Deemed dividend under tax law is not actual dividend distribution for section 23A purposes, limiting the deeming fiction's reach.

A loan or advance treated as a deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922 is not an actual distribution of profits for section 23A purposes. The deeming fiction in section 2(6A)(e) operates only for taxing the amount in the shareholder's hands and cannot be extended beyond its limited purpose. Because section 23A applies only where profits and gains are in fact distributed as dividends, a deemed dividend does not satisfy that statutory condition. On that basis, such a loan or advance is excluded from the computation of dividend distribution under section 23A, and the issue is stated to favour the revenue.

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Issues: Whether a loan or advance treated as a deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922 can be regarded as a distribution of dividend for the purpose of section 23A of the same Act.

Analysis: Section 2(6A)(e) creates a deeming fiction for taxing a loan or advance in the hands of the shareholder, but section 23A proceeds on a different footing and applies only where profits and gains are actually distributed as dividends. The concepts of payment and distribution are distinct, and a deemed dividend under clause (e) does not amount to an actual distribution of profits among shareholders. The legal fiction is confined to its own purpose and cannot be extended to satisfy the statutory requirement of distribution under section 23A.

Conclusion: A loan or advance deemed to be dividend under section 2(6A)(e) is not to be taken into account as distribution of dividend for determining liability under section 23A, and the issue is decided in favour of the revenue.

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