“closely held company”
The decision most relied on for closely held company is CIT v. Ankitech (P) Ltd. (340 ITR 14), cited in 202 judgments on BharatTax.
Leading authorities on closely held company
Deemed dividend under section 2(22)(e) cannot be taxed in the hands of a non-shareholder. The Supreme Court confirmed this view, affirming the Delhi High Court's decision in Ankitech.
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.
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.
For the purpose of deemed dividend under section 2(22)(e) of the Income-tax Act, the term 'shareholder' refers exclusively to a registered shareholder of the company, and not a beneficial owner or non-shareholder.
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.
Section 2(22)(e) of the Income Tax Act, 1961, aims to prevent tax evasion by treating certain payments made by closely held companies to shareholders or their concerns as dividends.
When shares are issued at a premium, the genuineness of the transaction is paramount, not necessarily the source of the investor's funds. The court emphasizes verifying the transaction's authenticity, even if investor identity is established.
