No s. 2(22)(e) “Deemed Dividend” if loans & advances given as quid pro quo

ACIT vs. G. Sreevidya (ITAT Chennai)

The assessee, a substantial shareholder of a closed held company, availed of a loan from the company. She claimed that the said loan was not assessable as “deemed dividend” u/s 2(22)(e) as she had given a personal guarantee and collateral security to a third party to enable the company to avail of credit facilities and in return she was entitled to withdraw funds from the company as and when required by her for personal purposes. The AO rejected the claim though the CIT(A) accepted it. On appeal by the department, HELD
dismissing the appeal:

Every payment by a company to its shareholders may not be a loan/ advance so as to come within the ambit of s. 2(22)(e). In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense, the amount forwarded by the company to the assessee was not in the shape of advances or loans. The arrangement between the assessee and the company was merely for the sake of convenience arising out of business expediency (Pradip Kumar Malhotra 338 ITR 538 (Cal) & Creative Dyeing & Printing 318 ITR 476 (Del) followed).