Tribunal rules loans to group companies not dividends, no TDS deduction required

The Tribunal upheld the CIT(A)'s decision, ruling that the loans advanced to the six group companies were not deemed dividends under Section 2(22)(e) and did not require TDS deduction under Section 194. As a result, the Revenue's appeals were dismissed, and the assessee's cross-objections were also dismissed as infructuous.

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Issues Involved:
1. Applicability of Section 194A for TDS on inter-corporate loans.
2. Classification of loans as deemed dividends under Section 2(22)(e).
3. Requirement for TDS deduction under Section 194.
4. Consequential orders under Sections 201(1) and 201(1A).

Issue-wise Detailed Analysis:

1. Applicability of Section 194A for TDS on inter-corporate loans:
The primary issue contested was whether TDS should be deducted under Section 194A on a loan of Rs. 19,56,37,008 advanced by the assessee company to its six subsidiary companies. The Revenue argued that these loans should be classified as deemed dividends under Section 2(22)(e), necessitating TDS deduction.

2. Classification of loans as deemed dividends under Section 2(22)(e):
The assessee had given inter-corporate deposits to six subsidiaries for business purposes. The Revenue contended that these loans are deemed dividends as per Section 2(22)(e) and thus required TDS deduction under Section 194. The Assessing Officer (AO) treated the amount of Rs. 19,56,37,008 as deemed dividend based on the substantial common shareholding among directors. However, the CIT(A) deleted this addition, stating that the payee companies were not registered shareholders of the appellant company, relying on various judicial pronouncements.

3. Requirement for TDS deduction under Section 194:
The CIT(A) observed that Section 194 requires TDS deduction only when payment is made to a registered shareholder. Since the loans were advanced to group companies that were not shareholders of the appellant company, TDS under Section 194 was not applicable. This interpretation was supported by the Jaipur Bench of ITAT in the case of ANZ Reality (P) Ltd. vs. ITO, where it was held that TDS under Section 194 is not required unless the loans/advances are given to a shareholder.

4. Consequential orders under Sections 201(1) and 201(1A):
The deletion of the order passed under Section 201(1) and the interest charged under Section 201(1A) amounting to Rs. 4,39,00,943 and Rs. 3,64,37,782 respectively for A.Y. 2007-08 was also challenged. Since the Tribunal decided that the inter-corporate deposit of Rs. 19,56,37,008 was not deemed dividend, the requirement for TDS deduction did not arise, rendering the orders under Sections 201/201(1A) infructuous.

Separate Judgments Delivered:
The Tribunal referred to various judgments, including the case of Vidhi Infrastructure Pvt. Ltd., where it was held that inter-corporate deposits are not deemed dividends and thus not subject to TDS under Section 194. The Tribunal also considered the judgment in M/s. Precimetal Cast Pvt. Ltd. vs. ITO, which stated that for the applicability of Section 2(22)(e), the assessee must be a shareholder in the company from which the loan or advance is taken.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the loans advanced to the six group companies were not deemed dividends under Section 2(22)(e) and thus did not require TDS deduction under Section 194. Consequently, the appeals by the Revenue were dismissed, and the cross-objections by the assessee were also dismissed as infructuous. The order was pronounced in open court on 07/02/2022.

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