Deemed dividend treatment of repayment from company to majority shareholder rejected where funds were repayment from deposit account

Deemed dividend under the Act was held inapplicable where payments to a majority shareholder were debited against an existing deposit account and did not constitute fresh advances or distribution of accumulated profits; the tribunal reasoned that no money was given by the company in any form and the shareholder continuously maintained a substantial credit balance, so the legal fiction of deemed dividend did not arise. Consequence: tax liability under the deemed dividend provision was not attracted and the taxpayer's appeal succeeded.

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Issues: Whether the payment of Rs. 25,00,000 made by the company by debiting the assessee's deposit account and claimed as deduction u/s 80GGC of the Income-tax Act, 1961, amounts to deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

Analysis: The assessee, a 57% shareholder and managing director, had a substantial credit balance in his deposit account with the company prior to payments totalling Rs. 25,00,000 being made on his instructions and debited to that account. The payments did not create any fresh liability of the company to the assessee and at no time did the deposit account show a debit balance; the payments reduced the assessee's existing deposit balance. The statutory language of Section 2(22)(e) covers any payment by a closely held company on behalf of, or for the individual benefit of, a qualifying shareholder to the extent the company possesses accumulated profits; however, where the payment represents withdrawal or repayment of the shareholder's own deposit (and no fresh loan or advance is made by the company), the element of benefit flowing from the company to the shareholder is absent. Applying these principles to the facts, the transaction here was a repayment/withdrawal from the assessee's deposit account and did not constitute a payment by the company conferring a benefit under Section 2(22)(e).

Conclusion: The payment of Rs. 25,00,000 by debiting the assessee's deposit account does not fall within Section 2(22)(e) of the Income-tax Act, 1961; the appeal is allowed in favour of the assessee.

Final Conclusion: The legal effect is that the addition made by the Assessing Officer treating the payment as deemed dividend under Section 2(22)(e) is set aside, and the assessment stands corrected accordingly.

Ratio Decidendi: A payment by a closely held company that merely withdraws or repays a shareholder's existing deposit (without constituting a fresh loan or an accruing benefit from the company) does not amount to deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

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