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 departmentNo later treatment found
  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 Mukundray K. Shah Supreme CourtHelps department
  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?
  Neither the closing balance nor the peak. The Supreme Court, adopting the Bombay High Court's reasoning in P.K. Badiani, held that the position must be ascertained at the date of each payment: every debit is examined individually, it is a loan only to the extent it exceeds the company's existing debt to the shareholder, and it is taxable only to the extent of accumulated profits existing on that date. The Court also upheld the taxing of money routed to the shareholder through partnership firms used as conduits, as a payment for his individual benefit.
• 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.
• Miss P. Sarada v CIT Supreme CourtHelps department
  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?
  Yes. The Supreme Court held that the legal fiction comes into play as soon as the money is paid, so each withdrawal made when the shareholder has no credit balance is a deemed dividend on the date it is made. A subsequent adjustment or repayment, even one made on the last day of the accounting year, does not alter the position.
• P.K. Badiani v CIT Supreme CourtHelps departmentNo later treatment found
  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.
• Jaykumar B. Patil v JCIT High CourtHelps departmentNo later treatment found
  The company advanced money to me against pending job-work orders and I repaid the whole of it within two months, in the same year. The Assessing Officer has still treated it as deemed dividend. I have a running account with the company and I am relying on Circular 19/2017 — is that enough?
  No. The Bombay High Court held that a trade advance escapes s.2(22)(e) only if the money is actually applied to the business transaction it was said to be for; the stated purpose is not the test, the actual utilisation is. Neither the existence of a running account nor repayment within the same financial year makes any difference.
• PCIT v Forum Sales Pvt Ltd — an estimate cannot be made without first rejecting the books under s.145(3) High CourtHelps taxpayer
  The Assessing Officer has disallowed forty per cent of my client's purchases on an estimate, but has not rejected the books. Is that open to him?
  No. The Delhi High Court held that it is the settled position of law that the books of account have to be necessarily rejected before the Assessing Officer proceeds to a best judgment assessment on fulfilment of the conditions in the Act, and that any pick and choose method of rejecting certain entries while accepting others, without appropriate justification, is arbitrary. Since the additions in question had been made on an estimate basis without rejecting the books, no substantial question of law arose and the Revenue's appeals were dismissed.
• Jayesh T Kotak v DCIT High CourtHelps taxpayerNo later treatment found
  A company in which my client holds shares lent money to two other companies in which he also holds shares. He received nothing. Can the reassessment stand?
  No, on these reasons. The Gujarat High Court quashed a s.148 notice issued more than four years after the assessment year, holding that where the reasons recorded show only that the lender advanced unsecured loans to sister concerns, and contain no information that the payment was made for the benefit of the petitioner, no obligation lay on him to disclose those transactions. Without a finding that income had accrued to him, the first proviso to s.147 was not satisfied.
• Mewar Polytex Ltd v ACIT High CourtHelps departmentNo later treatment found
  The loan my client's company took carried interest and TDS was deducted on it, and the lender's objects clause covers financing. Is that enough to keep it out of s.2(22)(e)?
  No, on these facts. The Rajasthan High Court held that payment of interest and deduction of tax at source do not convert a loan into an inter-corporate deposit or into a loan taken in the ordinary course of business, and that the sub-clause (ii) exception needs money lending to be a substantial part of the lender's business — interest of Rs 2,97,552 on a single loan was not. The Court also held that deemed dividend under s.2(22)(e) was outside the s.10(34) exemption read with s.115-O and remained taxable in the recipient's hands.
• 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 M.B. Stockholding Pvt Ltd High CourtHelps taxpayer
  The Assessing Officer has added the current year's profit up to the date of the advance to the opening reserves in working out 'accumulated profits' for s.2(22)(e), which is what pushes the deemed dividend up. Is there any authority against him?
  Yes, but it is thin and you must use it with your eyes open. The Gujarat High Court, considering Explanation 2 to s.2(22)(e), confirmed a Tribunal direction to the Assessing Officer not to include the current profit as part of accumulated profits, on the footing accepted by the Tribunal that profit accrues only when the books of account are closed. The Revenue's own argument, recorded in the judgment, was the opposite — that Explanation 2 requires the current year's profit up to the date of distribution to be taken into account.
• CIT v Atul Engineering Udyog High CourtHelps taxpayer
  A group company put a refundable interest-free security deposit with my firm under an agreement for the use of our generators. The Assessing Officer says it is a loan and has taxed it as deemed dividend. Is a security deposit a loan or advance under s.2(22)(e)?
  No, not where it is genuinely a deposit under a commercial arrangement. The Allahabad High Court held that the legislature made a conscious distinction between a loan and a deposit, that the two are not identical in meaning, and that a refundable interest-free security deposit given by a company to a sister concern against the use of its generators was a business transaction in the normal course of business and outside s.2(22)(e).
• 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 taxpayer
  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 Creative Dyeing & Printing Pvt Ltd High CourtHelps taxpayer
  A group company funded half the cost of my client's plant expansion because it needed the extra capacity for its own exports. Is that a deemed dividend?
  No. The Delhi High Court held that an advance made for a business transaction from which both the payer and the payee benefit does not fall within s.2(22)(e) at all. It also held that the money-lending exception in sub-clause (ii) is in the nature of an explanation giving one example, and cannot be used to cut down the main provision — once the payment is found to be a business transaction, there is no need to go to sub-clause (ii) 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.
• XL Enterprises Ltd v ITO ITATHelps taxpayerNo later treatment found
  The Assessing Officer has taken the accumulated profits figure straight off the lender's balance sheet. Can I insist that depreciation at Income-tax Act rates be deducted first?
  Yes. The Tribunal held that accumulated profits for s.2(22)(e) have to be arrived at after allowing depreciation as computed under the Income-tax Act and not as per the Companies Act. On the facts, once Income-tax Act depreciation was taken into account the accumulated profits were negative, so there was nothing to support the deemed dividend and the entire addition was deleted.
• DCIT v The Hooghly Mills Co. Ltd. ITATHelps taxpayerNo later treatment found
  My client holds only 1.7 per cent in the lending company but its subsidiary holds another 11 per cent. The Assessing Officer has added them together to cross 10 per cent. Is that right?
  No. The Tribunal held that for the first limb of s.2(22)(e) what has to be considered is only the voting power held by the assessee itself as registered and beneficial shareholder, and the shareholding of the assessee's own subsidiary is irrelevant and cannot be added to it. With 1.7 per cent, the section was not attracted and the addition of Rs 10.20 crores went.
• ITO v Ketan Bhanuchandra Mahta ITATCuts both waysNo later treatment found
  The Assessing Officer has included the company's share premium account in accumulated profits to support a s.2(22)(e) addition. Can he?
  No. The Tribunal held that share premium is not available for distribution as dividend and is required to be treated as part of the share capital, so it cannot be commercial profits and cannot be included in accumulated profits for s.2(22)(e). The same order confirms, against the assessee, that current year's profits up to the date of each payment must be included, because Explanation 2 defines accumulated profits to include all profits up to the date of payment.
• Statutory position — the exclusions in s.2(22)(i) to (v) and Explanations 1, 2 and 2A: what "accumulated profits" means, and the exclusion clause (iv) for buy-backs that was DELETED with effect from 1 October 2024 CBDT Circulars & InstructionsCuts both ways
  How is "accumulated profits" measured for a deemed dividend, what falls outside the definition of dividend altogether, and what happened to the clause that used to keep buy-back payments out of it?
  One of these exclusions is the hinge of the 1 October 2024 buy-back changeover: exclusion clause (iv), which had kept a company's payment on purchase of its own shares outside the definition of "dividend" since 1 April 2000, was OMITTED by Act No. 15 of 2024 with effect from 1 October 2024, at the same moment sub-clause (f) was inserted to bring such a payment IN — so a buy-back before 1 October 2024 is not a dividend and a buy-back on or after that date is. The surviving exclusions are: (i) a distribution under (c) or (d) on a share issued for full cash consideration where the holder is not entitled on liquidation to participate in the surplus assets; (ia) a distribution under (c) or (d) attributable to capitalised profits representing bonus shares allotted to equity shareholders after 31 March 1964 and before 1 April 1965; (ii) an advance or loan to a shareholder or concern by a company in the ordinary course of its business where lending money is a substantial part of that business; (iii) a dividend set off against a sum previously treated as a dividend within sub-clause (e); and (v) a distribution of shares by the resulting company to the shareholders of the demerged company pursuant to a demerger, whether or not there is a reduction of capital in the demerged company. "Accumulated profits" is then fixed by Explanation 1 (certain capital gains excluded), Explanation 2 (all profits up to the date of distribution or payment, or up to liquidation for sub-clause (c), with a carve-out for compulsory acquisition) and Explanation 2A (an amalgamated company's accumulated profits are increased by those of the amalgamating company on the date of amalgamation).
• Statutory position — s.115-O: the dividend distribution tax charge, the fifteen per cent rate, the thirty per cent proviso for s.2(22)(e), and the s.115-O(1B) grossing-up CBDT Circulars & InstructionsCuts both waysSuperseded by amendment
  My company paid dividend distribution tax for a year before 2020 and the Assessing Officer is now recomputing it. What does s.115-O actually charge, at what rate, and on what base?
  Section 115-O charges a domestic company to additional income-tax, called tax on distributed profits, on any amount declared, distributed or paid by way of dividends (whether interim or otherwise) on or after 1 April 2003 but on or before 31 March 2020, whether out of current or accumulated profits, at the rate of fifteen per cent. A proviso to sub-section (1) makes that rate thirty per cent for a deemed dividend under s.2(22)(e), and sub-section (1B) requires the net distributed profits to be grossed up — increased to such amount as would, after reduction of the tax on the increased amount at the sub-section (1) rate, be equal to the net distributed profits — so the effective burden is higher than the headline fifteen per cent.
• Statutory position — s.115BBDA: the ten per cent charge on a resident shareholder receiving dividend above ten lakh rupees, and why it sat on top of DDT rather than instead of it CBDT Circulars & InstructionsCuts both waysSuperseded by amendment
  My client got a notice charging ten per cent on his dividend income under s.115BBDA even though the companies had already paid DDT. Is that double taxation, and for which years does it apply?
  Section 115BBDA charges a specified assessee resident in India, whose total income includes dividend in aggregate exceeding ten lakh rupees declared, distributed or paid by a domestic company or companies on or before 31 March 2020, to income-tax at ten per cent on the amount of such dividend in aggregate exceeding ten lakh rupees, plus the tax on the rest of his income computed as if the dividend were excluded. Sub-section (2) bars any deduction for expenditure or allowance and any set off of loss in computing that dividend income, and the Explanation excludes a s.2(22)(e) deemed dividend and takes a domestic company, a s.10(23C)(iv)/(v)/(vi)/(via) fund, institution, trust, university or hospital, and a trust or institution registered under s.12A, s.12AA or s.12AB out of 'specified assessee'.
• 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.