Deemed dividend in real-estate transactions excluded where advances formed part of genuine commercial dealings.

Amounts advanced in reciprocal real-estate dealings were not treated as deemed dividend under section 2(22)(e) where the company and the shareholder/director were engaged in business transactions, the accounts showed frequent mutual entries with the running balance ultimately squared up, and the advance was supported by an agreement to sell land. On these facts, the payment was characterised as part of a commercial arrangement in the ordinary course of business, not as a loan or gratuitous advance attracting the deeming fiction. The addition under section 2(22)(e) was therefore held unsustainable.

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Issues: Whether the amounts advanced by the company to a substantial shareholder/director in the course of reciprocal real-estate transactions constituted deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.

Analysis: The assessee and the company were engaged in real-estate business and their accounts showed frequent reciprocal transactions with the running balance ultimately squared up. The advance was supported by an agreement to sell for land, and the surrounding material showed that the payments were made in the ordinary course of business rather than as a simple loan or gratuitous advance. On these facts, the advance was treated as part of a commercial arrangement connected with business dealings, and not as a payment attracting the deeming fiction of dividend.

Conclusion: The addition under section 2(22)(e) was not sustainable and the issue was decided in favour of the assessee.

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