Loan from a fellow subsidiary denied treatment as deemed dividend; revisionary recharacterisation overturned for lack of shareholder nexus

Whether a loan from a fellow subsidiary constitutes a deemed dividend under the Income tax Act turns on the presence of a shareholder nexus; the deeming provision requires that the recipient be a shareholder of the lending company, and absent that nexus the amount cannot be treated as a dividend - outcome: the Rs.100 crore advance is not a deemed dividend. Whether a revision order under the revisional power could recharacterise the loan as a deemed dividend depends on the legal basis for invoking the deeming provision - outcome: the revision under revisionary power is unsustainable and is set aside.

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Issues: Whether a loan of Rs.100 crore received by the assessee from a fellow subsidiary attracts the deeming provision of section 2(22)(e) of the Income-tax Act, 1961 and whether the revision order passed under section 263 of the Income-tax Act, 1961 is sustainable.

Analysis: The admitted and uncontroverted fact is that the assessee was not a shareholder of the lending company. Section 2(22)(e) applies to amounts treated as dividends where the recipient is a shareholder of the lending company; that shareholding nexus is a necessary condition for invoking the deeming provision. The legal position established by the Special Bench decision in ACIT v. Bhaumik Colour (P) Ltd. and upheld by the jurisdictional High Court (Apeejay Pvt. Ltd.) confirms that, in absence of the borrower being a shareholder of the lender, amounts advanced by the lender cannot be treated as deemed dividends under section 2(22)(e). Applying these principles to the present facts, the requirement for treating the loan as deemed dividend is not satisfied. Consequently, the exercise of revisionary power under section 263 to treat the loan as deemed dividend was without a sustainable legal basis.

Conclusion: The loan of Rs.100 crore does not attract section 2(22)(e) and the revision order passed under section 263 is unsustainable; the appeal is allowed in favour of the assessee.

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