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Facts
The assessee company received a loan of Rs. 16,00,000 from a sister concern, Monachem Additives Pvt. Ltd. The Assessing Officer treated this loan as deemed dividend under Section 2(22)(e) of the Income Tax Act, while the assessee contended it was a business transaction in the ordinary course of business. The CIT(A) upheld the addition.
Held
The Tribunal held that the loan was given to a sister concern and not to a shareholder who is a beneficial owner of shares, therefore it cannot be termed as dividend under Section 2(22)(e). The decision of a previous Tribunal case with the same parties was also noted.
Key Issues
Whether a loan advanced by a company to a sister concern, where there is substantial interest but not direct shareholding by a specific person, can be considered as 'deemed dividend' under Section 2(22)(e) of the Income Tax Act.
Sections Cited
2(22)(e), 148
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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: MS. SUCHITRA KAMBLE
(Assessment Year: 2012-13) Addpol Chemspecialities Pvt. Ltd., Vs. Deputy Commissioner of 24th Floor, The Ruby Tower, 29th Income Tax, Senapati Bapat Marg, Dadar West, Circle-1(1)(1), Bhawani Shankar, Dadar West, Vadodara Mumbai-400039 [PAN No.AAGCA9859E] (Appellant) .. (Respondent) Appellant by : Shri Sunil Talati, C.A. Respondent by : Shri Suresh Chand Meena, Sr. D.R. Date of Hearing 01.12.2025 Date of Pronouncement 02.12.2025 O R D E R The appeal filed by the assessee is against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), ADDL/JCIT(A)-4, Mumbai on 29.07.2025 for A.Y. 2012-13.
The grounds of appeal raised by the assessee are as under:
“1. The Ld. CIT(A) erred in confirming addition of Rs. 16,00,000 on account of deemed dividend u/s 2(22)(e) of the act without appreciating that provision of section 2(22)(e) is applicable only in hands of a shareholder being person/ or to any concern in which such shareholder is having substantial interest and not in hands of appellant company. It is therefore submitted addition amounting Rs. 16,00,000 is prayed to be deleted.
2. Without prejudice to above, the Ld. CIT(A) has failed to appreciating facts that the loan received by appellant company was in ordinary course of its day-to-day business activities. It is prayed that same be held now.
3. The Order passed by the Ld. CIT(A) is bad in law and contrary to the provisions of law and fats. It is submitted that the same be held so now.
Addpol Chemspecialities Pvt. Ltd. vs. DCIT Asst.Year–2012-13 - 2 - 4. Your appellant craves leave to add, alter, and/or amend all or any of the grounds before the final hearing of the appeal.”
The assessee filed return of income on 23.03.2013 declaring total loss of Rs. 9,60,677/-. The case was subjected to re-assessment and notice under Section 148 of the Act was issued on 19.03.2019. The assessee filed return of income on 17.04.2019 thereby admitting total loss of Rs. 9,60,677/- in response to notice under Section 148. Statutory notices were issued to the assessee which was replied by the assessee as well as filed the details before the Assessing Officer. The assessee is into business of manufacturing of chemicals and during the relevant assessment year received loan from Monachem Additives Pvt. Ltd. amounting to Rs. 16,00,000/-. The Director of the company Shri Dilip G Shah was having 87.7% shareholding as on 31.03.2012 in the said M/s. Monachem Additives Pvt. Ltd. and 50% of shareholdings as on 31.03.2012 in Addpol Chem Specialties Pvt. Ltd. The Assessing Officer observed that as per provision of Section 2(22)(e) of the Income Tax Act payment by way of loan / advance to the extent of accumulated profits by a closely held company is to be treated as dividend. Thus, the Assessing Officer after taking cognizance of the assessee’s reply held that the payment received by way of loan of Rs. 16,00,000/- has to be considered under Section 2(22)(e) of the Income Tax Act as deemed dividend income of the assessee for A.Y. 2012-13 and added the same. The Assessing Officer also disallowed the interest expenditure to the extent of 17,733/-.
Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.
Addpol Chemspecialities Pvt. Ltd. vs. DCIT Asst.Year–2012-13 - 3 - 5. The Ld. AR submitted that the Tribunal in case of Shamik Dilip Shah vs. DCIT (ITA No. 572/Ahd/2022 A.Y. 2012-13) has categorically mentioned that the transaction interest between the sister concerns and the assessee cannot be partake of the nature of either deposit or loan though interest might have been taken on the same.
The Ld. DR relied upon the assessment order and the order the CIT(A).
Heard both the parties and perused all the relevant material available on record. The assessee is into the business of manufacturing of chemicals and has received loan from M/s. Monachem Additives Pvt. Ltd. The Director of M/s. Monachem Additives Pvt. Ltd. is having 87.7% shareholding in the said company and 50% of the shareholding as on 31.03.2012 in the assessee’s case. The contention of the assessee that the transfer of fund was from and to the sister concern on need basis for a few days and therefore, receipt and payment of the amount is only for short period and it is as per the exigencies of the business of the assessee company. As per Section 2(22)(e), payment by a company not being a company in which the public substantially interested by any sum by way of advance or loan to a shareholder being a person who is a beneficial owner of shares not being shares entitled to a fixed rate of dividend whether with or without right to participate in profits holding not less than 10% 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 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 is called as dividend. In the present assessee’s case the transaction was between assessee company and M/s. Monachem Addpol Chemspecialities Pvt. Ltd. vs. DCIT Asst.Year–2012-13 - 4 - Additives Pvt. Ltd. cannot be termed as dividend because the loan was to a sister concern and not to shareholder being a person is the beneficial owners of the shares. The decision of the Tribunal in case of Shri Dilip G Shah which has the same parties has categorically mentioned therein. The decision of Hon’ble Delhi High Court in case of CIT vs. Ankitech Pvt. Ltd. 199 taxman 341 will not be applicable in the present assessee’s case as well. Thus, the addition made by the Assessing Officer and confirmed by the CIT(A) is not justifiable, hence, the addition is deleted. Thus, appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed. This Order pronounced in Open Court on 02/12/2025