“loan to shareholder”
The decision most relied on for loan to shareholder is Pradip Kumar Malhotra v. CIT (338 ITR 538), cited in 152 judgments on BharatTax.
Leading authorities on loan to shareholder
Section 2(22)(e) of the Income Tax Act, which addresses deemed dividends, does not apply to loans or advances provided by a company to its shareholders if these transactions occur in the normal course of business, are driven by business expediency, or are made in consideration of a benefit conferred upon the company by the shareholder. Conversely, gratuitous loans or advances given to shareholders fall within the purview of this section.
Genuine trade advances made by a company in the ordinary course of business to a shareholder do not fall within the definition of deemed dividend under Section 2(22)(e) of the Income-tax Act.
Deemed dividend under section 2(22)(e) is assessable only in the hands of the beneficial shareholder who receives the benefit of the loan or advance, and not in the hands of the company receiving the loan.
For Section 2(22)(e) to apply, a payment by a company must be in the nature of a loan or advance, and the company must have accumulated profits. Such payments to a concern in which a shareholder, holding more than 10% voting power, has a substantial interest are deemed dividends if the shareholder ultimately benefits, even if routed through different modes or concerns.
When an assessee company receives share application money or unsecured loans and provides the identity of the shareholders or creditors to the Assessing Officer, the amount cannot be treated as the assessee's undisclosed income under Section 68. The Income Tax Department must instead proceed against the alleged bogus shareholders or creditors individually.
A loan or advance from a closely held company to a shareholder is a deemed dividend under Section 2(22)(e) upon receipt, unaffected by subsequent repayment or adjustment.
Money received by a company as share application money from directors or shareholders, especially when no interest is charged and held in a current account, does not constitute a 'loan or deposit' under Section 269SS. Therefore, no penalty can be levied under Section 271D for such transactions.
A loan or advance from a closely held company to a 'concern' where a common shareholder has a substantial interest is not a deemed dividend under Section 2(22)(e) for the 'concern' if it is not a shareholder of the lending company. Deemed dividend under Section 2(22)(e) is taxable only in the hands of the registered or beneficial shareholder.
