Deemed dividend on shareholder debit balance upheld, but daily credit for accrued interest required in recomputation.

A shareholder's debit balance in a closely held company's books was held chargeable as deemed dividend under section 2(22)(e) because the assessee held substantial shareholding and the account showed a net debit balance, so the basic charge was sustained. However, for computing the extent of the deemed dividend, the Tribunal accepted that the account was a running account and that accrued interest could not be ignored for the entire period. The net debit balance was therefore directed to be recomputed on a day-to-day basis after giving credit for accrued interest, with an opportunity of hearing to the assessee.

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Issues: (i) Whether the debit balance in the shareholder's account with the company was chargeable as deemed dividend under section 2(22)(e); (ii) whether, for computing the net debit balance, the assessee was entitled to give day-to-day credit for accrued interest standing in the company's books.

Issue (i): Whether the debit balance in the shareholder's account with the company was chargeable as deemed dividend under section 2(22)(e).

Analysis: The assessee held more than the prescribed shareholding in the company, and the account showed a net debit balance during the relevant period. The provision on deemed dividend applies where a closely held company makes a payment by way of loan or advance to a shareholder having substantial interest, to the extent of accumulated profits. The Tribunal affirmed the applicability of the provision on the facts found by the lower authorities and found no error in the basic charge under section 2(22)(e).

Conclusion: The addition under section 2(22)(e) was sustained in principle and this issue was decided against the assessee.

Issue (ii): Whether, for computing the net debit balance, the assessee was entitled to give day-to-day credit for accrued interest standing in the company's books.

Analysis: The Tribunal accepted the alternate plea that the account between the assessee and the company was a running account and that interest credited at year-end could not be ignored for the entire earlier period. It held that the net debit balance for the purpose of deemed-dividend computation had to be reworked after granting due benefit of accrued interest on a day-to-day basis, with reasonable opportunity of hearing to the assessee.

Conclusion: The matter was restored for recomputation of the net debit balance on a day-to-day basis after allowing credit for accrued interest, in favour of the assessee.

Final Conclusion: The deemed-dividend addition was upheld in principle, but the quantum was directed to be re-determined by giving credit for accrued interest on a daily basis, resulting in partial relief to the assessee.

Ratio Decidendi: For section 2(22)(e) purposes, where a shareholder's account is a running account and interest accrues against the outstanding balance, the net debit balance must be computed on a realistic day-to-day basis rather than by ignoring accrued interest for the relevant period.

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