Deemed dividend applies to the full shareholder loan, limited only by accumulated profits under the income-tax rule.

A loan or advance by a closely held company to its shareholder is treated as deemed dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922 to the extent of the company's accumulated profits. The provision operates on the whole payment made to the shareholder, not merely on a proportionate part referable to shareholding. Accordingly, where the loan falls within the section and accumulated profits are sufficient, the full amount of the loan is taxable as dividend up to the available profits. On the stated facts, the loan was less than the accumulated profits and was therefore assessable in full as dividend.

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Issues: Whether, on the facts and in the circumstances of the case, a loan advanced by a closely held company to its shareholder is assessable as dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922, only to the extent of the shareholder's proportionate holding or to the extent of the actual loan, subject to the company's accumulated profits.

Analysis: Section 2(6A)(e) creates a legal fiction treating any loan or advance by a company in which the public are not substantially interested as dividend to the extent of the company's accumulated profits. The provision speaks of the whole payment made to the shareholder, not of any proportionate part referable to shareholding. Therefore, once the loan falls within the section and the company has sufficient accumulated profits, the entire loan is taxable as deemed dividend up to the amount of those accumulated profits. On the facts, the loan of Rs. 13,385 was less than the accumulated profits of Rs. 18,067.57.

Conclusion: The loan of Rs. 13,385 was assessable in full as dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922, and not merely to the extent of 19/40 of the accumulated profits.

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