is s.10(34), the exemption that made a declared dividend tax-free in the shareholder's hands so long as it had borne dividend distribution tax under s.115-O. Because a s.2(22)(e) sum was outside s.115-O until 1 April 2018, s.10(34) never reached it, which is why a deemed dividend was taxable in the shareholder's hands in years when a declared dividend was not. The Finance Act 2020 amended clause (34) so that "the provision of this clause shall not apply to any income, by way of dividend, received on or after 1st April, 2020", which is the same AY 2021-22 boundary. From that year a s.2(22)(e) finding is income of the shareholder, chargeable under the head income from other sources at that shareholder's own slab rate. There is no separate rate for it, which is why the finding hurts an individual promoter far more than the thirty per cent dividend distribution tax did.
The deduction side and the withholding side both need care, and on the deduction side this note has to record what it cannot state. Section 194 obliges the principal officer of the company to deduct "before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rates in force". Sub-clause (e) is named in the section, so the obligation attaches to a deemed dividend as much as to a declared one. It is the awkward one to comply with, because the company has paid out money, not dividend, and has nothing left to deduct from; in practice the deduction has to be funded, and the company that has already advanced the whole sum is in default from the moment the advance is made. The rate is ten per cent — the rate in s.194 was changed from the rate in force to ten per cent with effect from the 2020-21 Budget — and the threshold is ten thousand rupees: no deduction is required where the dividend paid to a shareholder in a financial year does not exceed that amount, the figure having been raised from five thousand rupees with effect from 1 April 2025, so FY 2025-26 is the first year on the higher figure. Both the rate and the threshold are stated here from secondary material rather than from the Act, and the statutory condition attached to the threshold relief — that it runs to an individual shareholder paid otherwise than in cash — has not been verified. Read the proviso itself before telling a corporate shareholder, or a company paying cash, that it is covered. On the deduction side, once the dividend is the shareholder's own income he will want to set expenditure against it under s.57, and the restriction on doing that is the thing to check. No restriction has been established for this note, and none is stated here: neither a bar nor a percentage cap. That is a gap in this page and not a statement that the section is silent. Take the restriction from the current Act before you claim anything against a deemed dividend, and do not assume a general expenditure claim survives.
A word about s.115-O, because it is the provision the middle regime ran through and it is now spent. Dividend distribution tax was a charge on the company, imposed by s.115-O on dividend declared, distributed or paid; the Finance Act 2018 brought a sub-clause (e) dividend within it at thirty per cent by deleting the Explanation to Chapter XII-D that had kept it out, and the Finance Act 2020 stopped the charge altogether for dividend declared, distributed or paid on or after 1 April 2020. For the two-year window in between, the company is the taxpayer and the shareholder is not, which changes who has to be heard, who appeals, and against whom recovery runs. For a year outside that window, s.115-O has nothing to do with a s.2(22)(e) finding — before it, because the Explanation excluded sub-clause (e); after it, because the section no longer charges anything. The dividend distribution tax history set out above is taken from secondary material and not from the text of s.115-O itself, so a practitioner working inside the 2018 to 2020 window should read the section and the proviso as they stood for his year before computing anything.
On the Income-tax Act, 2025, the official correspondence table from the 1961 Act to the new Act maps s.2 to s.2 of the new Act, s.57 to s.93, and s.194 to entries in s.393 — the row gives "393(1)[Table: S.No. 7], 393(4)[Table: S.No.10]" — and marks s.115-O "Redundant", which is what you would expect of a dividend distribution tax that no longer exists. That mapping is not fine-grained enough to be useful for this note. It does not break s.2 down to the level of clause (22) or sub-clause (e), and the text of s.2 of the 2025 Act has not been read here. So the successor definition of dividend sits in s.2 of that Act, but the clause number is not given here and should not be guessed. Anyone advising on a tax year governed by the 2025 Act has to find the successor sub-clause, satisfy himself that the ten per cent voting power test and the concern limb survive in it, and check whether the accumulated profits ceiling and the Explanations carry across in the same terms.
Two things decide most s.2(22)(e) disputes and neither is the merits. The first is who is being assessed: if the department has taxed the borrowing concern, Ankitech is a complete answer to that assessment, and the reply should say so and stop — but it should also anticipate the protective assessment on the shareholder, which is what the Court invited. The second is the year: the same finding produced no company-level tax before 1 April 2018, a 30 per cent DDT on payments between then and 31 March 2020, and from AY 2021-22 lands the whole amount on an individual promoter's return at his slab rate with s.194 deduction due from the company. A defence pitched at the wrong one of those three regimes wastes the appeal.
A company lent money to our HUF. The shares are held in the members' names but bought with family funds. Is the loan a deemed dividend of the HUF?
My company reduced its share capital and paid me cash and property for the reduction. Is that dividend, capital gains, or both?
The company and I have a mutual, open and current account with money moving both ways. Is the deemed dividend the closing debit balance, the highest debit balance during the year, or something else? And can the Department tax money that reached me through a firm rather than directly?
The Assessing Officer has disallowed interest under section 14A against my dividend income, though I have more than enough of my own funds — can he do that without showing a link?
The shares are in the Karta's name, not the HUF's. Does s.2(22)(e) still catch a loan to the HUF?
I borrowed on overdraft to honour a personal donation rather than sell my shares. Can I deduct the interest as it protected my income-earning assets?
Shares held for control, or as stock-in-trade. Does s.14A still bite?
I have a running account with my company. I overdrew during the year, but the account was squared up by a journal adjustment on the last day of the year against another shareholder's credit balance. Can the withdrawals still be deemed dividend?
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