No deemed dividend on loan given to director for providing collateral to bank to obtain loan for Co.: HC

Case details: CIT v. N.S. Narendra - [2021] 129 taxmann.com 335 (Karnataka)

Judiciary and Counsel Details

• • Alok Aradhe and Hemant Chandangoudar, JJ.
  • K.V Aravind, Adv. for the Appellant. 
  • S. Annamalai and M. Lava, Advs. for the Respondent.

Facts of the Case

Aggrieved by order of AO, assessee preferred an appeal before CIT(A). CIT(A) held that payments received by assessee from the company could not be termed as deemed dividends. The payment made to assessee was for the benefit acquired by the company from assessee by availing loans for further business. ITAT upheld the order of CIT(A).

High Court Held

On further appeal, Karnataka High Court held that as per Section 2(22)(e), the phrase ‘by way of the advance of loan’ must be construed to mean those advances or loans which a shareholder enjoys for simply on account of being a person who is the beneficial owner of shares. If such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, such advance or loan cannot be said to be a deemed dividend. Thus, the gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22). However, the loan or advance given in return for an advantage conferred upon the company by such a shareholder could not be categorised as deemed dividend.

Assessee was the company’s managing director and holding more than 10 percent of the voting power. He was the owner of an apartment, which was offered as collateral security in the form of mortgage to the bank, in lieu thereof, the company availed of credit facility from the banks. Thus, the company arrived at the benefit from assessee and granted the loan/advance to him. Thus, the loan advanced by the company to assessee couldn’t be treated as deemed dividend under Section 2(22)(e).

Case Review

• • CIT v. NS Narendra IT Appeal No. 557/Bang/2013 (para 10) affirmed.

List of Cases Referred to

• • Pradip Kumar Malhotra v. CIT [2011] 15 taxmann.com 66/203 Taxman 110/338 ITR 538 (Cal.) (para 5)
  • Jamuna Vernekar v. Dy. CIT [IT Appeal No. 43 of 2013, dated 10-2-2021] (para 5)
  • Bagmane Constructions (P.) Ltd. v. CIT [2015] 57 taxmann.com 120/231 Taxman 260 (Kar.) (para 5)
  • CIT v. Creative Dyeing & Printing (P.) Ltd. [2009] 184 Taxman 483/318 ITR 476 (Delhi) (para 5)
  • CIT v. Ambassador Travels (P.) Ltd. [2008] 173 Taxman 407/[2009] 318 ITR 376 (Delhi) (para 5).