ITAT allows credit balance adjustment for addition of deemed dividend u/s 2(22)(e)

ITAT allows adjustment of credit balance for the purposes of addition of deemed dividend as per section 2(22)(e)

In a recent judgment, ITAT Pune directed the Assessing Officer to re-compute the net debit balance for the purposes of addition of deemed dividend as per section 2(22)(e) of the Income Tax Act.

ABCAUS Case Law Citation:
5096 (2026) (04) abacus.in ITAT

Important Case Laws relied upon by Parties:
Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345
Venkatachalam Mohan
Miss P. Sarada vs CIT 96 Taxman 11 (SC)

In the instant case, the assessee had challenged the order passed by the CIT(A) in dismissing the appeal of the assessee against addition made towards deemed dividend income u/s 2(22)(e) of the Income Tax Act, 1961 (the Act).

The appellant assessee was an individual and director of four Private Limited Companies. The assessee was deriving income as salary from above companies, income from partnership firm, income from capital gains and income from other sources.

The Return of income was furnished u/s 139(1) and was processed by CPC u/s 143(1) of the Act. Subsequently, search & seizure action u/s 132 of the IT Act was conducted at the premises of the assessee.  During the course of assessment proceedings, the Assessing Officer found that the assessee was a shareholder of not less than 10% of the total shares of one of the said companies and there was net debit balance of in the Ledger Account of the assessee appearing in the books of the company and the accumulated profits of the company was in excess of the net debit balance. 

The Assessing Officer completed the assessment proceedings u/s 143(3) of the Act determining income of the assessee which included addition on account of deemed dividend u/s 2(22)(e) of the Act.

Before the CIT(A), the assessee contended that he was maintaining a running current account with the company and was advancing money to the company as and when required by the company. The assessee stated that on most of the days of the year, there was a net credit balance and it was only for few days, the said debit balance occurred.

It was further argued that during the covid pandemic, there was a disruption in the business operation of the company and it was not getting new orders from the customers. As a result, the company had unutilized surplus funds which were temporarily given to the assessee for a short period. The appellant had not been benefitted from said transaction, Since the net debit balance in the appellant’s account maintained by the company was only for a short period. The assessee relied upon the judgment of ITAT Chennai in its support.

The CIT(A) placing reliance on the judgment of the Hon’ble Supreme Court confirmed the addition observing that if other conditions as provided u/s. 2(22)(e) of the Act are satisfied and the money withdrawn by the shareholder is in the nature of loan or advance, the provisions of section 2(22)(e) kicks in as soon as the money is withdrawn by the shareholder from the company. The duration for which the money remains with the shareholder is immaterial.

The Tribunal noted that in the books of the company under issue, there was debit balance in the name of assessee for a total period of 8 days, therefore the Assessing Officer added the above debit balance in the income of the assessee as deemed dividend u/s 2(22)(e) of the Act, since the above company was having accumulated profit of more than debit balance.

The Tribunal observed that CIT(A) had rejected the ground on the basis that TDS on interest payment was made in the last Quarter of the year, therefore the benefit of The Tribunal opined that the finding given by CIT(A) did not appear to be correct since it was the alternate contention of Ld. counsel of the assessee that there was net debit balance only for a period of 8 days and for remaining period there was always credit balance in the name of the assessee in the books of the company on which the assessee was paid interest by the above company. 

The Tribunal further observed that it was contendedby the assessee  that the benefit of accrued interest on credit balance on the day to day basis should have been taken In the instant appeal, the assessee had challenged the order of CIT(A) in confirming consideration for determining the exact amount of net debit balance and the consequential net debit balance may be added to the income of the assessee u/s 2(22)(e) of the Act.

Finding force in the above alternate contention of the assessee the Tribunal set-aside the order passed by CIT(A) with regard to relevant ground and directed the Assessing Officer to re-compute the net debit balance for the purposes of addition of deemed dividend as per section 2(22)(e) of the Act after allowing due benefit of accrued interest on the credit balance standing in the name of the assessee.

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