DEEPAK VARANDMAL WADHWA,NAVI MUMBAI vs. ASSESSING OFFICER CIRCLE27(1) MUMBAI, NAVI MUMBAI

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ITA 4843/MUM/2026Status: DisposedITAT Mumbai19 August 2026AY 2020-2120 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the payment was a repayment of the company's debt to the assessee, not a loan or advance by the company to the shareholder. The character of the payment as a loan or advance is central to section 2(22)(e).

What were the facts?

The assessee, a substantial shareholder and director of a company, received ₹48,00,000 from it. The assessee claimed this was a withdrawal from his credit balance in the company's running account, as he had advanced funds to the company. The Assessing Officer treated this as deemed dividend under section 2(22)(e).

What were the issues?

Whether a withdrawal from a shareholder's credit balance in a company's running account, where the company owes the shareholder, constitutes a loan or advance taxable as deemed dividend under section 2(22)(e).

Which sections of the Income-tax Act were involved?

Section 2(22)(e)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH

For Appellant: Shri B. N. Rao & Vaibhav
For Respondent: Shri Prasanna Tewari, SR DR
Hearing: 30/07/2026Pronounced: 19/08/2026

आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against the impugned order passed by the learned Commissioner of Income-tax (Appeals) for the Assessment Year 2020-21, arising out of the assessment order dated 29.03.2025 passed

2 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa under section 147 read with sections 144 and 144B of the Income-tax Act, 1961. Though in the assessment proceedings several additions had been made, the controversy which survives for our adjudication in the present appeal is confined to the addition of ₹48,00,000 made by the Assessing Officer and sustained by the learned CIT(A) as deemed dividend under section 2(22)(e) of the Act. The core issue, therefore, is whether a sum of ₹48,00,000 received by the assessee from M/s Dhanraj Global Corporation 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

3 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa ₹60,00,000. In the course of assessment proceedings, he explained the source of the said investment, inter alia, as comprising ₹48,00,000 received from M/s Dhanraj Global Corporation Pvt. Ltd. on 23.05.2019 and ₹15,00,000 received from Shri Roshan Pramod More, stated to be repayment of an earlier loan. Insofar as the sum of ₹48,00,000 is concerned, the assessee explained that this was not a loan or advance received by him from the company. His specific explanation was that he had been advancing funds to the company from time to time and, as on 01.04.2019, a sum of ₹42,03,475 was already standing to his credit in the books of the company. During the year also, further funds were introduced by him in the company and withdrawals were made therefrom according to requirements. Thus, according to the assessee, the relationship disclosed by the account was that of the company being indebted to him and not vice versa.

3.

The Assessing Officer, however, did not accept the aforesaid explanation. He noticed from the audited financial statements of M/s Dhanraj Global Corporation Pvt. Ltd. that an amount of ₹68,91,536 was reflected under the head “Short Term Borrowings” as unsecured loan from the assessee. According to him, no loan agreement between the assessee, being the promoter-director, and the company had been furnished specifying the repayment schedule, interest and other conditions. He further observed that a promoter-director

4 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa could not automatically withdraw the loan amount from the company unless such withdrawal was in conformity with the terms governing the borrowing; and that, since there were other directors, approval of the Board would be required for a major financial transaction involving repayment or withdrawal of the loan. The Assessing Officer thereafter referred to the decisions in Sunil Kapoor v. CIT, Shashi Pal Agarwal v. CIT and Lailabi Khalid v. CIT and concluded that the amount of ₹48,00,000 received by the assessee from the company constituted deemed dividend under section 2(22)(e). What is, however, material for the present purpose is that the Assessing Officer did not record any finding that immediately before the impugned payment the assessee owed any amount to the company or that, as a consequence of the payment of ₹48,00,000, the assessee’s account had become overdrawn or had acquired a debit balance. The addition proceeded substantially on the premise that the assessee was a substantial shareholder and that ₹48,00,000 had travelled from the company to him.

4.

Before the learned CIT(A), the assessee placed considerable emphasis upon the nature and movement of the running account. It was pointed out that the audited 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

5 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa assessee had an opening credit balance of ₹42,03,475 and, notwithstanding the withdrawal of ₹48,00,000 during the year, the account ultimately reflected a closing credit balance of ₹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 ₹42,03,474 and the closing balance as on 31.03.2020 was ₹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 was not sufficient to disregard the transaction when it stood duly recorded in the books and was supported by the audited financial statements.

5.

Despite recording the aforesaid factual findings, the learned CIT(A) sustained the addition upon interpreting the opening words of section 2(22)(e), namely, “any payment by a company”. According to him, since the expression employed by the Legislature was “any payment”, even a payment representing repayment of a loan earlier given by the

6 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa shareholder to the company was not excluded from the ambit of deemed dividend. On this reasoning, he held that the conditions of section 2(22)(e) stood satisfied and sustained the addition of ₹48,00,000. Before us, the learned counsel assailed this reasoning and submitted that it proceeds upon reading the expression “any payment” in isolation while ignoring the immediately succeeding and controlling words “by way of advance or loan to a shareholder”. He submitted that the assessee’s running account unmistakably establishes that the company remained a debtor of the assessee throughout the year and that there was no occasion when the assessee became a debtor of the company. Consequently, a payment made by the company in discharge, wholly or partly, of an existing liability towards the assessee could not acquire the character of a loan or advance merely because the recipient happened to be a substantial shareholder. Reliance was also placed upon the decisions in Sri A. Dayanand Reddy v. DCIT, Exotica Housing & Infrastructure Co. (P.) Ltd. v. ITO and Ravindra R. Fotedar v. ACIT. The learned DR, on the other hand, strongly relied upon the orders of the authorities below and submitted that the assessee admittedly held 85% shareholding in the closely held company and had received ₹48,00,000 from it; and, therefore, the learned CIT(A) was justified in sustaining the addition under section 2(22)(e). 5.1. We have heard the rival submissions and perused the material placed on record. The issue has to be examined first

7 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa on the language of section 2(22)(e) and thereafter in the light of the true character of the running account between the assessee and the company. The relevant portion of section 2(22)(e), as applicable to the controversy before us, reads as under:

”(22) ‘dividend’ includes— … (e) any payment by a company, not being a company in which the public 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

8 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa 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. In other words, before a payment can assume the character of deemed dividend, it must first answer the description of a loan or advance by the company to the shareholder. The other conditions relating to the nature of the company, percentage of shareholding and availability of accumulated profits become relevant only when this foundational character of the payment is established. The provision undoubtedly creates a statutory fiction by bringing within the ambit of dividend certain payments which, in their ordinary commercial sense, may not constitute dividend; but the fiction operates within the contours delineated by the Legislature and cannot be enlarged by detaching the words “any payment” from the qualifying expression “by way of advance or loan”. The inquiry, therefore, cannot stop upon finding that ₹48,00,000 travelled from the company to the assessee. It must proceed further to ascertain whether, having regard to the subsisting financial relationship between the parties immediately before and after such payment, the company had in fact lent or advanced ₹48,00,000 to the assessee. This requirement that the payment must possess the character of a loan or advance is intrinsic to the statutory provision itself and cannot be rendered otiose merely because the recipient satisfies the prescribed shareholding threshold. This construction is also

9 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa consistent with the manner in which section 2(22)(e) has been judicially understood as a deeming provision whose operation depends upon satisfaction of its specified ingredients.

7.

It is in the above statutory perspective that the ledger account between the assessee and M/s Dhanraj Global Corporation Pvt. Ltd. assumes decisive significance. The factual position emerging from the audited accounts and the ledger is not seriously in dispute. As on 01.04.2019, an amount of ₹42,03,475 stood to the credit of the assessee in the books of the company. Thus, at the commencement of the previous year itself, the company was indebted to the assessee and not the assessee to the company. During the year, the assessee continued to introduce funds into the company and also withdrew amounts from the same running account. The assessee’s submission before the authorities was that the further amounts introduced during the year aggregated to ₹74,88,061 and that ₹48,00,000 was withdrawn on 23.05.2019. At the end of the year, far from there being any amount recoverable by the company from the assessee, the account reflected a closing credit balance of ₹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

10 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa 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 ₹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 altogether different where money is already due and payable by the company to the shareholder and the company thereafter returns a part of such money to him. In the latter situation, the payment does not create an indebtedness of the shareholder towards the company; it extinguishes, to the extent of the payment, the pre-existing indebtedness of the company towards the shareholder. A repayment by a debtor cannot, merely by reason of the direction in which money moves, be transmuted into a loan by the debtor to its creditor. For section 2(22)(e), what is material is not merely the physical movement of money from the company to the shareholder but the legal and commercial character in which that money is paid. If the

11 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa shareholder’s account already contains an amount standing to his credit and the company makes payment against such credit without the account becoming debit, the payment is ordinarily a discharge of the company’s liability. It does not result in the shareholder borrowing money belonging to the company. This distinction assumes greater significance in the present case because the finding recorded by the learned CIT(A) himself is that the assessee’s account did not become debit at any stage during the relevant previous year. The payment of ₹48,00,000, therefore, cannot be examined as a solitary entry denuded of the account from which it arose; it has to be appreciated as one transaction in a continuing running account which, throughout the relevant period, represented money due by the company to the assessee.

9.

We have also examined the reasoning adopted by the Assessing Officer for rejecting the assessee’s explanation. His principal objections were that no formal loan agreement between the assessee and the company had been produced; that the repayment schedule, rate of interest and other terms were not demonstrated; and that there was no material regarding approval of the Board for withdrawal or repayment of the amount. In our view, none of these considerations answers the question arising under section 2(22)(e). The issue before the Assessing Officer was not whether the company had complied with every corporate formality governing

12 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa acceptance or repayment of funds from its director, but whether the impugned sum represented a loan or advance by the company to the assessee. The audited financial statements recognise the assessee as a creditor and the amount 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 ₹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

13 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa ₹26,88,061 as unexplained investment under section 69. The learned CIT(A), after examining the ledger account, bank statement and supporting material, deleted that addition and specifically found the transactions to be in order. Thus, for the purpose of section 69, the appellate authority accepted the movement of funds from the assessee to the company as genuine and supported by the banking and accounting records. The same running account cannot thereafter be viewed in fragments while examining section 2(22)(e), by isolating the payment of ₹48,00,000 and ignoring the credit balance against which it was made. The nature of an account is determined from the cumulative effect of its entries and the resultant balance, particularly when the account reflects reciprocal movements of funds over a period of time. Here, the evidence demonstrates a continuous financial account in which the company was the recipient of funds from the assessee and remained indebted to him. The opening credit of ₹42,03,475, the further funds introduced during the year, the withdrawal of ₹48,00,000 and the ultimate closing credit of ₹68,91,536 are parts of one composite account. The fact that the closing credit is substantially higher than even the opening credit further corroborates the position that, viewed over the relevant period, the assessee was a net lender of funds to the company and not a borrower from it. The assessee’s case, therefore, does not rest merely upon the nomenclature employed in the books but upon the actual

14 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa movement of funds and the balance continuously subsisting in his favour.

11.

It is equally important to distinguish the present factual situation from a case where a shareholder first receives a loan or advance from the company and subsequently repays or adjusts it. If, at the time when money is paid by the company, the shareholder thereby becomes indebted to the company, the taxable character of that payment, where the remaining ingredients of section 2(22)(e) are fulfilled, cannot ordinarily be effaced merely because the amount is repaid subsequently. That principle, however, presupposes the existence of a loan or advance at the point of payment itself. The present case stands on the opposite factual footing. Here, the antecedent liability ran from the company towards the assessee and the impugned payment reduced that liability. The distinction is not semantic; it goes to the 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

15 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa 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 ₹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(A), because, despite having accepted the material factual foundation of the assessee’s case, he has sustained the addition essentially on the premise that section 2(22)(e) uses the expression “any payment” and, therefore, even repayment by the company of money earlier advanced by the shareholder would fall within the ambit of the provision. In our considered opinion, this construction cannot be sustained. The expression “any payment” is not an independent charging expression standing by itself. The Legislature has employed the words “any payment by a company…of any sum…by way of advance or loan to a shareholder”. These words form one composite statutory prescription and have to be read together. If “any payment” were to be understood as comprehending every payment made by a closely held

16 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa company to a specified shareholder irrespective of its nature and antecedent liability, the words “by way of advance or loan” would become largely redundant. Such an interpretation would bring within the deeming fiction even payments made in discharge of genuine liabilities of the company merely because the payee happens to be a substantial shareholder, a consequence which does not flow from the language employed by the Legislature. What section 2(22)(e) brings within the extended meaning of dividend is a payment which bears the character of an advance or loan by the company to the specified shareholder, or a payment made by the company on behalf of or for the individual benefit of such shareholder, subject to the other conditions prescribed therein. Thus, the character of the payment remains central to the operation of the provision. In the present case, the learned CIT(A) himself has accepted that the assessee had advanced money to the company; that the amount stood reflected as a liability in the audited financial statements; that the assessee had an opening credit balance; that further funds had moved from the assessee to the company during the year; that the impugned withdrawal was against the amounts so advanced; and, most importantly, that the assessee’s account did not have a debit balance at any point of time. Having accepted these facts, the conclusion that the repayment of ₹48,00,000 nevertheless constituted a loan or advance by the company merely because it was a “payment”

17 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa runs contrary to the very factual findings recorded in the impugned order.

13.

The 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, Exotica Housing & Infrastructure Co. (P.) Ltd. v. ITO and Ravindra R. Fotedar v. ACIT support the broader proposition that, in examining

18 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa section 2(22)(e), the real nature of the running/current account and the movement of funds between the shareholder and the company cannot be ignored. In Ravindra R. Fotedar, in particular, the Tribunal considered reciprocal movement of funds in a running account while examining the applicability of the deeming provision. We, however, do not consider it necessary to rest our conclusion merely upon the authorities cited by either side, because the issue in the present case follows from the statutory language itself when applied to the admitted and established facts. A deeming provision may undoubtedly attribute a legal character which the transaction may not possess under ordinary law, but the fiction can operate only after the facts contemplated by the provision exist. Here, the primary fact required for invoking section 2(22)(e), namely, a payment having the character of a loan or advance by the company to the shareholder, has not been established. On the contrary, the material accepted by the learned CIT(A) demonstrates the reverse relationship.

14.

Thus, viewed cumulatively, the position which emerges is that the assessee was holding 85% shares in M/s Dhanraj Global Corporation Pvt. Ltd. and therefore satisfies the shareholding threshold contemplated in section 2(22)(e); but that fact by itself does not attract the deeming provision. As on 01.04.2019, ₹42,03,475 was already standing to the assessee’s credit in the books of the company. The assessee

19 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa continued to provide funds to the company during the year. There were reciprocal movements through the running account, including the impugned payment of ₹48,00,000 on 23.05.2019, and the account ultimately closed with a still higher credit balance of ₹68,91,536 in favour of the assessee. The ledger and audited financial statements were produced before the authorities below and the learned CIT(A) has himself accepted that there was no debit balance in the assessee’s account at any point of time. There is no finding by either authority identifying any stage at which the payment by the company resulted in the assessee becoming its debtor. These facts are decisive. The impugned payment represented withdrawal/repayment against the amount already due by the company to the assessee and did not constitute an advance or loan by the company to him. The mere fact that money moved from a closely held company to a shareholder holding substantial voting power cannot substitute the statutory requirement that such payment must answer the description contemplated in section 2(22)(e). We, therefore, hold that the learned CIT(A) erred in sustaining the addition by placing an isolated construction upon the words “any payment” without giving due effect to the qualifying expression “by way of advance or loan”. Accordingly, the addition of ₹48,00,000 made under section 2(22)(e) is directed to be deleted and the relevant ground raised by the assessee is allowed.

20 ITA No.4843/Mum/2026 Deepak Varandmal Wadhwa 15. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 19th August, 2026.

Sd/- Sd/- (ARUN KHODPIA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 19/08/2026 KARUNA, sr.ps

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai

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