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.

[B L Bhojwani]

It does not stand to reason that the substantial interest holder of the company  will first take the loan of Rs. 20 lacs from the Company on 22.01.2008 and give a cheque of Rs. 30 lacs  to the Company on the same day.The cheque is cleared in the bank account of the individual on 23.01.2008, while in the bank account of the Company, it is cleared on 30.01.2008. The substance of a transaction shall always prevail over its form. It is clear that the substantial interest holder owed Rs. 20 lacs to the Company for a few days.

It is immaterial whether the loan on which the provisions of section 2(22)(e) are applicable is provided for a short period and carried interest. In the case of Walchand & Co. Ltd. v. CIT (1975) 100 ITR 598 (Bom), the loan was repaid by the assessee within 22 or 23 days alongwith interest to the company, even then the loan was deemed as dividend.

AI Summary

Deemed dividend where cheque clearance timing creates a temporary debit; substance over form sustains characterization. A temporary debit created by staggered cheque clearances can be treated as a deemed dividend where a substantial interest holder effectively receives an advance; substance over form governs, and short-term repayment does not prevent deemed dividend treatment, with precedent supporting such characterization. The reply does not resolve whether concealment penalties apply.