Deemed dividend provisions under Section 2(22)(e) cannot apply to inter-corporate deposits between sister companies (22)(e)

The ITAT Rajkot dismissed the Revenue's appeal regarding deemed dividend under Section 2(22)(e) for inter-corporate deposits. The assessee received a loan from a sister concern where a common shareholder held 98.76% in the assessee company and 59.17% in the lending company. The CIT(A) had deleted the addition after the assessee explained the transaction as an inter-corporate deposit to a sister concern in financial need, as bank deposits were not viable. The Revenue's representative conceded that the assessee held no shares in the lending company and that Section 2(22)(e) provisions could not apply. The ITAT relied on the SC precedent in Madhur Housing Development & Co, establishing that deemed dividend provisions cannot be invoked when loans are given in the normal course of business benefiting both companies.

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ISSUES:

Whether the acceptance of inter-corporate deposit by a company from another company, which is not a shareholder in the recipient company, attracts the provisions of Section 2(22)(e) of the Income Tax Act, 1961.Whether a loan or deposit received from a company in which the recipient company does not hold shares can be treated as deemed dividend under Section 2(22)(e).Whether the provisions of Section 2(22)(e) apply when the loan or advance is given in the normal course of business benefiting both payer and payee companies.

RULINGS / HOLDINGS:

The provisions of Section 2(22)(e) of the Act are not attracted where the recipient company does not hold any shares in the company from which the loan or inter-corporate deposit is received, as it is a pre-requisite that the recipient company should be a registered shareholder of the lender company.The acceptance of inter-corporate deposit from a company in which the recipient company holds no shares cannot be treated as deemed dividend under Section 2(22)(e) of the Act.The Supreme Court has held that "where loans and advances are given in normal course of business and transaction in question benefits both payer and payee companies, provisions of section 2(22)(e) cannot be invoked," supporting the view that such transactions do not attract deemed dividend provisions.

RATIONALE:

The court applied the statutory interpretation of Section 2(22)(e) of the Income Tax Act, 1961, which defines deemed dividend to include loans or advances made by a company to its shareholders or to any concern in which the company's shareholders have substantial interest.The decision relied on the jurisdictional High Court precedent that emphasized the necessity of shareholding by the recipient company in the lender company to invoke Section 2(22)(e).The Supreme Court's authoritative ruling in the case of CIT vs. Madhur Housing Development & Co. was followed, which clarified that transactions in the normal course of business benefiting both parties do not attract Section 2(22)(e).No dissenting or differing opinions were recorded; the Tribunal respected binding precedents and statutory language to reach its conclusion.

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