ACIT., CENTRAL CIRCLE-2(4), HYDERABAD vs. SATYANARAYANA REDDY MANNE, HYDREABAD

The assessee has raised the following grounds in the instant appeal: 1) “The order of the Ld. CIT(A) is erroneous on the facts of the case and contrary to the provisions of law, in so far as it is prejudicial to the appellant. 2) The Ld. CIT(A) grossly erred in law in resorting to enhancement of the assessment u/s 251(1)(a) of the Act in respect of a "new source of income" represented by unexplained investment towards on- money payments made for purchase of lands at Rangareddyguda in the names of three companies of MSN group, which was not the subject matter of consideration and examination by the AO during the assessment proceedings u/s 143(3) r.w.s 153A for the instant assessment year. 3) The Ld. CIT(A) grossly erred in law in resorting to enhancement of the assessment u/s 251(1)(a) of the Act in respect of a "new source of income" represented by the on-money payments made to Sri.J.Anirudh Reddy over and above the on-money payments made for purchase of lands at Rangareddyguda in the names of three companies of MSN group, which was not the subject matter of consideration and examination by the AO during the assessment proceedings u/s 143(3) r.w.s 153A for the instant assessment year. 4) The Ld.CIT(A) ought to have appreciated that it is a settled law that the CIT(A) has no powers or jurisdiction to make enhancement of assessment in respect of new sources of income and the enhancement so made by him is unsustainable in law. 5) The enhancement of assessment in respect of both the issues by the Ld. CIT(A) is unsustainable in law as the same is not based on 3. ITA.Nos.382 & 472/Hyd./2025 independent exercise of his quasi-judicial appellate powers but is based on request of the Assessing Officer, though the Ld.CIT(A) himself had earlier directed the Assessing Officer to take appropriate action in appropriate hands for the appropriate years on the said issues in the appellate orders for A.Y 2020-21/2021- 22 in the cases of the group which purchased the lands at Rangareddyguda. 6) On the facts and circumstances of the case, the Ld. CIT(A) erred in law in relying on the material seized during the search in the case of a person other than the appellant for enhancing the assessment made u/s 153A in the case of the appellant though the scope of assessment u/s 153A does not extend to such material which is not seized in the case of the assessee. 7) On the facts and circumstances of the case, the Ld. CIT(A) erred in law in concluding that on-money payments to the extent of Rs.42.80 crores were made during the previous years relevant to A.Ys 2017-18 and 2018-19, though there is no evidence of the quantum and the period of on-money payments in the seized material relied on by him and though the statements that are relied on by him were not rendered on the basis of any documentary evidence and they are unreliable due to internal inconsistencies. 8) The Ld. CIT(A) erred on facts and in law in relying on the tentative acceptance of the quantum of on-money payments at Rs.42.80 crores subject to further verification by the appellant vide statement dated 27.02.2021 and disregarding his subsequent statement dated 27.04.2021 which was rendered after making necessary verification wherein it was stated that the quantum of on-money payments amounted to Rs.32.66 crores only. 9) Without prejudice to the above grounds, the Ld. CIT(A) erred on facts and in law in restricting the benefit of telescoping against the on-money payments considered for enhancement to the extent of 4. ITA.Nos.382 & 472/Hyd./2025 cash handed over to the appellant out of the unaccounted sales of spent solvents and scrap by the group companies and denying the said benefit to the cash so handed over to his family members. 10) Without prejudice to the above grounds, the Ld. CIT(A) erred on facts and in law in considering the entire quantum of on-money payments of Rs.11.50 crores relating to the purchase of lands at Rangareddyguda by three companies of the group for enhancement in A.Ys 2017-18 though the ld. CIT(A) himself held that on-money payments were made during the previous years relevant to A.Y 2017-18 and 2018-19. 11) Any other legal and factual ground that may be urged at the time of hearing of the appeal.”

The Revenue pleads the following grounds in it’s instant appeal : 1. “Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) ought to have considered the fact that 150% of purchases were treated as trade advances while arriving at outstanding debit balances while calculating deemed dividend u/s 2(22)(e) of the Act?

The brief facts of the case are that a search operation u/s 132 of the Income Tax Act, 1961 (hereinafter referred to as the "Act") was conducted in MSN Group of cases on 24.02.2021. Search was also conducted in the case of Sri. Satyanarayana Reddy Manne, (Sri.M.S.N.Reddy), the appellant) at his residential premises as a part of the said search operations. Consequent to the said search, notices u/s 153A of the Act were issued by the Assessing Officer (hereinafter referred to as the "AO") in the case of the appellant for assessment years from A.Ys 2015-16 to 2020- 21, being the six assessment years immediately preceding the 6 ITA.Nos.382 & 472/Hyd./2025 assessment year relevant to the previous year in which the search was conducted. Further, in the assessment order dated 03.04.2023 passed u/s 153A for A.Y 2017-18, which is the subject matter of the present appeal, the AO made addition of Rs.149,98,02,505/- towards deemed dividend u/s 2(22)(e) of the Act, in respect of the alleged transactions of loans or advances between the MSN group companies in which the appellant is the common substantial shareholder.

The facts which leads to the proposed enhancement of assessment in respect of on-money payment made for purchase of lands by various group companies of appellant are that, during the course of search, at the Corporate Office of MSN Laboratories Pvt. Ltd and its associated concerns at MSN House, Sanath Nagar, Hyderabad, a photo image of an agreement for sale dated 04.06.2016 was found in the laptop of Shri. M.Uday Kumar Reddy, an employee of the MSN group. The entire data found in the said laptop, including the said agreement for sale, was imaged into a hard disk and the same was seized vide Annexure- A/MSN/OFF/HD1. A copy of the said agreement for sale dated 04.06.2016 was also found during the course of the search conducted in the case of Shri J. Anirudh Reddy at his residence and the same was seized at Page Nos.49 and 50 of Annexure A/JAR/RES/01. The agreement for sale dated 04.06.2016 was executed by Shri J. Anirudh Reddy, Shri J. Dushyant Reddy and Smt. J. Sashikala Reddy, who are collectively referred to as "sellers" in the said agreement in favour of Shri M.S.N. Reddy, the CMD of MSN group companies and agreed to sell about 400 acres of agricultural lands situated at Rangareddyguda @ Rs.14.50 lakhs per acre. The agreement did not contain any details of the payment of the consideration, except an advance of Rs.5 crores to be paid to the bank account of Smt. J. Sashikala Reddy through RTGS. A statement on oath was recorded from Shri J. Anirudh Reddy and in reply to Q.No.10, Shri J. Anirudh Reddy confirmed

Aggrieved by the Order of the learned CIT(A), the Assessee as well as the Revenue are now in appeal before the Tribunal.

The first issue that came-up for consideration from grounds of appeal

The ld. Counsel for the assessee further submitted that, the learned CIT(A) has considered the issue of alleged on-money payment of Rs.10.14 crores paid over and above the on-money apportioned to 08 companies at Rs.32.66 crores on the basis of affidavit of MSN Reddy in the hands of the assessee in two assessment years i.e., 2017-2018 and 2018-2019 on the basis of number of months falls in each assessment year. Further, although, the learned CIT(A) rejected the contention of the assessee in light of decision of Hon’ble Supreme Court in the case of CIT vs., Nirbheram Deluram 224 ITR 610 (SC) and CIT vs., Shapoorji Pallonji Mistry (supra), but reliance sought to be placed by the ld. CIT(A) on the above two Judgments to hold that, the enhancement power of the CIT(A) extends to new sources of income which were not considered by the Assessing Officer during the course of the assessment proceedings is wholly misplaced and untenable. Further, going by the ratio laid down by the Hon’ble Supreme Court in the case of Shapoorji Pallonji Mistry (supra), it is very clear that, the power of enhancement of the Appellate Assistant Commissioner (AAC) is restricted only to the issues considered by the Assessing Officer in the assessment 21 ITA.Nos.382 & 472/Hyd./2025 proceedings, but not extended to a new source of income. As regards the Judgment of the Hon'ble Supreme Court in the case of Nirbheram Deluram (supra), from which support was sought to be drawn by the learned CIT(A), it was submitted that, said case was whether the CIT(A) had the jurisdiction to direct enhancement of the income by hundi loan amounts of Rs.2,30,000/- over and above the hundi loan amounts of Rs.2,45,000/- added by the Assessing Officer in the assessment order ? The Hon'ble Supreme Court held that, having regard to its judgment in the case of Jute Corporation of India Ltd vs., CIT [1991] 187 ITR 688 (SC) that, the Hon’ble High Court was in error in holding that, the appellate power conferred on the AAC u/sec.251 was confined to the matter, which had been considered by the Income Tax Officer and the AAC exceeded his jurisdiction in making an addition of Rs.2,30,000/- on the basis of the other 10 items of hundis which had not been explained by the assessee. The Learned Counsel for the Assessee in this connection, submitted that the facts of the above case are entirely different where the Hon’ble Supreme Court considered the power of AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income Tax Officer. Therefore, reliance placed by the learned CIT(A) on the above Judgment is misconceived and cannot be accepted. Therefore, he submitted that, since it is an undisputed fact that, the two issues in respect of which, the learned CIT(A) has directed for enhancement of assessment relates to new source of income, which was not considered by the Assessing Officer, the exercise of the power of enhancement of assessment u/sec.251(1)(a) of the Act with regard to the said two issues is impropriety in Law and unsustainable.

CA MV Prasad, Learned Counsel for the Assessee referring to ground nos.7 and 8 of assessee’s appeal submitted that, on merit, the second part of show cause notice issued by the Assessing Officer towards enhancement of assessment to the extent of Rs.7,24,28,571/- for the assessment year in question is covered by the decision of ITAT, Hyderabad Bench in appellant’s own case for the assessment year 2018-2019 in ITA.No.1332/Hyd./2024, where the issue has been considered by the Tribunal and after considering relevant facts held that, the proposed revision of assessment order by the PCIT was on the issue of apportionment of alleged on-money payment of Rs.10.14 crores is unsustainable in law. Therefore, the assessee placed reliance on the above Judgment of the Coordinate Bench in support of it’s contentions. Further, in respect of proposed enhancement of Rs.11,50,56,875/- towards alleged on-money payment made for purchase of land at Rangareddyguda in the name of 03 companies (i) Dakshayani Horticulture Pvt Ltd, (ii) Mrinal Farms Pvt Ltd and (iii) Varenya Horticulture Pvt Ltd, for the previous year relevant to the assessment year 2017-2018, except the statement of Sri J. Anirudh Reddy and Shri M. Uday Kumar Reddy, there is no evidence with the Assessing Officer or the learned CIT(A) to allege that there is a cash payment of on- money for purchase of lands. Further, the above 03 companies were not in existence at the time of alleged payment of on-money. Therefore, the enhancement of assessment by the learned CIT(A) on the issue of alleged on-money payment on the basis of statement of above persons, is incorrect and cannot be accepted.

Shri B. Bala Krishna, learned CIT-DR, on the other hand, supporting the order of the learned CIT(A) on the issue of enhancement of assessment submitted that, the learned CIT(A) is having powers u/sec.251(1) of the Act to enhance an assessment on an appeal. Further, in the present case, going by the facts available on record, the learned CIT(A) has exercised his power for 24 ITA.Nos.382 & 472/Hyd./2025 enhancement on the basis of evidences available during the course of appellate proceedings which clearly shows that, although, there is an element of on-money payment of Rs.11 crores for purchase of lands by 03 companies of MSN Group during the period from June, 2016 to July, 2017, which was further confirmed by Sri J. Anirudh Reddy and Sri M. Uday Kumar Reddy and Sri MSN Reddy in their statements recorded during the course of post-search investigation, but, the Assessing Officer only on the basis of an Affidavit of Sri M. Uday Kumar Reddy filed during the course of post-search investigation has considered the addition in the hands of 08 group companies for assessment year 2020-2021 or 2021-2022. Further, the learned CIT(A) in the appellate proceedings of above companies, has deleted the addition made by the Assessing Officer towards on-money on the ground that, there is no incriminating material for the relevant assessment years to make the addition for on-money. However, further observed that, going by the material available on record, there is a clear evidence of on-money payment for purchase of land for assessment year 2017-2018 and 2018-2019. On the basis of said observations, the PCIT has invoked jurisdiction u/sec.263 of the Act in case of 04 companies and directed the Assessing Officer to consider on-money payment made for purchase of land for the assessment year 2017-2018. Further, the learned CIT(A) had also observed that, in respect of balance amount of Rs.10.14 crores alleged on-money paid by MSN Group to Sri J. Anirudh Reddy, there is no evidence on the utilization of the said fund. Therefore, directed the Assessing Officer to consider the remaining amount in appropriate hands and appropriate assessment year. Based on the said direction/observation, the PCIT has invoked 25 ITA.Nos.382 & 472/Hyd./2025 jurisdiction u/sec.263 of the Act and apportioned the above amount in the hands of the assessee for both assessment years i.e., 2017-2018 and 2018-2019. Since the appellate proceedings are pending for the assessment year 2017-2018 before the learned CIT(A), the PCIT invoked 263 proceedings only for the assessment year 2018-2019. Therefore, the present proceedings initiated by the learned CIT(A) in terms of provisions of sec.251(1) of the Act is on sound basis and based on the relevant evidences. Therefore, the argument of the Counsel for the Assessee that, it is a new source of income, which is not part of assessment proceedings and cannot be subject matter of enhancement is devoid of merit and cannot be accepted. The Learned DR further referring to the entire assessment proceedings submitted that, the present case needs to be considered in an holistic manner going by the findings of the search, since it was conducted in the case of MSN Group where incriminating material relates to payment of on-money was found and seized. Further, the assessee has come-out with a different version of explanation right from the date of search to the post-search investigation and finally filed an affidavit and claimed that on-money payment made for purchase of lands is assessable for the assessment year 2020-2021 and 2021-2022. The Assessing Officer on the basis of affidavit filed by Sri MSN Reddy has incorrectly assessed the on-money for different assessment years, even though, the material found during the course of search suggest that, on-money payment for purchase of land is assessable for the assessment year 2017-2018. The learned CIT(A) after considering the relevant facts, has rightly invoked his jurisdiction and enhanced the assessment and, therefore, the order of the learned CIT(A) should be upheld.

Shri B. Bala Krishna, learned CIT-DR, further referring to ground nos.7, 8 and 9 of assessee’s appeal submitted that, although, the second part of show cause notice issued by the learned CIT(A) with regard to enhancement of assessment towards alleged on-money payment made over and above the amount apportioned to 08 companies and although, the issue is now covered by the decision of ITAT, Hyderabad in appellant’s own case for the assessment year 2018-2019 in ITA.No.1332/Hyd./2024, order dated 09.04.2025 in 263 proceedings of the learned PCIT (Central), Hyderabad, but, the fact remains that while adjudicating the issue, the ITAT itself has missed certain wide points for consideration and, therefore, the present appeal needs to be considered on stand-alone basis on the basis of reasons given by the learned CIT(A). Therefore, if we look by the reasoning given by the learned CIT(A), there is a clear evidence of payment of on-money paid in the name of above 03 companies as unexplained income of the assessee. Therefore, he submitted that, arguments of the Learned Counsel for the Assessee on this issue, on merit, does not help and needs to be rejected.

We have heard both the parties, perused the material on record and the orders of the authorities below. The learned CIT(A) enhanced the assessment by exercising powers conferred u/sec.251(1)(a) of the Act on the issue of alleged on-money payment made by MSN Group of companies for purchase of lands at Rangareddyguda in the hands of the assessee for the assessment year 2017-2018. The learned CIT(A) has considered two issues for enhancement. The first issue of enhancement is alleged on-money payment for purchase of lands by 03 group companies of the appellant viz., (i) Dakshayani Horticulture Pvt Ltd, (ii) Mrinal Farms Pvt Ltd and (iii) Varenya Horticulture Pvt 28 ITA.Nos.382 & 472/Hyd./2025 Ltd. amounting to Rs.11,50,56,875/-. The second issue considered by the learned CIT(A) for enhancement is, balance of amount of Rs.7,24,28,571/- out of the remaining amount of Rs.10.14 crores of cash payment allegedly made over and above the on-money payment of Rs.32.66 crores which was apportioned by the PCIT for the assessment year 2017-2018 on the basis of statement of Sri J. Anirudh Reddy and Sri M. Uday Kumar Reddy and Sri MSN Reddy. Admittedly, in respect of second issue, there was 263 proceedings by the PCIT in the appellant’s case for the assessment year 2018-2019 where the PCIT has considered an amount of Rs.2.89 crores out of Rs.10.14 crores for the assessment year 2018-2019 and directed the Assessing Officer to re-consider the issue in light of relevant evidences found during the course of search for the assessment year 2018-2019. In respect of balance amount of Rs.7.24 crores, the PCIT has not invoked jurisdiction u/sec.263 of the Act presumably for the simple reason that, the appellate proceedings for the assessment year 2017-2018 is pending for adjudication before the learned CIT(A). Therefore, it is necessary for us to examine the reasons given by the learned CIT(A) for enhancement of assessment on the above two issues in light of relevant provisions of sec.251(1)(a) of the Act and also certain judicial precedents on the issue. For better understanding of the issue, it is necessary for us to reproduce the provisions of sec.251 of the Act which read as under : “251. (1) In disposing of an appeal, the Commissioner (Appeals) shall have the following powers – (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment:

Indeed, examining Daluram's holding, a Division Bench of the Delhi High Court in CIT v. Union Tyres [1999] 240 ITR 556/107 Taxman 447, has observed that Daluram did not comment whether these wide powers also include the power to discover a new source of income. So, Union Tyres concludes that the principle of law laid down in Shapoorji and Chamaria still holds the field.

The principle emerging from various pronouncements of the Supreme Court, Union Tyres observes, is that the first Appellate Authority is invested with very wide powers under Section 251(1)(a) of the Act and once an assessment order is brought before the authority, his competence is not restricted to examining only those aspects of the assessment about which the assessee makes a grievance and ranges over the whole assessment to correct the Assessing Officer not only regarding a matter raised by the assessee in appeal but also regarding any other matter considered by the Assessing Officer and determined in assessment.

There is a solitary but significant limitation, according to Union Tyres, to the power of revision: It is not open to the Appellate Commissioner to introduce in the Assessment a new source of 37 ITA.Nos.382 & 472/Hyd./2025 income and the assessment must be confined to those items of income which were the subject-matter of the original assessment.

In course of time, Union Tyres was doubted. In Sardari Lal& Co. (supra) the same issue-whether the appellate authority has the power under section 251 to discover a new source of income-was referred to a Full Bench. After examining the authorities holding the fielding on that issue, the learned Full Bench has held that the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the assessing officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147, or section 148, or even section 263 of the Act if requisite conditions are fulfilled. It is inconceivable, according to SardariLal, that in the presence of such specific provisions, a similar power is available to the first appellate authority. Eventually, SardariLal upheld the decision in Union Tyres.

Undeniably, the precedential position on the powers of the first appellate authority under section 251 undulates. There are seeming contradictions. But, as held by Union Tyres, and as affirmed on reference by Sardari Lal, there is a consistent judicial assertion that the powers under section 251 are, indeed, very wide; but, wide as they are, they do not go to the extent of displacing powers under, say, sections 147, 148, and 263 of the Act.

Therefore, we are in respectful agreement with the view taken by the Full Bench of the High Court of Delhi in Sardari Lal. As a corollary, we hold that the Tribunal's deleting the enhancement of Rs.22,15,116/- and cancelling the order of the CIT (A) on that issue call for no interference.”

The next issue that came-up for consideration from ground no.2 of Revenue’s appeal is deletion of addition made by the Assessing Officer towards deemed dividend u/sec.2(22)(e) of the Act, of Rs.149,98,02,505/-.

The Assessing Officer made an addition of Rs.149,98,02,505/- towards payment by one group company to another group company of the appellant on the grounds that appellant is the substantial shareholder in the payer company as 40 ITA.Nos.382 & 472/Hyd./2025 well as the payee company. The Assessing Officer has considered excess payments by MSN Laboratories Pvt. Ltd., to M/s. MSN Life Sciences Pvt. Ltd., in excess of 150% of sales amounting to Rs.121,11,83,360/- as loans and advances for the purpose of section 2(22)(e) of the Act. Similarly, the Assessing Officer has considered excess payment by M/s. Mythri Labs Pvt. Ltd., to M/s. MSN Life Sciences Pvt. Ltd., in excess of 150% of sales amounting to Rs.3,88,10,540/-. Similarly, the Assessing Officer had considered excess payment by M/s. MSN PharmaChem Pvt. Ltd., to M/s. MSN Laboratories Pvt. Ltd., in excess of 150% of sales amounting to Rs.24,71,36,834/-. In other words, the Assessing Officer has considered excess payments by one company to another company against sales or purchases in excess of 150% of sales as loans or advances for the purpose of deemed dividend u/sec.2(22)(e) of the Act and, therefore, considered excess payments by M/s. MSN Laboratories to M/s. MSN Life Sciences Pvt. Ltd., of Rs.121,11,83,360/-, excess payment by M/s. Mythri Laboratories Pvt. Ltd., to M/s. MSN Life Sciences Pvt. Ltd., for Rs.3,88,10,540/- and also excess payment by M/s. MSN PharmaChem Pvt. Ltd., to M/s. MSN Laboratories Pvt. Ltd., for Rs.24,71,36,884/-, in aggregate totaling to Rs.149,98,02,505/- in the hands of assessee as deemed dividend u/sec.2(22)(e) of the Act on the ground that the appellant is substantial shareholder in the payee company and the payer company.

On appeal, the learned CIT(A) decided the issue and held that, excess payment by one company to another company in excess of 200% of sales should be considered as loans or advances for the purpose of sec.2(22)(e) of the Act and accordingly, re- 41 ITA.Nos.382 & 472/Hyd./2025 worked the total amount to be considered for the purpose of sec.2(22)(e) of the Act. Further, the learned CIT(A) deleted the entire addition made by the Assessing Officer towards deemed dividend u/sec.2(22)(e) of the Act for Rs.149,98,02,505/- by following decision of ITAT, Hyderabad Bench in the case of M/s. MSN PharmaChem Pvt. Ltd., in ITA.No.884 and 885/Hyd./2024 for the assessment years 2019-2020 and 2020-2021.

We have heard both the parties, perused the material on record and the orders of the authorities below. This issue is no longer res-integra. The Co-ordinate Bench of ITAT, Hyderabad has considered an identical issue in the case of M/s. MSN PharmaChem Pvt. Ltd., in ITA.No.884 & 885/Hyd./2024 for the assessment years 2019-2020 and 2020-2021 and after considering the relevant facts of the case and also provisions of sec.2(22)(e) of the Act held that, trade advances given in the ordinary course of business between group companies cannot be 43 ITA.Nos.382 & 472/Hyd./2025 arbitrarily restricted to a certain percentage as trade advances and excess amounts over and above the arbitrary limit cannot be treated as loans or advances for the purpose of sec.2(22)(e) of the Act. The Coordinate Bench, further held that, trade advances between intra group companies cannot be treated as loans or advances in the hands of the recipient company in terms of sec.2(22)(e) of the Act. The relevant observations of the Tribunal are as under: “15. We have heard both parties, perused the materials available on record and gone through the orders of the authorities below. We have also carefully considered the plethora of case laws relied upon by both sides. The addition towards deemed dividend for the purpose of levy of dividend distribution tax has been made by considering the debit balance outstanding in the accounts of two group concerns i.e., M/s MSN Laboratories Pvt. Ltd and M/s MSN Organics Pvt. Ltd, in the books of the appellant company as on 31.03.2019. The appellant company and two group companies MSN Laboratories Pvt. Ltd and MSN Organics Pvt. Ltd (referred to as recipient companies) are engaged in the same line of business of manufacture and sale of Active Pharmaceutical Ingredients (API). The appellant company and the recipient companies have carried out trading transactions of purchases and sales with each other in the course of the said business. The appellant company has made payments in respect of purchases made from the recipient companies and received payments in respect of sales made to recipient companies. During course of assessment proceedings, the AO analyzed the details of opening balance, sales, purchases, receipts, payments and closing balance in the accounts of the two recipient companies and observed that they are in receipt of excess amounts from the appellant company in comparison to the amounts receivable by them against the trading transactions of purchases and sales that took place between the appellant company and the recipient companies during the year. The AO worked out the quantum of excess payments made by the appellant company to the recipient companies by aggregating the sales and payments made to the recipient companies and subtracting the purchases made and payments received from the recipient companies. However, having regard to the Board’s Circular No.19/2017, wherein it was stated that the trade advances, which are in the nature of commercial transactions, would not fall under the ambit of the word “advance” in section 44 ITA.Nos.382 & 472/Hyd./2025 2(22)(e) and keeping in view the flexibility required in practical business situations, the AO treated the payments made by the appellant company to the extent of 150% of the purchases made from the recipient companies as the payments made in the ordinary course of business and the payments made in excess of such 150% of the purchases as payments having no nexus with the business transactions. Accordingly, the AO reduced an additional amount of 50% of the purchases from the excess payments and such balance excess payments were treated as payments made by way of ‘advances or loans’ on the reasoning that they have no relation to the trading transactions between the companies. In this connection, the AO noted that the appellant company is not engaged in the business of finance and that no interest was charged in respect of such ‘advances or loans’. The said amounts of excess payments were accordingly held to be constituting deemed dividend u/s 2(22)(e) in the hands of Sri. M.S.N.Reddy, who is the common substantial shareholder in the appellant company and the recipient companies. The deemed dividend worked out by the AO amounted to Rs.241,53,50,035/- in the case of payments made to MSN Laboratories Pvt Ltd and Rs.1,53,47,177/- in the case of payments made to MSN Organics Pvt Ltd. The aggregate deemed dividend worked out for Asst. Year 2019-20 amounted to Rs.243,66,97,212/-. Similar working has been made for Asst. Year 2020-21 and worked out deemed dividend of Rs.266,76,84,647/-. The details of the recipient companies and the payments made to them by the appellant company in excess of 150% of the purchases, which has been treated as deemed dividend u/s 2(22)(e) by the Assessing Officer for the assessment years 2019-20 and 2020-21 under consideration are summarized in the table given below: A/c of MSN Laboratories Pvt A/c of MSN Organics Pvt Ltd in the books of the Ltd in the books of the Particulars appellant appellant Amount (Rs.) Amount (Rs.) Opening debit Balance 57,44,33,690 0 Add: Sales 100,52,08,397 54,74,844 Add: Payments (net of rent) 298,63,99,230 14,79,63,266 Less: Purchases 1,95,03,644 53,36,102 Less: Receipts 154,70,02,126 13,00,86,779 Closing debit balance 299,95,35,547 1,80,15,229 Excess payments during the year 242,51,01,857 1,80,15,228 (sales + payments – purchases – receipts) Less: Additional50% of purchases in 97,51,822 26,68,051 addition to 100% of purchases considered above Balance excess payments 241,53,50,035 1,53,47,177 treated as “advance or loan” constituting deemed dividend Aggregate deemed dividend for 243,06,97,212 AY 2019-20 45 ITA.Nos.382 & 472/Hyd./2025 Particulars A/c of MSN Laboratories Pvt Ltd in the books of the appellant. Amount in (Rs.) Opening debit balance 299,95,35,547 Add: Sales 100,43,24,928 Add: Payments (net of rent) 506,40,05,020 Less: Purchases 2,13,45,020 Less: Receipts 336,86,26,307 Closing debit balance 567,78,93,192 Excess payments during the year (sales + 267,83,57,645 payments – purchases – receipts) Less: Additional 50% of purchases in addition to 1,06,72,998 100% of purchases considered above Balance excess payments treated as 266,76,84,647 “advance or loan” constituting deemed dividend.

The provisions of section 2(22)e) of the Income Tax Act, 1961 deals with ‘Deemed Dividend’. As per the provisions of section 2(22)(e) of the Act, deemed dividend defined to mean, any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to 46 ITA.Nos.382 & 472/Hyd./2025 a shareholder, being a person who is the beneficial owner of shares holding not less than 10% of the voting power, or to any Concern in which such shareholder is member or partner and in which he has a substantial interest 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. The term ‘Concern’ has been defined which includes ‘a company’ also. Therefore, in the present case, the conditions prescribed for invoking the provisions of Section 2(22)(e) of the Act is primarily satisfied to the extent the appellant company and other two companies are having common share holder Shri MSN Reddy, who is holding more than 10% voting power in all the three companies and further, the appellant company is having accumulated profits which is in excess of the amount of advance computed by the Assessing Officer. However, whether the transactions between the appellant company and the other two companies are trade advances which are carried out in the normal course of business of all the companies or any loan or advances which fall within the ambit of Section 2(22)(e) of the Act has to be seen in light of nature of transaction between the parties.

There is no dispute regarding the satisfaction of the some of the basic ingredients for inferring deemed dividend such as the payer company (appellant) being a company in which public are not substantially interested, substantial shareholding of Sri. M.S.N. Reddy in both the appellant company as well as the recipient companies as per the specified percentages of shareholding and the availability of accumulated profits in the hands of the appellant company. However, it is the contention of the appellant that the other basic ingredient for inferring deemed dividend that there should be payments by the payer company (appellant) by way of ‘advances or loans’ to the recipient company, is not satisfied in the appellant’s case and consequently, no deemed dividend arises in the hands of the common substantial shareholder and no liability to pay dividend distribution tax arises in the hands of the appellant company. Therefore, it is necessary to examine the issue in light of provisions of section 2(22)(e) of the Act, nature of transactions between two companies and the purpose of payments to two recipient companies.

The appellant has made three-fold arguments. The first and foremost argument of the appellant is that all the transactions between the appellant company and the recipient group companies have been made in the ordinary course of the business carried on by them and they do not come under the purview of deemed dividend u/s 2(22)(e) of the Act, as they cannot be characterized as ‘loans or advances’. Admittedly, these group companies are 47 ITA.Nos.382 & 472/Hyd./2025 engaged in the same line of business of manufacturing and sale of Active Pharmaceutical Ingredients (API). The appellant company and the recipient companies have carried out trading transactions of purchases and sales with each other in the course of the said business. These group companies have made payments in respect of purchases made by them from the other group companies and received payments in respect of sales made by them to other group companies. This is evident from the summary of transactions between the appellant company and the recipient companies, i.e., MSN Laboratories Pvt Ltd and MSN Organics Pvt Ltd for both assessment years. From the above, it is undisputedly proved that these are trade advances, which arises in the course of carrying out purchases in the normal course of the business and which result in closing debit balance in the account of the recipient company in the books of payer company and thus, these trade advances in the ordinary course of business cannot be regarded as payment of ‘loans or advances’ to the recipient company, since the same are undeniably in the nature of commercial transactions. It is a settled position of law that trade advances given in the normal course of business on account of trading transactions cannot be treated as ‘loans or advances’ so as to constitute deemed dividend u/s 2(22)(e) of the Act. This legal position is fortified by the decisions in the case of CIT Vs. India Fruits Ltd [2015] 53 taxmann.com 307 (Andhra Pradesh), where it has been held as under: “The finding of facts arrived at by the Tribunal was that the transaction in question was a business transaction and it would have benefited both, the assessee-company and the company P. In fact, the revenue had also conceded that the amount was not a loan but only an advance because the amount paid to the assessee-company would be adjusted against the entitlement to moneys of the assessee-company payable by P in the subsequent years. [Para 10] The revenue contended that since the company P was not in the business of lending money, the payments made by it to the assessee-company would be covered by section 2(22)(e)(ii) and, consequently, payment even for business transactions would be a deemed dividend. There was no merit in the contentions of the revenue. The provision of section 2(22)(e)(i) is basically in the nature of an explanation. That cannot, however, have bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions do not fall within section 2(22)(e), there is no need to go further to 48 ITA.Nos.382 & 472/Hyd./2025 section 2(22)(e)(ii). The provision of section 2(22)(e)(i) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that's all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e). This interpretation is in accordance with the legislative intention of introducing section 2(22)(e). [Para 11] Therefore, the Tribunal was correct in holding that the amount advanced for business transaction between the assessee-company and the company P was not such to fall within the definition of the deemed dividend under section 2(22)(e). [Para 12]”

We further noted that the transactions of payments made by the appellant to the recipient companies have arisen due to business exigencies and the said transactions therefore bear commercial character. The appellant company and the recipient companies are associate concerns of the same group with a common Managing Director and substantial shareholder Sri.M.S.N Reddy. The group companies, including the said companies, are engaged in similar line of business of manufacture of Active Pharmaceutical Ingredients (API). As mentioned by the AO himself in the assessment order (Pg No. 50 and 51 of the order), the business activities of the group companies are inter-related and inter-dependent since each company is making sale of raw materials, engineering materials and intermediates to the other associate companies, in view of the fact that the manufacturing process is fragmented into different stages and different group companies are handling the manufacture at different stages. In view of existence of such inter-dependency among the associate concerns, the said companies provide funds to each other on a need basis as a measure of business expediency as and when there is requirement of funds for the purpose of business in order to provide the required support to the business of the other associate concerns. Further, this fact is also apparent from the audited financials of the appellant company that export sales constitute a significant portion of its total sales (Pg No 17 of PB-I). The appellant is making the export sales by taking marketing services from the foreign subsidiary companies promoted by MSN Laboratories Pvt Ltd namely, MSN Pharmaceuticals Inc, USA, MSN Laboratories Europe Ltd and Mega MSN Pte Ltd, Singapore (Pg No.37 of PB-I). The sales commission paid to such foreign subsidiary companies is debited to P&L A/c (Pg No.18 back side of PB-I). These facts clearly bring out the large-scale dependency of the appellant on MSN Laboratories Ltd for effecting its export sales. We further noted from the funds flow statement regarding the utilization of the funds given by the appellant company to MSN 51 ITA.Nos.382 & 472/Hyd./2025 Laboratories Pvt. Ltd (page No.75 of PB-I), where there is utilization of such funds by way of investment in foreign subsidiaries of MSN Laboratories Pvt. Ltd to the extent of Rs.60 crores during the year, apart from utilization towards working capital and acquisition of fixed assets of the business (for setting up new units/expansion of existing units). The business expediency for making huge payments to MSN Laboratories Pvt. Ltd is revealed by this crucial fact also in addition to the explanation furnished in the preceding paragraph. Therefore, the payments made by the appellant to MSN Laboratories Pvt. Ltd which are evidently imbued with business expediency cannot be considered to be falling under the ambit of “advance or loans” under section 2(22)(e) so as to constitute deemed dividend. Further, the provisions of deemed dividend are not attracted in the facts of the case for the instant assessment years as the basic ingredient to invoke the said provisions that payments by way of ‘advance or loans’ have been made by the appellant company to the recipient companies in which Sri. M.S.N.Reddy is the common substantial shareholder, is non- existent. Therefore, in our considered view, the addition made by the AO, to the extent upheld by the CIT(A), towards deemed dividend u/s 2(22)(e) in the hands of the appellant for the purpose of levy of dividend distribution tax without the satisfaction of the said basic condition laid down in the section is unwarranted and untenable.

The appellant, in support of the aforesaid contention places reliance on several judicial decisions. In the case of CIT Vs. Schutz Dishman Bio-tech Pvt Ltd in Tax Appeal Nos. 958 & 959 of 2015 (Pg No.100-101 of PB-I), the Hon’ble Gujarat High Court held that where there is movement of funds on a need basis, unlike transactions in the nature of loans or advances which are usually few in number, such transactions are in the form of current adjustment accommodation entries. The Hon’ble Court held that when the CIT(A) and Tribunal have concurrently held that the amounts are not in the nature of loan or deposit but merely adjustments based on large number of adjustment entries occurring in the accounts between the entities, application of section 2(22)(e) would not arise. Similarly, Hon’ble Calcutta High Court in the case of CIT Vs. Gayatri Chakraborti [2018] 407 ITR 730 (Calcutta) (Pg No.102-104 of PB-I) held that the transactions between the shareholder and the company were in the nature of current account and the provisions of section 2(22)(e) would not be applicable, where there were transactions of giving money by the company to the shareholder and vice versa in the account. Further, the ITAT, Mumbai held in the case of Ravindra R Fotedar Vs. ACIT [2017] 85 taxmann.com 314 (Mumbai) (Pg No.105-111 of PB-I) that where the movement of funds is in both ways on need basis between the two companies in which the assessee held substantial interest, the transactions are in the form of current accommodation entries and the amount in question could not be regarded as deemed dividend. In another case of Neha Home Builders Pvt Ltd Vs. DCIT [2018] 98 taxmann.com 465 (Mumbai-Trib) also (Pg No.112-116 of PB-I), the ITAT, Mumbai held that when the transactions between group companies were current and inter banking accounts containing both receipt and payment entries, same could not be regarded as loans and advance, as contemplated under section 2(22)(e) and no addition could be made as deemed dividend. Similar view was expressed by the ITAT, Delhi in the case of Saamag Developers Pvt Ltd Vs. ACIT [2018] 90 taxmann.com 20 (Delhi-Trib) (Pg No.117-131 of PB-I), wherein the Tribunal held that the amounts received from various group companies could not be considered as loans and advance, as contemplated u/s 2(22)(e) since the said transactions between the group concerns are current and inter banking accounts containing 53 ITA.Nos.382 & 472/Hyd./2025 both types of entries of giving and taking of amounts. In the case of Iswar Chand Jindal Vs. ACIT [2015] 61 taxmann.com 428 (Delhi- Trib), the ITAT, Delhi held that the transactions between the two group companies are in the nature of current account transactions and the same cannot be regarded as deemed dividend under section 2(22)(e) of the Act. The sum and substance of ratio laid down by various courts and Tribunals is that current account transactions between two group companies cannot be regarded as loans or advances as defined u/s 2(22)(e) of the Income Tax Act, 1961. Therefore, we are of the considered view that the provisions of deemed dividend u/s 2(22)(e) are not applicable to the transactions between the appellant company and recipient companies, as the said transactions bear the character of current adjustment account transactions due to two-way movement of funds on a need basis. Thus, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend distribution tax to the extent upheld by the LD.CIT(A) is not warranted and therefore, deleted for this reason also.

The third and final proposition canvassed by the appellant is that deemed dividend not attracted when payments to recipient company were utilized for its business and not diverted to or utilized for the benefit of the common substantial shareholder. In this regard, we find that the payments made by the appellant company to the two recipient companies during the year do not come under the ambit of deemed dividend u/s 2(22)(e), as the said funds have been used by the recipient companies for the purpose of their business and they have not been diverted to or utilised in any manner for the benefit of the common substantial shareholder. The business expediency /exigencies in making the said payments to the recipient companies had already been explained in earlier part of this order. The funds received from appellant company have been wholly used by the recipient companies for meeting the working capital requirements of the business, financing the acquisition of fixed assets of the business (setting up new units/expansion of existing units), investment in subsidiaries and loans to related parties (subsidiaries). The funds have not been diverted to the common substantial shareholder or were not utilised for the benefit of said shareholder. The details of the utilisation of the funds by the two recipient companies are submitted at Pg No.75-76 of PB-I, which were submitted to the LD.CIT(A) during the appellate proceedings. The said statements are prepared on the basis of the cash flow statement forming part of the audited financial statements of the recipient companies, the copies of which were furnished to the AO during the assessment proceedings. It may be seen from the perusal of the said 54 ITA.Nos.382 & 472/Hyd./2025 statements that the funds received from appellant company have been fully subsumed in the funds utilised by the recipient companies during the year for the purpose of working capital, acquisition of fixed assets of the business (setting up new units/expansion of existing units), investment in subsidiaries and loans to related parties (subsidiaries). Thus, the payments made to the recipient companies during the year were wholly used by them for the purpose of their business and such payments did not yield any benefit to the substantial common shareholder. We further noted that at para 7.19.2 of the assessment order, the AO has also accepted the factual position that the funds received from the appellant company have been utilized for financing the current assets of the recipient companies. Thus, it may be seen that there is no finding by the AO on facts that such funds have been diverted by the recipient companies for the benefit of the common substantial shareholder. On the other hand, the AO expressed his opinion that such financing of current assets of the recipient companies by the interest free funds received from the appellant company can be construed as a benefit accruing directly or indirectly to the recipient company. Since the utilization of the relevant funds for financing the working capital (current assets) of the recipient companies is an undisputed fact, it cannot be said that any part of the said funds has been diverted to the common substantial shareholder. Consequently, there is no scope for obtaining any direct or indirect benefit by the common substantial shareholder from the said funds. Therefore, in our considered view, it is not legally tenable to consider the payments made by the appellant company to the recipient companies as ‘deemed dividend’ in the hands of the common substantial shareholder for the purpose of levy of dividend distribution tax in the hands of the appellant company, in the absence of any benefit derived by such shareholder from the said payments.

In support of this contention, the appellant placed reliance on the decision of the Hon’ble Gujarat High Court in the case of Jayesh T Kotak Vs. DCIT [2020] 425 ITR 435 (Gujarat) (Pg No.140- 146 of PB-I), wherein it was held in the light of the decision of the Hon’ble Supreme Court in the case of CIT Vs. Mukundray K. Shah [2007] 290 ITR 433 (SC) that any payment made by a company in which a shareholder has shareholding exceeding 10% of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The Hon’ble High Court held that the intention of the legislature is to tax funds ultimately received by a shareholder holding not less than 10% voting power in the company, which have been routed through different modes/concerns. The Hon’ble 55 ITA.Nos.382 & 472/Hyd./2025 High Court held that what needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. The relevant portion of the said decision is extracted below: “7.11 Examining the facts of the case in the light of the above legal and statutory position, this case relates to the second mode of payment envisaged under clause (e) of section 2(22) viz. to any concern in which such shareholder is a member or a partner and in which he has substantial interest. From the reasons recorded it emerges that according to the Assessing Officer unsecured loans have been extended by M/s J.P. Infrastructure Limited to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd. and Aryan Arcade Pvt. Ltd. and that the petitioner held 27.49% shares in M/s J.P. Infrastructure Limited; 50% shares in Gujarat Mall Management Co. Pvt. Ltd.; and 29% shares in Aryan Arcade Pvt. Ltd., which according to him had to be treated as deemed dividend in the hands of the shareholder and taxed accordingly. As is apparent on a plain reading of the reasons recorded, while the Assessing Officer has information that M/s J.P. Infrastructure Limited has advanced unsecured loans as referred to therein to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd. and Aryan Arcade Pvt. Ltd., there is no information to the effect that such payment was made for the benefit of the petitioner. Except for the fact that the loan giver company in which the petitioner had shareholding in excess of 10 per cent of the voting power, had given loans and advances as referred to therein to two concerns in which the petitioner had substantial interest, the reasons are totally silent as regards any benefit having been obtained by the petitioner from the said loan transactions. It is not the case of the respondent that even if no amount has travelled to the petitioner, he would still be liable to be taxed for the said transactions merely by dint of the fact that two concerns in which he had substantial interest had received loans from a company in which he had shareholding exceeding 10 per cent of the voting power. According to the respondent, the question as to whether or not the amount had travelled to the petitioner is a matter to be decided at the stage of evaluation at during the course of the re-assessment proceedings. Evidently, therefore, the Assessing Officer has not recorded any satisfaction that the amount paid by M/s J.P. Infrastructure Limited to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd. and Aryan Arcade Pvt. Ltd. had been paid for the benefit of the petitioner. In the opinion of this court, in the light of the decision of the Supreme Court in Mukundray K. Shah (supra), any payment made by a company in which a 56 ITA.Nos.382 & 472/Hyd./2025 shareholder has shareholding exceeding 10 per cent of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The intention of the legislature is to tax funds ultimately received by a shareholder holding more than 10% voting power in the company, which have been routed through different modes/concerns. What needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. It is not the case of the Assessing Officer in the reasons recorded for reopening the assessment that the petitioner has received any amount as holder of substantial shares from the loan giver company or the loan receiver company. Therefore, in the absence of any benefit having been received by the petitioner, there was no obligation cast upon him to disclose such transactions.”

Further, the SLP filed by the Revenue against the said decision of the Hon’ble Gujarat High Court has been dismissed by the Hon’ble Supreme Court by stating that it does not find any ground to interfere with the impugned order passed by the High Court, as reported in DCIT Vs. Jayesh T Kotak [2021] 130 taxmann.com 170 (SC) (Pg No.147 of PB-I). Therefore, in our considered view, it is now a settled law that the payment made by the payer company to the recipient company, in which there is a common shareholder holding not less than 10% and 20% of the voting power respectively, would be deemed to be ‘dividend’ in the hands of such shareholder only if any benefit from such transaction has been received by such shareholder or the amount is ultimately used for the benefit of the shareholder. This settled legal principle has been judicially laid down having regard to the intention of the legislature to tax funds ultimately received by a shareholder holding not less than 10% voting power in the company, which have been routed to him through different concerns in which he holds substantial interest.

Let us now come back to the observations of the Assessing Officer. In the assessment order, the AO expressed the view that the requirement that the payment made by the payer company should result in a benefit to the shareholder so as to construe the same to be in the nature of deemed dividend is not applicable to the limb of section 2(22)(e) dealing with “payments by way of loans or advances made by a company in which the shareholder has not less than 10% voting power to a company/concern in which such shareholder has substantial interest”. The AO stated that the said condition is 57 ITA.Nos.382 & 472/Hyd./2025 applicable only to another limb of section 2(22)(e) which deals with the “payments made by the payer company on behalf of or for the individual benefit of the shareholder”. However, the said view of the AO is patently contrary to the decision rendered by the Hon’ble Gujarat High Court in the case of Jayesh T Kotak (supra) which has since been affirmed by the Hon’ble Supreme Court. The decision rendered by the Hon’ble Gujarat High Court in the said case that receipt of benefit by the shareholder on account of payment made by the company in which he holds voting power of not less than 10% is a sine qua non for regarding such payment to be deemed dividend is with specific reference to the limb of section 2(22)(e) dealing with “payments by way of loans or advances made by a company in which the shareholder has not less than 10% voting power to a company/concern in which such shareholder has substantial interest”. Therefore, in our considered view, the said decision is squarely applicable to the facts of the appellant’s case where the transactions forming the subject matter of examination of the applicability of provisions of deemed dividend in the assessment order are the payments made by the appellant company to the recipient company in which the appellant holds not less than 10% and 20% of the voting power respectively. In the case of the appellant, it is undisputed that the payments made by the appellant company have been used for the business purposes of the recipient companies as already discussed above. The relevant funds have not been utilized by the recipient companies for the benefit of the common substantial shareholder. In view of the said incontrovertible fact and having regard to the decisions of the Hon’ble Gujarat High Court and Hon’ble Supreme Court in the case of Jayant T Kotak (supra), we are of the considered view that the payments made by the appellant company to the recipient companies during the year do not fall under the scope of deemed dividend u/s 2(22)(e) of the Act. Therefore, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend distribution tax, to the extent upheld by the LD.CIT(A) is not warranted for this reason also and thus, deleted.

In this view of the matter and considering facts and circumstances of this case and also, by following ratios of various Courts/Tribunals discussed hereinabove, we are of the considered view that the transactions between appellant Company and two other recipient Companies do not come under the provisions of section 2(22)(e) of the Income tax Act, 1961 and consequently, the AO/CIT(A) is erred in levying dividend distribution tax in the hands of the assessee for both 58 ITA.Nos.382 & 472/Hyd./2025 assessment years. Thus, we set aside the order of the LD.CIT(A) on this issue, and direct the Assessing Officer to delete addition made u/s 2(22)(e) and consequent levy of Dividend Distribution Tax u/s 115-O r.w.s. 115Q of the Income Tax Act, 1961 for Asst. Years 2019-20 and 2020-21 in the hands of the assessee.”

In the result, appeal filed by the Assessee is allowed and appeal filed by the Revenue is dismissed. A copy of this common order is placed in the respective case files.