Section 2(22)(e)

Section 2(22)(e) — the law in short

What the courts have decided on section 2(22)(e), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• National Travel Services v CIT Supreme CourtHelps departmentValidity unconfirmed
  Our firm is not on the company's register of members — our partners are. Can s.2(22)(e) still reach a loan to the firm?
  A two-Judge Bench of the Supreme Court said it prima facie can, and doubted the High Court line that a 'shareholder' must be both registered and beneficial owner. It did not decide the point. It referred the correctness of the Delhi High Court's Ankitech judgment to a three-Judge Bench, and that reference is the state of play.
• Gopal and Sons (HUF) v CIT Supreme CourtHelps department
  The shares are in the Karta's name, not the HUF's. Does s.2(22)(e) still catch a loan to the HUF?
  Yes. On the record the HUF was shown in the company's filings as registered and beneficial shareholder. In any event s.2(22)(e) also reaches a payment to a concern in which a shareholder is a member with a substantial interest — beneficial entitlement to not less than 20 per cent of the concern's income — and the Karta was a member of the HUF.
• CIT v G. Narasimhan Supreme CourtCuts both ways
  My company reduced its share capital and paid me cash and property for the reduction. Is that dividend, capital gains, or both?
  Both, in that order. The Supreme Court held that what a company distributes on a reduction of capital splits into two components. So much as can be correlated with its accumulated profits, capitalised or not, is deemed dividend under section 2(22)(d) and is taxed as income. Only the excess over accumulated profits is a capital receipt, from which the cost of acquiring the extinguished portion of the shareholding is deducted to find any capital gain. The Court also held that a loan already taxed as deemed dividend under section 2(22)(e) reduces the company's accumulated profits.
• P.K. Badiani v CIT Supreme CourtHelps departmentValidity unconfirmed
  The officer has added a development rebate reserve to 'accumulated profits'. Is that reserve really available for a deemed dividend?
  Yes. 'Accumulated profits' in the deemed dividend definition means profits in the commercial sense, not the profits assessed to tax. A development rebate reserve is a bookkeeping appropriation of commercial profit, so it stays inside accumulated profits even though it was never taxed.
• CIT v C.P. Sarathy Mudaliar Supreme CourtHelps taxpayerSuperseded by amendment
  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?
  No, on the law as it then stood. The Supreme Court held that a Hindu undivided family cannot be a shareholder of a company; the shareholder is the person registered as such in the company's books. Since the family was not and could not be registered, a loan to it was not a loan to a shareholder, and the deemed dividend provision did not apply. The provision creates an artificial dividend out of money that has to be repaid and never becomes the borrower's income, so it must be strictly construed and shareholder means the registered shareholder, not the beneficial owner.
• CIT v Kabul Chawla High CourtHelps taxpayer
  A search was carried out at my premises and the Assessing Officer has reopened six years under section 153A — can he add to years already assessed when nothing incriminating was found?
  No. The Delhi High Court held on 28 August 2015 that a completed assessment can be interfered with in a section 153A assessment only on the basis of incriminating material unearthed in the search, or undisclosed income or property discovered in it, which was not produced or disclosed in the original assessment. Where an assessment for a year is not pending on the date of the search it does not abate, and in the absence of such material the completed assessment can only be reiterated. Here the assessments for 2002-03, 2005-06 and 2006-07 stood completed, nothing was found, and the deemed dividend and other additions fell.
• CIT v Ankitech P Ltd High CourtHelps taxpayerUnder appeal
  My company got an advance from a sister concern. Can it be taxed as deemed dividend in our hands?
  No. The payment answered the description of deemed dividend under s.2(22)(e), but it cannot be assessed on the recipient concern because that concern is not a shareholder of the paying company. The fiction enlarges the meaning of dividend; it does not enlarge who counts as a shareholder.
• CIT v Universal Medicare Private Limited High CourtHelps taxpayerValidity unconfirmed
  Money came into our company's account from another company with a common shareholder. Can the deemed dividend be taxed on us?
  No. A deemed dividend under s.2(22)(e) is still a dividend, and a dividend is taxed in the hands of the shareholder. A company that is not a shareholder of the paying company cannot be assessed on it. The Court also upheld, as a finding of fact, that money misappropriated by an employee and never entered in the books was not a loan or advance at all.
• CIT v Shri Raj Kumar High CourtHelps taxpayer
  The company advanced money to me against goods I was to supply. Is that a 'loan or advance' under s.2(22)(e)?
  No. The word 'advance' in s.2(22)(e) takes its colour from the word 'loan' next to it, so it means an advance carrying an obligation of repayment. Money moved to give effect to a genuine commercial transaction — a trade advance — is outside the clause.
• CBDT Circular 19/2017 CBDT Circulars & InstructionsHelps taxpayer
  The company advanced money to a sister concern against job work and the officer says it is a deemed dividend. Is there anything binding on him that says a trade advance is not?
  Yes. The Board's own position is that trade advances in the nature of commercial transactions fall outside the word 'advance' in s.2(22)(e), that the courts have settled it, and that its officers are not to file appeals on the ground and are to withdraw or not press those already filed. It binds the department, not the courts — and it is about trade advances in the nature of commercial transactions, not about related-party payments at large.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.