2026 (3) TMI 1489 - AT - Income Tax

Deemed dividend requires proof of an actual loan or advance; presumptive cash generation cannot sustain the addition.

Deemed dividend under section 2(22)(e) was held unsustainable because there was no evidence of any actual advance or loan by the company to the ... Deemed dividend u/s 2(22)(e) - Advance or loan to shareholder - Strict interpretation of fiscal statute - proof of instance of “any payment by a company by way of advance or loan to a shareholder” HELD THAT: - The Tribunal held that section 2(22)(e) is attracted only where there is payment by way of advance or loan by the company to a shareholder. On the record, there was no material to show that the company had actually made any such payment to either of the assessees. The departmental authorities had proceeded only on assumptions that the amount arising from the purchases disallowance represented distribution to the directors/shareholders. In the absence of an actual advance or loan, the statutory condition for deemed dividend was not met, and the provision, being a fiscal charging provision, could not be extended by inference or presumption. [Paras 6] The deemed dividend addition was deleted in entirety and the Revenue's challenge to its deletion was rejected. Final Conclusion: The Tribunal allowed all the assessees' appeals for the relevant assessment years and dismissed the Revenue's cross appeals. It held that, in the absence of any material showing an actual advance or loan by the company to the shareholders, the addition under section 2(22)(e) was unsustainable. Issues: Whether the addition made as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 was sustainable in the absence of any actual advance or loan by the company to the shareholders/directors.Analysis: The provision applies only where there is a payment by a company by way of advance or loan to a shareholder. On the facts found, there was no material to show that the company had made any such payment to the assessees. The addition was made by treating a disallowance of bogus purchases as if it represented dividend distribution, which rested only on assumptions and presumptions. A charging provision in a fiscal statute must be construed strictly, and the deeming fiction could not be extended beyond its clear terms.Conclusion: The deemed dividend addition was unsustainable and was deleted in full, in favour of the assessees.Final Conclusion: The assessees succeeded and the Revenue's cross appeals failed, with the entire addition under section 2(22)(e) set aside.Ratio Decidendi: Section 2(22)(e) can be invoked only on proof of an actual advance or loan by the company to a shareholder, and a deemed dividend cannot be inferred merely from unrelated disallowance or presumptive cash generation.