An addition of Rs. 11 lakhs made by the Assessing Officer as deemed dividend under section 2(22)(e ) of the Act. However, the assessee has challenged the sustenance of the addition of Rs. 4,55,250 as deemed dividend under section 2(22)( e) in respect of loans received from the following companies :
| (a) | Taneja Builders Pvt. Ltd. (TBPL)
(Holding more than 50% share capital & Director) |
Rs. 75,750 |
| (b) | Panchsheel Properties Pvt. Ltd. (PPPL)
(Director of the company) |
Rs. 19,500 |
| (c) | Tera Construction Pvt. Ltd. (TCPL)
(Holding more than 52.8% share capital) |
Rs. 3,60,000 |
| Rs. 4,55,250 |
Deemed dividend under income tax act:
Explanation 2 to section 2(22) accumulated profits shall always include all profits of the company to date of payment of dividend and cannot merely be taken as accumulated profits on the last date of previous accounting year as business profits earned by company accrues from day to day and not only at end of the year when accounts are finalized
Therefore, once the amount is advanced to extent of which the company possesses accumulated profits, on the date of advance itself it becomes income in form of deemed dividend under section 2(22)(e).
The provision of section 2(22)( e) and Explanation 2 thereto are extracted herein:—
“Section 2(22)(e): 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 31-5-1987, 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 a dividend 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 percent 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;
| ** | ** | ** |
Explanation 2.—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, [but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place].”
Analysis and conclusion:
The assessee was having a substantial shareholding in three companies, namely, ‘TBL’, ‘PPPL’, and ‘TCPL’. He had taken advances from these three companies.
Whether amount taken from the company shall be treated as advances taken for the business of company or loan and/or an advance of an employee?
The assessee was also a director in these three companies and to achieve the objectives of the company, he had to supervise the transaction of sale and purchase of properties and had to make handy payments in substantial sums for acquiring, maintaining, refunding, and selling the properties. He was, therefore, required to keep a sufficient amount in his saving bank account to meet the urgent needs.
If the amount remained unutilized for one or two months, it was deposited back in the companies account through cheque.
On perusal of accounts of the assessee in the books of said company, it nowhere revealed that the amount was advanced for the purpose of the business of the company. The assessee was not able to substantiate such a claim.
An assertion that the amount advanced by the company was for the purpose of the business of the assessee, could not be accepted in the absence of any corroborative material.
Thus, the amount was rightly treated as loans and advances within the meaning of section 2(22)(e ).
Also, said companies were possessing accumulated profits on the date of payments of loans/advances so what is the amount assessable as a deemed dividend?
The issue was as to what was the amount assessable as such.
- The amount assessable could not exceed the accumulated profits possessed by these companies. As per Explanation 2, the expression ‘accumulated profits’ in sub-clause (e) of section 2(22) shall include all profits of the company up to the date of distribution or payment referred to in this clause.
- The expression ‘accumulated profits’ shall mean profits in the commercial sense and not assessable or taxable profits liable to be taxed as income.
- It is wrong to merely take the accumulated profits as appearing under the head ‘Reserves and surplus’ as per the accounts of those companies only or their taxable profits.
- There is no provision that only the cash balance available to the company on the date of payment is to be treated as deemed dividend. Thus, the contention of the assessee that the amounts were invested in real estate and, hence, to be reduced from the accumulated profits, was also wrong.
- Further, the contention raised by the assessee was that accumulated profits mean the balance on the last date of the previous accounting year and could not include current profits in which advance was made, was also wrong.
- The contention that closing balance in the loans and advances were to be treated as a deemed dividend and the re-payments received from the loans and advances will reduce the quantum to a deemed dividend. There is no such provision under section 2(22)(e ), which suggests that only the outstanding balance at the end of the year is to be treated as deemed dividend.
- Once the amount is advanced to the extent of which the company possesses accumulated profits, on the date of advance itself it becomes income in the form of deemed dividend under section 2(22)(e).
Hence, said the payment was treated as deemed dividend as per section 2(22)( e), read with Explanation 2 to said section. It was also not in dispute that the assessee was holding substantial shares in the said companies. Thus, the amount of loans and advances to such shareholder to the extent the company was possessing accumulated profits could be assessed as income by way of deemed dividend as per section 2(22)(e ).