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 1,757 judgments on BharatTax that turn on this section.
Leading authorities on Section 2(22)(e)
Section 14A of the Income-tax Act, 1961, which disallows expenditure incurred in relation to exempt income, is not applicable if the assessee has not earned any exempt income in the relevant assessment year.
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.
Interest expenditure incurred for acquiring capital assets, even if capitalized in the books, is deductible if for the purpose of business. Section 36(1)(iii) is a self-contained code regarding such deductions.
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 reasonableness of an expenditure for business purposes must be assessed from the businessman's perspective, not the revenue's, and the primary motive to earn income directly is not a prerequisite for its admissibility as a deduction.
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 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.
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.