Section 2(22)(e) of the Income Tax Act
The decision most relied on for Section 2(22)(e) is CIT v. Winsome Textile Industries Ltd. (319 ITR 204), cited in 378 of the 240 judgments on BharatTax that turn on this section.
Leading authorities on Section 2(22)(e)
Disallowance under Section 14A of the Income-tax Act cannot exceed the exempt income earned during the relevant period. If no exempt income is earned by the assessee in the relevant year, no disallowance under Section 14A is warranted.
The provisions of Section 2(22)(e) are not applicable to a concern receiving a payment from a closely held company, even if a shareholder of the company holds a substantial interest in that concern, unless the concern itself is the registered shareholder of the company.
The onus lies on the assessee to demonstrate that interest-bearing funds were advanced or utilized for genuine business purposes and commercial expediency to claim interest expenditure as a deduction.
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.
The necessity and reasonableness of business expenditure must be judged from a prudent businessman's perspective, not by the Revenue. The assessee bears the initial onus to prove that interest-bearing funds were used for business purposes and commercial expediency.
The Assessing Officer must first record satisfaction that the assessee’s claim regarding expenditure incurred for earning exempt income is incorrect or unreasonable before applying the provisions of Rule 8D to determine such disallowance under Section 14A(2) of the Income Tax Act.
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.
Genuine trade advances or amounts advanced for bona fide business transactions, driven by commercial expediency, do not fall within the definition of deemed dividend under section 2(22)(e) of the Income-tax Act.
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.
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.
Judgments on Section 2(22)(e)
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