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Section 2(22)(e ) of the Income Tax Act, 1961

Dear Friends,

Today we are going to consider problem based on provisions of Sections 2(22)( e) of the Income Tax Act, 1961.


Mr. X holds 25% voting power in ABC (P)Ltd., he permits his own land to be mortgaged to a bank for enabling the company to obtain a loan. Mr. X requests the company to release the property from the mortgage. The company fails to do so , but for remaining benefit of the bank loan ,it give an advance of Rs. 10.00 Lakhs to Mr. X. The payment is authorized by a resolution passed at the meeting of Board of Directors of the company. The company's accumulated profit at the date of advance is Rs. 50.00 Lakhs. The Assessing Officer proposes to tax above payment of Rs. 10.00 Lakhs in the hand of company by invoking provisions of Section 2(22)(e ) of the Income Tax Act, 1961.

Whether non gratuitous payment to a shareholder by company is taxable as deemed dividend



Section 2(22)(e) in the Income Tax Act, 1961

(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 the 31st day of May, 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 dividend whether with or without a right to participate in profits) holding not less than ten per cent (10%) 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; but" dividend" does not include -

a distribution made in accordance with sub- clause (c) or sub- clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;



From above we find that Mr. X is holding 25% voting power in ABC(P.) Ltd., a company in which public is not substantially interested and the accumulated profit of the company at the date of advance is of Rs. 50.00 lakhs, the criteria provided by provisions of section 2(22)(e) are fulfilled here.

Please Note That: Section 2(22)(e ) is applicable only in the case of those advances or loans which a shareholder enjoys simply on account of being a person who is a beneficial owner of shares (holding not less than 10% of the voting power). If however, such loan or advances is given to a shareholder as a consequence of any further consideration which is beneficial to the company received from such shareholder, such advance or loan cannot be said to be deemed dividend within the meaning of the Act,1961.

Thus for a gratuitous loan or advance give by a company to those classes of shareholders would come within the meaning of Section 2(22)(e ) of the Act but not the cases where the loan or advance is given in return to an advantage conferred upon the company by such a shareholder.


In above given case Mr. X permits his property to be mortgaged to the bank enabling the company to take the benefit of loan and in spite of request of the assessee, the company is unable to release the property from mortgage. In such situation ,for retaining the benefit of loan availed from bank, if decision is taken to give advance to the assessee, such decision is not to give gratuitous advance to its shareholder but to protect the business interest of the company.

The decision of proposal of Assessing Officer to tax advance received by Mr. X of Rs. 10.00 Lakhs from M/s. ABC (P) Ltd., is not taxable, because the transaction is not payment on the basis of gratitude but it is a payment to save the interest of company and continuous availing benefit of loan from the bank.

DISCLAIMER: The above write up is an attempt to share information and knowledge with our readers. The view expressed here are the personal views of the author and same should not be considered as a professional advice. It is advisable to consult with your tax consultant before acting on any part of this article.

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Category Income Tax, Other Articles by - FCS Deepak Pratap Singh