Deemed dividend applies on payment of shareholder loans, and later repayment does not undo the tax charge

A loan or advance by a closely held company to a shareholder is deemed dividend to the extent of accumulated profits when the statutory conditions in section 2(6A)(e) read with section 12(1B) are met. The statutory fiction operates at the time of payment, and the Act does not require the loan to remain outstanding at the end of the previous year. Repayment before year-end therefore does not displace the charging provision, and the court declined to add words from an overseas analogue that the legislature had not adopted. The amount remained taxable as deemed dividend notwithstanding repayment.

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Issues: Whether an advance or loan paid by a private company to a shareholder, to the extent of accumulated profits, is deemed dividend under section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act, 1922 even if the shareholder repays the amount before the close of the relevant previous year.

Analysis: The relevant provisions create a statutory fiction by which payments by way of advance or loan made by a company in which the public are not substantially interested are treated as dividend to the extent of accumulated profits. The Court held that the fiction operates when the factual conditions for its application exist, and the Act does not make subsistence of the loan at the end of the previous year an additional requirement. It further held that the charging provisions assess income with reference to the previous year, but the deemed dividend arises at the time of payment when the statutory conditions are satisfied. The omission to import words found in the Australian analogue could not be supplied by interpretation, since that would amount to amending the statute. Repayment during the same year therefore does not take the payment outside the charging fiction.

Conclusion: The loan remained taxable as deemed dividend notwithstanding repayment before the end of the previous year, and the answer was against the assessee.

Ratio Decidendi: Where the statutory conditions for a deemed-dividend provision are satisfied, the payment is brought to tax at the time it is made and later repayment does not negate the fiction unless the statute itself so provides.

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