Deemed dividend treatment for excess shareholder advances upheld where the payment exceeded the running credit balance in a closely held company.

A shareholder-director holding more than 10% voting power in a closely held company received sums over and above the opening credit balance in his account, and the company had accumulated profits sufficient to cover the advance. On these facts, the excess receipt was treated as a loan or advance rather than a mere continuation of a running account, so it fell within deemed dividend under section 2(22)(e) of the Income-tax Act, 1961. The business expediency argument was rejected as inapplicable on the facts, and the addition was upheld.

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Issues: Whether the amount received by a shareholder-director from a closely held company, over and above the running credit balance in the account, constituted deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.

Analysis: The assessee was a beneficial owner of more than 10% voting power in a company in which the public were not substantially interested, and the company had accumulated profits exceeding the amount advanced. The account reflected that after adjustment of the opening credit balance, further sums were received and later repaid in the subsequent year. On these facts, the excess amount was held to be in the nature of a loan or advance, and the plea that it was merely a continuation of a running account was rejected. The cited decision on business expediency was found inapplicable on the facts.

Conclusion: The amount was taxable as deemed dividend under section 2(22)(e), and the addition was upheld against the assessee.

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