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Facts
The Revenue filed appeals against CIT(A) orders for assessment year 2017-2018. The cases involved additions made by the Assessing Officer on account of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, relating to payments between group companies. These payments were treated as loans or advances exceeding 150% of purchases/sales.
Held
The Tribunal held that payments made between group companies do not fall under the definition of deemed dividend under Section 2(22)(e) when they are in the ordinary course of business, especially when there is no cross-holding or shareholder relationship between the payer and recipient companies. The addition made on a protective basis was therefore unsustainable.
Key Issues
Whether payments made between group companies in the ordinary course of business can be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
Sections Cited
2(22)(e), 143(3), 153A, 132
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Income Tax Appellate Tribunal, HYDERABAD “A” BENCH: HYDERABAD
Before: SHRI VIJAY PAL RAO & SHRI MANJUNATHA G
ORDER PER MANJUNATHA G.: The above twin appeals are filed by the Revenue against the orders of the learned CIT(A)-12, Hyderabad, both
2 ITA.Nos.394 & 396/Hyd./2025 dated 31.01.2025, relating to the assessment year 2017- 2018. Since common issues are involved in both these appeals, these appeals were heard together and are being disposed of by this single consolidated order for the sake of convenience and brevity.
ITA.No.394/Hyd./2025 – A.Y. 2017-2018 :
Brief facts of the case are that, the assessee- company is engaged in manufacturing of bulk drugs and pharmaceuticals. The assessee-company has filed it’s return of income for the assessment year 2017-2018 on 06.11.2017 declaring total income of Rs.20,02,08,506/- and the assessment was completed u/sec.143(3) of the Income Tax Act, 1961 [in short “the Act”] on 25.03.2019 determining the total income at Rs.20,17,33,566/-. A search and seizure operation u/sec.132 of the Act was conducted in the case of MSN Group of Cases on 24.02.2021. The assessee-company is one of the companies covered u/sec.132 of the Act as part of the group. In the case of assessee-company, search and seizure operation was commended on 24.02.2021 and the proceedings were 3 ITA.Nos.394 & 396/Hyd./2025 finally concluded on 27.04.2021. Consequent to search, notice u/sec.153A of the Act was issued to the assessee- company on 05.10.2021. In response, the assessee- company filed it’s return of income on 02.11.2021 declaring total income of Rs.20,49,70,364/-. The case of the assessee- company was selected for scrutiny and assessment has been completed u/sec.143(3) of the Act on 31.03.2023 and determined the total income at Rs.145,49,64,238/- by making addition of Rs.124,99,93,874/-, on protective basis towards deemed dividend u/sec.2(22)(e) of the Act, because, substantive addition has been made in the case of Shri M. Satyanarayana Reddy, Managing Director of the Appellant- Company who is having substantial interest in both the payee and payer companies. The Assessing Officer has invoked the provisions of sec.2(22)(e) and made addition of Rs.124,99,93,874/- towards excess payment by M/s. Maithri Laboratories Pvt. Ltd., to assessee-company of Rs.3,88,10,514/-.
The assessee-company preferred appeal before the learned CIT(A) and challenged the additions made by the 4 ITA.Nos.394 & 396/Hyd./2025 Assessing Officer towards deemed dividend u/sec.2(22)(e) of the Act and contended that, payments made by one group company to another group company cannot be treated as deemed dividend in the hands of the Company, because, there is no cross-holding by both the companies. The assessee further contended that payments made by M/s. MSN Laboratories Pvt. Limited to the appellant-company is in the ordinary course of business for purchases and sales and cannot be considered as loans or advances which falls under the definition of deemed dividend as per sec.2(22)(e) of the Act. The learned CIT(A) after considering the relevant submissions of the assessee held that, payments received by the assessee-company from MSN Laboratories Pvt. Ltd., and from M/s. Maithri Labs Pvt. Ltd., over and above 150% of sales is loan or advances falls under the definition of sec.2(22)(e) and liable to be taxed. However, the learned CIT(A) deleted the entire addition made by the Assessing Officer by following the decision of ITAT, Hyderabad Bench in the case of M/s. MSN Pharmachem Pvt. Ltd., in ITA.Nos.884 & 885/Hyd./2024 dated 08.11.2024.
5 ITA.Nos.394 & 396/Hyd./2025 4. Aggrieved by the order of the learned CIT(A), the Revenue is in appeal before the Tribunal and the Assessee has filed petition under Rule-27 of Income Tax [Appellate Tribunal] Rules, 1963.
Shri B. Bala Krishna, learned CIT-DR supporting the order of the Assessing Officer submitted that, the Assessing Officer has made addition on substantive basis in the case of Shri MSN Reddy and further, made addition in the hands of appellant-company on protective basis to protect the interest of Revenue. He further submitted that, if at all substantive addition made in the hands of Shri MSN Reddy is sustained, then, the addition made in the hands of the assessee cannot be sustained. He further submitted that, although, this issue is covered in favour of the assessee by the decision of ITAT, Hyderabad Bench in the case of M/s. MSN Pharmachem Pvt. Ltd., (supra), but, the Department did not accept the decision of the ITAT and has preferred further appeal before the Hon’ble Jurisdictional High Court of State of Telangana. Therefore, the Assessing
6 ITA.Nos.394 & 396/Hyd./2025 Officer has filed the appeal to keep the issue alive. Therefore, the issue may be decided in accordance with law.
CA MV Prasad, Learned Counsel for the Assessee submitted that, the addition made by the Assessing Officer in the hands of the appellant-company on protective basis cannot be sustained because, the appellant-company is not a shareholder of the payee-payer company i.e., M/s. MSN Laboratories Pvt. Ltd., and M/s. Maithri Laboratories Pvt. Ltd., The Counsel for the Assessee further submitted that, addition made by the Assessing Officer on protective basis u/sec.2(22)(e) towards payments received by the appellant- company from other two group companies in the ordinary course of business, cannot be sustained because, the said payment is in the ordinary course of business against purchases/sales between both the companies. Further, this issue is squarely covered in favour of the assessee by the decision of ITAT, Hyderabad Bench in the case of M/s. MSN Pharmachem Pvt. Ltd., (supra), where this issue has been dealt with in detail in light of provisions of sec.2(22)(e) of the Act and held that, payment made by one group company to 7 ITA.Nos.394 & 396/Hyd./2025 other group company is a trade advance which does not fall under the definition of deemed dividend u/sec.2(22)(e) of the Act. Therefore, he submitted that, the addition made by the Assessing Officer should be deleted.
We have heard both the parties, perused the material on record and the orders of the authorities below. The Assessing Officer made additions towards funds transferred between the two group companies in the ordinary course of business either against purchases or sales by fixing an artificial limit of 150% of value of such purchases or sales and payments in excess of 150% of the limit has been treated as loans or advances for the purpose of sec.2(22)(e) of the Act. According to the Assessing Officer, although, there are commercial transactions between the two companies in the ordinary course of business for purchases or sales or services, but, the assessee-company has paid huge amount over and above the value of purchase which attracts provisions of sec.2(22)(e) of the Act and thus, made addition u/sec.2(22)(e) of the Act towards such excess payment as per the Assessing Officer in the h ands of the 8 ITA.Nos.394 & 396/Hyd./2025 substantive shareholder Shri M. Satyanarayana Reddy on substantive basis and further to protect the interest of the Revenue, made addition on protective basis in the hands of the appellant-company. The protection additions made by the Assessing Officer in the hands of the appellant-company is not in accordance with law going by the facts on record because, the appellant-company is not a shareholder in a payer company and in absence of that shareholder relation- ship and holding of specified percentage of shares, as per sec.2(22)(e) of the Act, the additions made by the Assessing Officer in the hands of the appellant-company on protective basis, cannot be sustained. Therefore, on this ground itself the additions made by the Assessing Officer should be deleted.
We find that, this issue is squarely covered in favour of the assessee by the decision of ITAT, Hyderabad Bench in the case of M/s. MSN Pharmachem Pvt. Ltd., (supra), where, this issue has been discussed in detail in light of provisions of sec.2(22)(e) of the Act and after considering the relevant facts held that, trade advances
9 ITA.Nos.394 & 396/Hyd./2025 between the two group companies, cannot be treated as loan or advances within the meaning of sec.2(22)(e) of the Act. Therefore, on this ground itself, the addition made in the hands of appellant-company on protective basis, cannot be sustained. Further, the addition made by the Assessing Officer on protective basis in the case of the appellant- company cannot be sustained for one more reason that, the provisions of sec.2(22)(e) are attracted only in the case of shareholder of a Company who holds substantial interest in the Company. In the present case, neither the payer nor the recipient Company are shareholder in each other companies. Therefore, the provisions of sec.2(22)(e) of the Act cannot be invoked. On this ground also, the addition made by the Assessing Officer on protective basis towards payment made by M/s. MSN Laboratories Pvt. Ltd., and M/s. Maithri Laboratories Pvt. Ltd., to the appellant- company cannot be treated as deemed dividend u/sec.2(22)(e) of the Act. The learned CIT(A) after considering the relevant facts, has rightly deleted the addition made by the Assessing Officer. Thus, we are 10 ITA.Nos.394 & 396/Hyd./2025 inclined to uphold the order of the learned CIT(A) and dismiss the appeal filed by the Revenue.
In the result, ITA.No.394/Hyd./2025 of the Revenue is dismissed.
ITA.No.396/Hyd./2025 – A.Y. 2017-2018 :
In this appeal also, the Assessing Officer, on identical facts, made addition of Rs.24,71,36,884/- on account of deemed dividend u/sec.2(22)(e) of the Act and assessed the income of appellant-company at Rs.180,35,21,274/- as against the returned income of the appellant-company of Rs.155,63,84,390/- vide order dated 31.03.2023 passed u/sec.153A of the Act.
Being aggrieved, the appellant-company preferred an appeal before the learned CIT(A) and the learned CIT(A) in view of identical facts, by following the order of the ITAT, Hyderabad Bench in the case of M/s. MSN Pharmachem Pvt. Ltd., in ITA.Nos.884 & 885/Hyd./2024 dated 08.11.2024, has deleted the addition made by the Assessing Officer.
11 ITA.Nos.394 & 396/Hyd./2025 12. Since, we have already decided this issue in the case of M/s. MSN Life Science Private Limited in ITA.No.394/Hyd./2025 for the assessment year 2017-2018, by following the reasoning given by us in the preceding paragraph no.7 of this order hereinabove, we are inclined to uphold the order of the learned CIT(A) and dismiss the appeal ITA.No.396/Hyd./2025 for the assessment year 2017-2018 filed by the Revenue.
In the result, ITA.No.396/Hyd./2025 of the Revenue is dismissed.
To sum-up, ITA.Nos.394 and 396/Hyd./2025 of the Revenue are dismissed. A copy of this common order be placed in the respective case files.