TaxTMI 
TaxTMI 
2026 (8) TMI 1817
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....Pvt. Ltd., in which he was a director and substantial shareholder, could be regarded as a "loan or advance" by the company within the meaning of section 2(22)(e), when the assessee's case, supported by the ledger account and the audited financial statements of the company, is that the company was already indebted to him; that the account between the assessee and the company was a running account; that substantial amounts had from time to time been advanced by the assessee to the company; and that the impugned payment merely represented withdrawal/repayment out of the amount already standing to his credit. 2. The relevant facts qua the issue involved are that the assessee is an individual and was holding 85% shares in M/s Dhanraj Global Corporation Pvt. Ltd. and was also its director. During the relevant previous year, the assessee purchased an immovable property for a consideration of Rs.60,00,000. In the course of assessment proceedings, he explained the source of the said investment, inter alia, as comprising Rs.48,00,000 received from M/s Dhanraj Global Corporation Pvt. Ltd. on 23.05.2019 and Rs.15,00,000 received from Shri Roshan Pramod More, stated to be repayment of an ear....
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....dited balance sheet of M/s Dhanraj Global Corporation Pvt. Ltd., including Note No. 3 relating to short-term borrowings, itself recognised the amount due to the assessee as a liability of the company. The assessee had an opening credit balance of Rs.42,03,475 and, notwithstanding the withdrawal of Rs.48,00,000 during the year, the account ultimately reflected a closing credit balance of Rs.68,91,536. More importantly, the assessee furnished the ledger account together with the working of the running balances to demonstrate that at no point during the relevant previous year had his account become debit. The learned CIT(A), upon examining the material, substantially accepted this factual position. He recorded that the opening balance as on 01.04.2019 was Rs.42,03,474 and the closing balance as on 31.03.2020 was Rs.68,91,535; that there was no debit balance at any point of time; that the assessee had advanced sums to the company in earlier years; and that the audited financial statements corroborated the existence of the company's borrowing from the assessee. The learned CIT(A) further observed that the objection of the Assessing Officer regarding absence of a formal loan agreement wa....
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....blic are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares ... holding not less than ten per cent of the voting power ... or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits..." 5.2. The statutory text itself, therefore, furnishes the starting point for examining whether the character of the impugned payment answers the description of a "loan or advance" contemplated by the deeming provision. 6. A plain reading of section 2(22)(e) shows that the legislative fiction is not attracted merely because there is a payment by a closely held company to a shareholder holding the prescribed voting power. The words "any payment" occurring in the provision cannot be read in isolation, divorced from the expression which immediately follows, namely, "by way of advance or loan to a shareholder". The character of the payment is thus an indispensable statutory ingredient. ....
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....far from there being any amount recoverable by the company from the assessee, the account reflected a closing credit balance of Rs.68,91,536 in favour of the assessee. These figures are not merely an explanation subsequently advanced in appellate proceedings. They emanate from the ledger account and audited financial statements of the company, wherein the amount payable to the assessee has itself been reflected under the head "Short Term Borrowings". Indeed, the learned CIT(A), after examining these materials, has categorically recorded that there was no debit balance in the assessee's account at any point of time and that the company had taken funds from the assessee. Once this factual position is accepted, the true character of the payment of Rs.48,00,000 has necessarily to be determined in the setting of this subsisting creditor-debtor relationship. 8. The distinction, in our opinion, is fundamental. Where a shareholder obtains money belonging to the company and thereby incurs an obligation to repay the company, the transaction may possess the character of a loan or advance by the company, subject of course to the other statutory conditions. The juridical position is altogeth....
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....ount payable to him as a borrowing of the company. The ledger records the movements of funds between them. The learned CIT(A) himself found these materials sufficient to establish that the assessee had advanced funds to the company in earlier years and that the withdrawal of Rs.48,00,000 was from the sums already advanced by him. Once the existence and character of the underlying liability stand established from the books and audited accounts, absence of a separately executed loan agreement or stipulation regarding interest cannot reverse the direction of indebtedness. Nor can absence of evidence regarding a Board resolution, by itself, convert repayment of an acknowledged liability into a loan advanced by the company. Such considerations may conceivably have relevance under the corporate law governing the internal affairs of the company, but they cannot supply a missing jurisdictional fact for application of section 2(22)(e). 10. There is another aspect which fortifies the assessee's case. The Assessing Officer had simultaneously examined the amounts introduced by the assessee into the very same company during the year and had treated the net amount of Rs.26,88,061 as unexplain....
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....he very existence of the taxable event contemplated by the provision. The official ITAT decisions dealing with running/current accounts have similarly emphasised that the nature of the account and the existence of an actual loan or advance by the company must be examined rather than treating every outward payment as deemed dividend. (Income Tax Appellate Tribunal⁠ ) In the present case, the assessee's specific assertion that his account never became debit is borne out by the finding of the learned CIT(A), and no contrary entry has been identified either in the assessment order or in the impugned appellate order. Therefore, even before considering the authorities cited by either side, the matter, on the plain language of section 2(22)(e) read with the admitted financial position, leads to the conclusion that the payment of Rs.48,00,000 was not a loan or advance by M/s Dhanraj Global Corporation Pvt. Ltd. to the assessee, but represented repayment to the assessee against the amount which the company already owed him. The fundamental statutory ingredient necessary for invoking the deeming fiction is, therefore, absent. 12. We may now advert to the reasoning of the learned CIT....
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.... judicial authorities relied upon before the lower authorities also do not persuade us to take a different view. The decisions referred to by the Assessing Officer in Sunil Kapoor v. CIT, Shashi Pal Agarwal v. CIT and Lailabi Khalid v. CIT proceeded on factual situations where the amounts in question represented loans or advances made by the concerned companies to their shareholders and the controversy thereafter centred upon the applicability of section 2(22)(e) to such loans or advances. The antecedent relationship in the present case is materially different. Here, the evidence accepted by the first appellate authority establishes that it was the assessee who had placed his funds with the company and the company was indebted to him. Consequently, the payment in question did not originate as an advance of the company's funds creating a liability in the hands of the assessee, but represented a reduction of an already subsisting liability of the company towards him. The authorities relied upon by the Assessing Officer, therefore, do not govern this materially different factual situation. On the other hand, the decisions relied upon by the assessee in Sri A. Dayanand Reddy v. DCIT, E....