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Income Tax Appellate Tribunal, B BENCH, CHENNAI
Before: SHRI S.S. VISWANETHRA RAVI & SHRI S. R. RAGHUNATHA
आदेश /O R D E R
PER S. R. RAGHUNATHA, AM:
1. This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, [herein after “ld. CIT(A)] dated 16.07.2024 and pertains to assessment year 2011-12.
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2. The assessee has raised the following grounds of appeal:
1. “On the facts and circumstances of the case the order of first appellate authority dated 16.07.2024 in dismissing the appeal of the appellant is bad in law and is not legally justified.
2. On the facts and circumstances of the case the reopening of the assessment by issue of notice u/s.148 is bad in law in as much as the re-opening of the assessment is after four years from the end of the assessment year on the same set of facts without any fresh materials coming into the possession of the assessing officer.
On the facts and circumstances of the case the lower authorities are not justified in not giving a copy of the approval given from the competent authorities in terms of section 151 of the Act.
On the facts and circumstances of the case the AO is not justified in assessing a sum of Rs.1,79,52,270/- by invoking the provisions of section 2(22)(e) of the Act in assessing the above amount as deemed dividend which has been upheld by the First appellate authority.
5. On the facts and circumstances of the case the AO is not justified in making a protective assessment in the hands of the assessee in respect of the above sum of Rs.1,79,52,270/- when substantial assessment has been made in respect of the above amount in the case of M/s Best Cheran Spintex India Limited.
6. On the facts and circumstances of the case when the borrowal to an extent of Rs.10,38 Crores was made by M/s Best Cheran Spintex India Limited from M/s Cheran Spinners Limited and when the assessee is not involved in the above loan transaction making a protective assessment in the hands of the assessee is bad in law.
In view of the above grounds and other submissions to be made at the time of appeal hearing, the order U/S 250 passed by the Commissioner of Income Tax (Appeals), NFAC may be cancelled and justice rendered”.
3. In brief, the solitary issue raised by the assessee in the present appeal is that the ld. CIT(A) has erred in confirming the action of the AO in making an addition of Rs.1,79,52,270/- u/s. 2(22)(e) of the Income-tax Act, 1961.
(hereinafter referred to as “the Act”).
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4. At the outset, the ld. AR of the assessee submitted that the assessee expired on 22.04.2025, subsequent to the institution of this appeal on 17.09.2024. The AR has furnished copies of the death certificate and legal heir certificate, and prayed that the legal heirs of the deceased assessee be brought on record.
We have perused materials and documents available on record and observe from the legal heirs’ certificate of the deceased assessee, comprises the two sons and the spouse of the deceased. Accordingly, the legal heirs are hereby brought on record in place of the deceased assessee. Further, it is noted that Shri P.D.Balachandhran, one of the sons of the deceased assessee, has been duly authorised by the other legal heirs to represent them in the appeal proceedings for the impugned assessment year before this Tribunal.
Accordingly, Shri P.D.Balachandhran shall represent the legal heirs of the deceased assessee in the present proceedings.
The brief facts of the case are that the assessee is an individual. For the impugned year, the assessee filed his return of income on 24.04.2012 declaring a total income of Rs.4,16,100/-. The assessment for the impugned year was re- opened u/s.147 of the Act by issue of notice u/s.148 of the Act on 27.03.2018.
In response to the notice u/s.148 of the Act, the assessee filed his return of income on 26.11.2018 by admitting a total income of Rs.4,16,100/- same as declared in the original return filed u/s.139 of the Act. Subsequently, various statutory notices were issued to the assessee to which the assessee filed his
:-4-: ITA. No.:2438 /Chny/2024 reply from time to time. A show cause notice was issued to the assessee on 01.12.2018 proposing to make an addition u/s.2(22)(e) of the Act amounting to Rs.1,79,52,270/-. The assessee is a shareholder in M/s.Best Cheran Spintex India Limited. During the impugned year, M/s.Cheran Spinners Limited had given loan amounting to Rs.10,38,63,374/- to M/s.Best Cheran Spintex India Limited. The assessment of M/s.Best Cheran Spintex India Limited was finalized u/s.143(3) of the Act dated 31.12.2013 by making an addition of Rs.10,38,63,374/- as deemed dividend received from M/s.Cheran Spinners Limited in the form of unsecured loan and accordingly charged to tax u/s. 2(22)(e) of the Act. The appeal of M/s.Best Cheran Spintex India Limited was dismissed by the ld.CIT(A) and thereafter the company filed a second appeal before the Chennai Tribunal. The Tribunal, Chennai allowed the appeal of the dated 31.05.2017 and stated that the assessee company was not a registered shareholder of M/s.Cheran Spinners Limited and therefore, there cannot be any assessment in the hands of the assessee company while it can be assessed only in the hands of the shareholders of M/s.Best Cheran Spintex India Limited. The Revenue is in further appeal against the said order of the Tribunal, Chennai in the present case. Meanwhile, to protect the interest of the Revenue and to bring the assessment to its logical conclusion, reassessment proceedings were initiated against the assessee u/s.147 of the Act. The AO observed that the assessee held 17.28% of the total shareholding in M/s.Best Cheran Spintex India Limited and held 23.69% of the voting power in M/s.Cheran Spinners Limited. On this :-5-: ITA. No.:2438 /Chny/2024 basis, the AO concluded that since the assessee’s shareholding and voting rights in the respective companies exceeded 10%, the provisions of section 2(22)(e) of the Act, were attracted. The AO further held that the assessee, being both a significant shareholder and a beneficiary of the loans advanced, fell within the ambit and intent of the said deeming provision of 2(22)(e) of the Act.
Thereafter, the AO completed the assessment u/s.147 r.w.s 143(3) of the Act, on 06.12.2018 by assessing the total income of the assessee at Rs.1,83,68,370/- by making an addition of Rs.1,79,52,270/- on account of share of loan given u/s.2(22)(e) of the Act by holding as under:
“The provisions as laid down by section 2(22)(e) of the Act are very well applicable to the assessee in spirit as it is clearly observed that he is not only a beneficiary of the loan taken but is also holding significant voting power in the companies”: -
7. Aggrieved by the assessment order of the AO, the assessee preferred an appeal before the ld. CIT(A). The ld. CIT(A) agreed with the AO’s view and confirmed the addition made by the AO and dismissed the assessee’s appeal on this matter after considering the facts in totality by holding as under: -
“4.6. During the course of appellate proceeding, the appellant failed to explain the grounds taken against the issues. In the assessment order the addition under section 2(22)(e) was made based on the facts presented. This assessment order essentially finalizes the income tax liability for AY 2011-12 by making addition under section 2(22)(e) of the Income Tax Act. The reason for addition was mentioned in the assessment order. However, the appellant made no effort to counter the findings of the Ld. AO either by upholding relevant document(s) or explaining the matter in detail and chose to remain silent about the issue. Although in the grounds of appeal, the appellant stated that the Ld. assessing officer erred in assessing total income by making the addition without understanding the nature of income, however, no substantial document is provided by the appellant to corroborate the grounds of appeal taken in this :-6-: ITA. No.:2438 /Chny/2024 regard. During the course of appellate proceedings also the appellant was provided several opportunities for uploading details along with supporting evidence, however the appellant failed to submit any plausible explanation to substantiate grounds of appeal. The appellant did not comply to the departmental notices during appellate proceedings. 4.7 In view of this, I find no reason to interfere into the order of the Ld.AO and the same is upheld herewith. Therefore, Grounds of appeal taken by the appellant are dismissed.”
8. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
9. Before us, the ld. AR for the assessee submitted that the ld. CIT(A) has erred in confirming the addition of Rs.1,79,52,270/- made u/s.2(22)(e) of the Act. The said addition arose on account of loans advanced by M/s.Cheran Spinners Limited to M/s.Best Cheran Spintex India Limited, wherein the assessee is a common shareholder. The ld.AR drew our attention to pages 6 and 7 of the assessment order dated 06.12.2018, wherein the AO has reproduced the shareholding pattern of both companies, showing that the assessee holds 23.69% of the shares in M/s.Cheran Spinners Limited and 17.28% of the shares in M/s.Best Cheran Spintex India Limited. It was contended that M/s.Cheran Spinners Limited had advanced a loan of Rs.10,38,63,734/- to M/s.Best Cheran Spintex India Limited during the impugned year, and out of this, the AO has attributed 17.28% (based on share holding of the assessee), being Rs.1,79,52,270/-, as deemed dividend u/s.2(22)(e) of the Act in the hands of the assessee.
The ld. AR submitted that such an addition is misconceived in law and on facts because the assessee has not received any loan or advance from :-7-: ITA. No.:2438 /Chny/2024 M/s.Best Cheran Spintex India Limited. It was further submitted that the provisions of section 2(22)(e) have to be read in conjunction with section 2(32) of the Act, which defines the term “person who has a substantial interest in a company.” Since the assessee’s shareholding in M/s.Best Cheran Spintex India Limited is only 17.28%, which is below the threshold of 20% prescribed u/s.2(32) of the Act, the assessee cannot be said to have substantial interest in M/s.Best Cheran Spintex India Limited. Accordingly, the ld.AR contended that one of the primary conditions for invoking section 2(22)(e) of the Act is that that the loan must be given to a concern in which the shareholder has a substantial interest which is not fulfilled in the instant case, since the assessee is holding 17.28% of shares of the loan received company, which is less than prescribed threshold limit of 20%. Therefore the ld.AR prayed that the addition of Rs.1,79,52,270/- made as deemed dividend u/s. 2(22)(e) of the Act is not tenable in the hands of the assessee and deserves to be deleted. Further, reliance was placed on the following decisions: -
CIT v Ankitech Pvt Ltd. [2011] 340 ITR 14(Delhi)
S.M.Gupta, HUF v ACIT, Circle- 56 Kolkata,
[2011]10 Taxmann.com 276 (Kol - ITAT)
Per contra, the ld. DR for the revenue by supporting the orders of the authorities below submitted that the additions of Rs.1,79,52,270/- as deemed dividend u/s. 2(22)(e) of the Act in the hands of the assessee was lawful, justified and supported by facts, law and judicial precedents and pleaded for the dismissal of the appeal of the assessee.
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We have heard both the parties, perused materials available on record and gone through orders of the authorities below. From the material available on record, we note that the only issue is that the AO has made additions in reopened assessment amounting to Rs.1,79,52,270/- as deemed dividend u/s.2(22)(e) of the Act in the hands of the assessee. There is no dispute regarding the fact that the assessee is holding 23.69% of the shares in M/s.Cheran Spinners Limited (the lending company) and 17.28% of the shares in M/s.Best Cheran Spintex India Limited (the borrowing company). The provisions of section 2(22)(e) of the Act, expand the definition of dividend and includes certain loan and advances by a company as deemed dividend in the hands of the shareholder. For ready reference, the provisions of section 2(22)(e) of the Act are as under: -
Section 2(22) "dividend" includes- “(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987 , by way of advance or loan `entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits” but" dividend" does not include— (i) a distribution made in accordance with sub- clause (c) or sub- clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; (ia) 1a distribution made in accordance with sub- clause (c) or sub- clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares
:-9-: ITA. No.:2438 /Chny/2024 allotted to its equity shareholders after the 31st day of March, 1964, 2 and before the 1st day of April, 1965];] (ii) any advance or loan made to a shareholder 3 or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub- clause (e), to the extent to which it is so set off. (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is reduction of capital in the demerged company.] Explanation 1-The expression" accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April,1956. Explanation 2.-- The expression" accumulated profits" in sub- clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub- clauses, and in subclause (c) shall include all profits of the company up to the. date of liquidation, 4 but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. Explanation 2A.-In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation Explanation 3.- For the purposes of this clause,- (a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;]
On perusal of Clause (e) of section 2(22) of Act contemplates that any payment by a company (not being a company in which the public are :-10-: ITA. No.:2438 /Chny/2024 substantially interested) was by way of advance or loan to a shareholder who is the beneficial owner of the shares holding not less than 10% of voting power is deemed as dividend to the extent to which the company possesses accumulated profit. Further, it also includes any such payment by such company to any concern in which such shareholder is member or partner and in which he has the substantial interest. The third scenario under which any payment by such company is on behalf, or for the individual benefit of any such shareholder. Therefore, there are three possible situations under which the payment by a company as specified u/s.2(22)(e) of the Act will be treated as dividend. • Firstly, by way of loan or advances to share holder who is having not less than 10% of the voting powers in the said company. • Secondly, the advances or loan given by the said company to a concern in which a shareholder having not less than 10% of the voting rights in the lending company is a member or a partner and in which he has a substantial interest. • The third scenario will be where any payment by such company is on behalf, or for the individual benefit of any such shareholder.
In the instant case, the loan has been given by M/s.Cheran Spinners Limited to M/s.Best Cheran Spintex India Limited and the assessee is holding 23.69% of the voting power in the lending company, however holding only 17.28% of the shares in the borrowing company. Therefore, the assessee’s share of loan amounting to Rs.1,79,52,270/- has to be examined in the context of second situation, wherein, the payment is given to any concern in which the :-11-: ITA. No.:2438 /Chny/2024 shareholder is a member or a partner and has a substantial interest. There is no quarrel on the fact that the assessee is having more than 10% of the voting rights in the lending company. Therefore, to bring the assessee’s share of loan in question under the expression of “dividend” as per clause (e) of section 2(22), the condition that the assessee is having a substantial interest in the borrowing company has to be satisfied. The term “concern” has been defined in Explanation 3 to section 2(22)(e) of the Act above which includes HUF or firm or an association of person or a body of individual or a company. Therefore, M/s.Best Cheran Spintex India Limited, falls under the ambit of term “concern” as stipulated under clause (e) of section 2(22). Further, the term substantial interest is defined u/s.2(32) of the Act which reads as under :-
"person who has a substantial interest in the company", in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power”
In the instant case, we note that the assessee is having only 17.28% of shareholding of the borrowing company being M/s.Best Cheran Spintex India Limited. Therefore, by the parameters of section 2(32) of the Act, it can be seen that the assessee is not having substantial interest in the borrowing company M/s.Best Cheran Spintex India Limited. Since, the assessee is a shareholder of lending company M/s.Cheran Spinners Limited but does not have substantial interest in borrowing company M/s.Best Cheran Spintex India Limited (admittedly only 17.28%) of the shareholding in the said company, the conditions u/s. 2(22)(e) of the Act are not satisfied and therefore the same cannot be brought under the ambit of taxation.
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On perusal of share holding pattern at pages 6 and 7 of the assessment order dated 06.12.2018, we find that assessee is holding 23.69% of the voting power in the lending company and 17.28% in the borrowing company. Therefore, since the assessee does not have substantial interest in the borrowing company, i.e.17.28% which is less than 20% as stipulated, the conditions as per section 2(22)(e) of the Act are not satisfied. In the present facts and circumstances of the case, we are of the considered view that the ld. CIT(A) has erred in confirming the action of the AO in making an addition of Rs.1,79,52,270/- u/s. 2(22)(e) of the Act and hence we set aside the order of the ld. CIT(A) and direct the AO to delete the addition made u/s.2(22)(e) of the Act.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the court on 16th October, 2025 at Chennai.