Exempting Non-Shareholder Entities From Deemed Dividend Additions Under Section 2(22)(e)

Exempting Non-Shareholder Entities From Deemed Dividend Additions Under Section 2(22)(e)

Issue

Whether an addition on account of a deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961 can be legally sustained in the hands of an entity that is not a registered or beneficial shareholder of the closely held company advancing the loan.

Facts

• The case pertains to the Assessment Year 2014-15 regarding an addition made under the deemed dividend provisions.

• The Revenue sought to tax certain loans or advances made by a closely held company to the assessee under Section 2(22)(e).

• The assessee was not a registered or beneficial shareholder in the company from which the loans or advances were received.

Decision

• Held, yes: An addition on account of a deemed dividend under Section 2(22)(e) can only be made in the hands of a person or entity who is both a registered and a beneficial shareholder.

• Held, yes: Since the assessee did not hold registered or beneficial shares in the advancing company, the foundational requirement of Section 2(22)(e) was not satisfied.

• Held, yes: The addition made by the lower tax authorities on account of a deemed dividend was unsustainable in law and was ordered to be deleted, ruling in favor of the assessee.

Key Takeaways

• Shareholder Status is Mandatory: For Section 2(22)(e) to be triggered, the recipient of the loan or advance must be a registered or beneficial owner of shares carrying at least 10% of the voting power in the lending company.

• Non-Shareholder Immunity: Even if a business entity receives a loan or an advance from a corporate entity, the tax department cannot label it a “deemed dividend” in the hands of the recipient if that recipient does not own shares in the lending entity.