Reason for enacting Section 2(22)(e).

Last updated: 14 January 2008

Court :
SUPREME COURT

Brief :
The companies having accumulated profits and the companies in which substantial voting power lies in the hands of the person other than the public (controlled companies) are required to distribute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits. It is for this group to decide whether the profits should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. Therefore, the Legislature realized that though funds were available with the company in the form of profits, the controlling group refused to distribute accumulated profits as dividends to the shareholders but adopted the device of advancing the said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was the main reason for enacting section 2(22)(e).

Citation :
Commissioner of Income-tax, Kolkata v. Mukundray K. Shah CIVIL APPEAL NO. 1873 OF 2007 DECIDED ON 10-4- 2007