Repayment of Director’s own Deposit Not Deemed Dividend: ITAT Deletes ₹25L addition u/s 2(22)(e) [Read Order]

The Income Tax Appellate Tribunal ( ITAT ), Ahmedabad Bench held that repayment or withdrawal of a director’s own deposit maintained with a company cannot be treated as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

An individual assessee, Anang Kunjviharibhai Shah who was the Managing Director and majority shareholder (holding 57%) in a private limited company maintained a deposit account with the company. During the relevant assessment year, he had a credit balance of over ₹4.04 crore in that account.

During the year, the company made payments aggregating to ₹25 lakh on the instructions of the assessee and debited the same to his deposit account.

The Assessing Officer treated this payment as a deemed dividend under Section 2(22)(e), holding that it amounted to a payment made by the company for the individual benefit of the shareholder.

The addition was upheld by the CIT(A) and said that even if it was not a fresh loan, the payment conferred a personal benefit on the shareholder who also claimed a deduction under Section 80GGC in his return.

The Tribunal found that the payments were made by simply reducing the assessee’s own deposit balance with the company. At no point did the account show a debit balance, and even after the impugned payments, a large credit balance continued to remain in favour of the assessee.

Section 2(22)(e) applies where a company gives a loan or advance to a specified shareholder out of accumulated profits, said the tribunal bench of Sidhratha Nautiyala (Judicial member) and Dr. B.R.R. Kumar (Vice president).

In the present case, there was no such outgoing of company funds by way of loan or advance, instead, it was only a repayment or withdrawal of money already belonging to the assessee lying with the company as deposit.

Therefore, the bench held that since the company had not granted any fresh loan or advance and merely adjusted payments against the director’s own credit balance, the basic condition for invoking deemed dividend provisions failed.

It set aside the order of the CIT(A) and deleted the addition of ₹25,00,000 made under Section 2(22)(e).