Loan to sister concern not deemed dividend as conditions of section 2(22)(e) unmet; assessee's appeal allowed

ITAT AHMEDABAD allowed the assessee's appeal, deleting the addition made as "deemed dividend" u/s 2(22)(e). The Tribunal held that the impugned loan/advance was given by the assessee company to its sister concern and not to a shareholder who is a beneficial owner of shares holding at least 10% voting power, nor to a concern in which such shareholder had substantial interest. As the statutory preconditions of s. 2(22)(e) were not satisfied, the transaction could not be treated as deemed dividend. Reliance on Ankitech precedent was held inapplicable on these facts.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the amount of Rs. 16,00,000 received by the assessee from a closely held company could be taxed as "deemed dividend" under Section 2(22)(e) of the Income-tax Act when the payment was made to a corporate sister concern and not to the shareholder-beneficial owner of shares.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of inter-corporate loan as deemed dividend under Section 2(22)(e)

Legal framework

2.1 The Court reproduced and applied the text of Section 2(22)(e), which treats as "dividend" any payment by a closely held company, by way of advance or loan, to (i) a shareholder being a beneficial owner of not less than 10% voting power, or (ii) any concern in which such shareholder is a member/partner having substantial interest, or (iii) any payment on behalf of or for the individual benefit of such shareholder, to the extent of accumulated profits.

Interpretation and reasoning

2.2 The assessee was a company engaged in manufacturing of chemicals. It received Rs. 16,00,000 as loan from another private company. A common individual held 87.7% shares in the lending company and 50% shares in the assessee-company.

2.3 The assessee contended that funds moved between sister concerns on need basis for short periods, in the course of business exigencies, and relied on a Tribunal decision in a connected matter where such inter se transactions between sister concerns were held not to be in the nature of loan or deposit for purposes of deemed dividend.

2.4 The Court noted that the statutory trigger under Section 2(22)(e) is a payment "to a shareholder being a person who is a beneficial owner of shares" (holding not less than 10% voting power) or to a concern in which such shareholder has substantial interest. The Court emphasized that in the present case the payment was made by the lending company to the assessee-company, which is a corporate sister concern, and not to the individual shareholder who was the beneficial owner of the requisite shareholding.

2.5 On these facts, the Court held that the transaction between the lending company and the assessee-company could not be treated as a payment to a shareholder-beneficial owner of shares, nor could the assessee-company be treated as such shareholder. Hence, the essential statutory condition for invoking Section 2(22)(e) was not satisfied.

2.6 The Court referred to an earlier Tribunal decision involving the same group, which had categorically held that such transactions between sister concerns cannot partake the nature of "loan" or "deposit" for the purposes of deemed dividend, even where interest is charged.

2.7 The Court further observed that the decision of the Delhi High Court in "CIT v. Ankitech Pvt. Ltd." would not apply on the facts of the present case and therefore did not assist the Revenue in sustaining the addition.

Conclusions

2.8 As the loan was advanced by the closely held company to a sister concern (the assessee-company) and not to the individual shareholder who was the beneficial owner of the shares, the statutory preconditions of Section 2(22)(e) were not met.

2.9 The addition of Rs. 16,00,000 as deemed dividend under Section 2(22)(e), made by the Assessing Officer and confirmed by the first appellate authority, was held to be unjustified and was deleted.

2.10 Consequent upon deletion of the deemed dividend addition, the assessee's appeal was allowed in full.

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