DEEMED DIVIDEND U/S 2(22)(E)

[manoj gupta]

A substantial interest holder in a company has advanced a loan of Rs. 50 lac to the compnay. On 22.01.2008, the company pays him by cheque Rs. 70 lac thereby creating debit balance of Rs. 20 lacs. But on the same days he pays another cheque to company for Rs. 30 lacs. Thus the net effect is that on 22.01.2008, the loan account in the books of the company shows credit balance of Rs. 10 lacs. though after transaction of Rs. 70 lacs, it shows a debit balance of Rs. 20 lacs. The cheque of Rs. 70 lacs is cleared in the bank account of individual on 23.01.2008 while the cheque of Rs. 30 lacs is cleared on 30.01.2008 as the company presented it late to bank. Now, can the A.O. treat the debit balance of Rs. 20 lacs as deemed divident in the hands of shareholder. If No, are there any case laws supporting this. If yes, can penalty u/s 271 (1)(c) for concealment of income can also be levied.

AI Summary

Loan Transaction Results in Deemed Dividend Classification Under Section 2(22)(e) Despite Temporary Debit Balance A substantial interest holder in a company advanced a loan of Rs. 50 lakh, and on 22.01.2008, the company issued a cheque of Rs. 70 lakh, creating a temporary debit balance of Rs. 20 lakh. On the same day, the individual issued a cheque of Rs. 30 lakh to the company, resulting in a credit balance of Rs. 10 lakh. The question raised was whether the Assessing Officer could treat the Rs. 20 lakh debit as a deemed dividend under Section 2(22)(e). The reply indicated that the substance of the transaction should prevail, suggesting that the temporary nature of the debit does not negate its classification as a deemed dividend, referencing a similar case.