Deemed dividend: Section 2(22)(e): Advance or loan received by the assessee from a company is not to be assessed as ‘deemed dividend’ u/s.2(22)(e) if the recipient is not a shareholder.

The assessee-company received advances of Rs. 6.32 crore by way of book entry from Jackson Generators Pvt. Ltd, a closely-held company. The shareholders having substantial interest in the assessee-company were also having 10% of the voting power in Jackson Generators Pvt. Ltd. The Assessing Officer assessed the said advance of Rs. 6.32 crore as deemed dividend u/s.2(22)(e) in the hands of the assessee-company. The Tribunal deleted the addition and held that though the amount received by the assessee was ‘deemed dividend’ u/s.2(22)(e), it was not assessable in the hands of the assesseecompany as it was not a shareholder of Jackson Generators Pvt. Ltd.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“(i) U/s.2(22)(e), any payment by a closely-held company by way of advance or loan to a concern in which a substantial shareholder is a member holding a substantial interest is deemed to be ‘dividend’ on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The legal fiction in section 2(22)(e) enlarges the definition of dividend but does not extend to, or broaden the concept of, a ‘shareholder’. As the assessee was not a shareholder of the paying company, the dividend was not assessable in its hands.

(ii) As the condition stipulated in section 2(22) (e) treating the loan or advance as deemed dividend are established, it is open to the Revenue to take corrective measure by treating this dividend income at the hands of the shareholders and tax them accordingly.”