Apr 222021

The assessee was a shareholder and director in M/s Associated Cine Exploiters Pvt. Ltd. (ACEL) and obtained a loan of Rs.1,00,000/-.

Reason for such advance: The assessee has received Rs.1,50,000/- as commercial advance for granting rights for distribution of the movie and the amount was paid to M/s Sukrit Pictures on 03.05.2010 was a commercial advance for screening of the movie. It is a fact on record that the amount received from ACEL which is running a Cinema Theatre in Rohtak has given a loan to Sukrit Pictures which is the distributor. Thus, this is the amount received from the theatre owner to the distributor of the films.

Whether 2(22)(e) is attracted on commercial transactions:

To attract the provision of section 2(22)(e), the important consideration is that there should be a loan and/or advance by a company to its shareholder. Every payment by a company to its shareholder may not be a loan/advance. To treat the payment as a loan following is worthwhile to note:

  • Amount paid must make the company a creditor of shareholder
  • If at the time of making payment, the company is already a debtor, the payment would merely a repayment by the company.
  • If, an amount so paid exceeds the already existing debt, the amount so exceeds will be treated as a loan to the assessee and would attract section 2(22)e).
  • If, the assessee has a current account with the company, the above position as regards each debit will have to be considered individually. However, credits to the account will have to be completely ignored.
  • Thus, the amount does not bear the characteristics of loans, and advance section 2(22)(e) is not applicable.
  • Even, advance given by the company in exchange for an advantage conferred upon the company by such shareholders can not be treated as deemed dividend.
  • Section 2(22)(e) is applicable even if the whole amount is repaid before the close of the previous year.
  • Also, a bona fide loan, whether in the form of overdraft or otherwise, for a short duration is treated as a dividend if all the conditions of section 2(22)(e) are satisfied.
  • This section is applicable even if the loan is given in kind.

Thus, section 2(22)(e) covers not only advances and loans to shareholders but any other payments by the company on behalf of or for the individual shareholders, such as payment of shareholders’ personal expenses, insurance premia, etc., to the extent of the accumulated profits of the company.

The distinction between the other dividend and deemed dividend u/s 2(22)(e):

Dividend declared by a company or deemed dividend falling under section 2(22)(a) to (d) Deemed dividend u/s 2(22)(e)
If the dividend is covered by the above sections, the dividend distribution tax is paid by the assessee company and what the assessee would receive is the tax-free income. However, this situation is changed with budget 2020. In case of deemed dividend under section 2(22)(e) – the same is taxable in the hands of shareholders since the inception at the applicable slab rate of shareholder. However, after the applicability of budget 2020, TDS have to be deducted in both cases.



Where amounts are advanced to the assessee by another company for business purpose wherein both entities are having common directors and if it is in nature of a commercial transaction, provisions of section 2(22)(e) are not attracted.


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