Deemed dividend: Section 2(22)(e): A.Y. 1999-00: Gratuitous loan deemed to be dividend: Shareholder permitting his immovable property to be mortgaged to bank enabling company to obtain loan: Loan by company to shareholder not deemed dividend.

On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:

“(i) The phrase ‘by way of advance or loan’ appearing in sub-clause (e) of section 2(22) of the Incometax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares . . . . . ; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act.

(ii) Thus gratuitous loans or advance given by a company to those class of shareholders would come within the purview of section 2(22), but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.

(iii) For retaining the benefit of loan availed from the bank if decision was taken to give advance to the assessee, such decision was not to give gratuitous advance to its shareholder, but to protect the business interest of the company. The sum of Rs.20,75,000 could not be treated as deemed dividend.”