Payment on behalf of shareholder, debited to his deposit account not deemed dividend

Payment made on behalf of the shareholder and debited to his deposit account having credit balance not deemed dividend u/s 2(22)(e) – ITAT

In a recent judgment, ITAT Ahmedabad has held that payment made by the company on behalf of the shareholder and debited to his deposit account which had credit balance can not be treated as deemed dividend u/s 2(22)(e) of the Income Tax Act.

ABCAUS Case Law Citation:
5052 (2026) (02) abcaus.in ITAT

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

The assessee was an individual. The assessee derived income from salary, short-term / long term capital gains, interest, etc. He was also the Managing Director of a Private Limited Company in which he held 57% of shaeholding. The assessee had maintained a deposit account with the said company.

During the relevant year, Mthe company made a payment of donation aggregating to Rs. 25,00,000/- on behalf of the assessee, which were debited to the deposit account of the assessee maintained with the company.

The Assessing Officer observed that though the payment was not a fresh loan given by the company but it fell under payment on behalf or for the individual benefit of any such shareholder.

Accordingly, the AO held that the payment of Rs. 25,00,000/- on account of donation made by the company as per the instructions of the appellant, benefits of which had been derived by the appellant in the individual capacity in form of deduction u/s 80GGC of the Act, amounted to deemed dividend in the hand of appellant as per provisions of Sec 2(22)e of the Act.

The CIT(A) observed that the appellant assessee could not furnish any documentary evidence as to how the benefit of such payment was not derived by the appellant. The CIT(A) held that contention of the appellant that the payment did not represent fresh loan was of no avail to the appellant, as Sec 2(22)(e) of the Act not only covers payment which forms of fresh loans but also such transactions, benefits of which are derived by the shareholders.

Before the Tribunal, the assessee contended that the impugned payment represented mere withdrawal/repayment of the assessee’s own deposit lying with the company and did not constitute a loan or advance. The assessee also submitted that section 2(22)(e) applies only when a company grants a loan or advance out of its accumulated profits to a shareholder, which results in a benefit flowing from the company to the shareholder; in the present case, the assessee’s credit balance with the company stood reduced, and therefore no benefit accrued to the assessee from the company.

The Tribunal observed that the assessee was maintaining a deposit account with the company. On the instructions of the assessee, the company had made payment of Rs.25,00,000/-, by debiting the assessee’s deposit account, which facts were not in dispute.   Even after such payments, the assessee continued to have a substantial credit balance with the company and there was no point of time during the year when the account showed a debit balance.

Accordingly, the Tribunal held that in terms of the provisions of section 2(22)(e) of the Act, the company could not have bene said to given any money in any form to the assessee, and therefore, the provision of Section 2(22)(e) of the Act were not attracted.  

In the result, the appeal of the assessee was allowed.

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