2025 (10) TMI 763 - AT - Income Tax

Payment not a deemed dividend under s.2(22)(e); no TDS obligation under s.194 or ss.201(1)/201(1A), treated as commercial loan

ITAT held the payment was not a deemed dividend under s.2(22)(e) because the recipient was not a registered shareholder; therefore TDS obligation under ... Deemed dividend u/s 2(22)(e) - assessee failed to deduct tax at source as required u/s 194 on this deemed dividend - liability u/s 201(1) and 201(1A) - HELD THAT:- We find that the TBOPL is not a registered shareholder of the assessee-company; therefore, the primary condition of Section 2(22)(e) is not satisfied. Reliance is being placed on the judgements in the case of Daisy Packers Pvt. Ltd [2015 (7) TMI 253 - GUJARAT HIGH COURT] and Cama Hotel Pvt. Ltd [2018 (12) TMI 1894 - ITAT AHMEDABAD] wherein it was hold that deemed dividend provisions apply only when the recipient is a shareholder. TDS on dividend is applicable only when payment is made to a shareholder and it is not possible to fasten the liability of tax deduction in the case of deemed dividend. Hence, keeping in view the fact that it is a commercial lending, we hold that neither the provisions of Section 2(22)(e) nor section 201(1) of the Act are attracted in the present case. Appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether an advance of Rs. 20,00,000 by the assessee to a related company constitutes 'deemed dividend' under Section 2(22)(e) of the Income-tax Act where the recipient is not a shareholder of the payer. 2. Whether the payer-assessee can be held liable as an assessee-in-default under Sections 194 and 201(1)/201(1A) for failure to deduct tax at source on an amount treated as deemed dividend under Section 2(22)(e). 3. Whether the commercial character, temporary nature and full repayment within the same financial year of an intercorporate loan negate the applicability of Section 2(22)(e). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Section 2(22)(e) - whether the advance is a 'deemed dividend' when recipient is not a shareholder Legal framework: Section 2(22)(e) treats certain advances/loans to a person by a company as 'deemed dividend' where the person is a shareholder (or in specified relationship) and the advance/loan is in substance a distribution of accumulated profits. The provision requires, inter alia, that the recipient be a shareholder (or fall within specified relationships) for the deeming fiction to apply. Precedent Treatment: The Tribunal relied on earlier decisions of coordinate fora that held the deeming fiction under Section 2(22)(e) applies only when the recipient is a shareholder; similar decisions also held that the TDS provisions in respect of dividend presuppose payment to a shareholder. These earlier rulings were followed in the present decision. Interpretation and reasoning: The Court examined the factual matrix and found that the recipient company was not a registered shareholder of the payer; the primary statutory condition for invoking Section 2(22)(e) was therefore absent. The Tribunal treated the transaction as a bona fide commercial loan advanced to meet temporary working capital needs of the recipient under its contract obligations (including procurement and delivery of buses under a municipal contract), rather than an appropriation of accumulated profits for benefit of shareholders. The temporary character of the advance, its commercial purpose, and repayment within the same financial year were treated as indicia inconsistent with distribution of profits. Ratio vs. Obiter: Ratio - the deeming fiction under Section 2(22)(e) cannot be invoked where the recipient is not a shareholder; an intercorporate loan advanced for bona fide commercial purposes and repaid within the year is not covered by Section 2(22)(e). Observations about the commercial exigencies and delivery schedule of the municipal contract are supportive factual findings forming part of the reasoning rather than mere obiter. Conclusion: Section 2(22)(e) does not apply to the advance in question because the recipient was not a shareholder and the advance had commercial, temporary character; the amount cannot be treated as deemed dividend. Issue 2: Liability to deduct tax at source under Section 194 and assessee-in-default under Sections 201(1)/201(1A) Legal framework: Section 194 and the consequential provisions of Sections 201(1)/201(1A) mandate withholding of tax at source on certain payments, including dividends paid to shareholders; liability to deduct arises on the person making payment where the payment falls within chargeable categories under the Act. Precedent Treatment: The Tribunal followed earlier decisions holding that TDS on dividend is applicable where payment is made to a shareholder; absent the classification of a transaction as dividend under Section 2(22)(e) in relation to a shareholder, the statutory obligation to deduct tax on account of dividend does not arise. These coordinate rulings were applied to resolve the present dispute. Interpretation and reasoning: Since the advance was held not to be a deemed dividend (Issue 1), there was no payment of dividend to a shareholder that would trigger the withholding obligation under Section 194. The Tribunal therefore found it impossible to fasten liability for TDS or to characterize the payer as an assessee-in-default under Sections 201(1)/201(1A) in respect of the disputed advance. The factual finding that the advance was a temporary commercial loan, fully repaid in the same year, reinforced the conclusion that no tax deduction liability under dividend provisions arose. Ratio vs. Obiter: Ratio - absence of deemed dividend status negates the obligation to deduct tax under Section 194; consequently, Sections 201(1)/201(1A) cannot be invoked to treat the payer as an assessee-in-default for failure to deduct tax on a non-dividend transaction. Observations on the mechanics of bank funding and margin money arrangements are factual and supportive rather than obiter. Conclusion: The payer cannot be held liable to deduct tax under Section 194 nor treated as an assessee-in-default under Sections 201(1)/201(1A) in respect of the Rs. 20,00,000 advance because the transaction is not a deemed dividend payable to a shareholder. Issue 3: Effect of commercial character, temporariness and repayment within the same year on characterisation of transaction Legal framework: Characterisation of a transaction (loan versus distribution) depends on statutory conditions and surrounding facts, including purpose, commercial exigency, intention to distribute profits, nature and duration of advance, and repayment behavior. Precedent Treatment: The Tribunal relied on authoritative holdings that distinguish bona fide intercorporate loans advanced for working capital or business exigencies from distributions of accumulated profits; such factual distinctions have been accepted as negating applicability of deeming provisions where statutory conditions are otherwise unmet. Interpretation and reasoning: The Tribunal accepted factual submissions that the advance was made to secure margin money enabling the recipient to obtain bank finance for procurement of buses under a strict contractual delivery schedule and avoid heavy penalties. The recipient's weak financial standing and inability to raise funds independently were relevant to establishing commercial necessity. The temporary nature of the advance and its full repayment within the same financial year were treated as strong indicators against the inference of distribution of accumulated profits to shareholders. Ratio vs. Obiter: Ratio - bona fide, temporary commercial loans advanced and repaid in the same year weigh against classification as deemed dividend, provided statutory requisites (such as recipient being a shareholder) are not met. Factual findings regarding the recipient's procurement deadlines and penalty exposure are integral to the ratio in this case. Conclusion: The commercial purpose, temporariness and prompt repayment reinforce the finding that the advance was a genuine loan and not a distribution of profits; these factors support exclusion of the transaction from Section 2(22)(e) and the withholding obligations tied to dividend payments. Overall Conclusion The advance of Rs. 20,00,000 is not a deemed dividend under Section 2(22)(e) because the recipient was not a shareholder and the advance was a bona fide, temporary commercial loan repaid within the same year; accordingly, no obligation to deduct tax under Section 194 arose and the assessee cannot be treated as an assessee-in-default under Sections 201(1)/201(1A). The Tribunal allowed the appeal.