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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI B.M. BIYANI, & SHRI PARESH M. JOSHI
आदेश/ O R D E R
Per B.M. Biyani, A.M.:
Feeling aggrieved by order of first-appeal dated 06.08.2024 passed by learned Commissioner of Income-Tax (Appeals)-NFAC, Delhi [“CIT(A)”], which in turn arises out of assessment-order dated 17.12.2019 passed by DCIT-1(1), Indore [“AO”] u/s 143(3) r.w.s. 147 of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2015-16, the assessee has filed this appeal on the grounds as mentioned in Form No. 36 (Appeal Memo).
The background facts leading to this appeal are such that the assessee-company filed its return of income of relevant AY 2015-16 Page 1 of 10 scrutiny-assessment u/s 143(3) at a total income of Rs. 8,44,32,990/-.
Thereafter, the case of assessee was re-opened u/s 147 through a notice u/s 148 dated 23.03.2019. In response to this notice u/s 148, the assessee re- filed return on 03.05.2019 declaring total income of Rs. 8,44,32,990/-.
Thereafter, notices u/s 143(2)/142(1) were issued which were complied by assessee. Ultimately, the AO completed assessment at a total income of Rs. 8,93,89,110/- after making an addition of Rs. 49,56,118/- on account of deemed dividend u/s 2(22)(e) pertaining to loan taken by assessee-company from another company “M/s Arihant Bio-Chem Ltd”. Aggrieved, the assessee filed first-appeal to Ld. CIT(A) but did not get success. Now, the assessee has filed this appeal assailing the order of Ld. CIT(A).
At the start of hearing, Ld. AR for assessee submitted that he would be satisfied if the Ground No. 5 is decided in favour of assessee. In that event, he would not be pressing rest of the grounds and this bench need not adjudicate those grounds.
The Ground No. 5 reads as under:
“5.That, without prejudice to the above, the learned CIT(A) grossly erred, both on facts and in law, in confirming the action of the Id. AO for maintaining the addition of Rs.49,56,118/- in the appellant's income by holding the business liability of the appellant company towards Arihant Bio-Chem Ltd. as alleged loan received by the appellant company in the nature of deemed dividend without considering and appreciating the material fact that the appellant company was not a registered shareholder of Arihant Bio-Chem Ltd. and therefore, the provisions of s. 2(22)(e) could not have been validly invoked in case of appellant company in view of the established
Page 2 of 10 Assessment year 2015-16 position of law as laid down by the Hon'ble Apex Court in the case of CIT vs. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC).”
Thus, by means of this ground, the assessee claims that the CIT(A) has erred in confirming the addition of Rs. 49,56,118/- made by AO without considering the fact that the assessee was not a shareholder of M/s Arihant Bio-Chem Ltd. and therefore the provisions of section 2(22)(e) did not have any application.
6. Apropos to this ground, the relevant facts are very limited and do not require any elaboration. During the year, the assessee-company has taken a total loan of Rs. 8,60,71,773/- from “M/s Arihant Bio-Chem Ltd.”. The AO found that one “Mr. Abhay Jain” was having more than 10% shareholding (i.e. actual holding is 50%) in “M/s Arihant Bio-Chem Ltd.” and at the same time having a substantial interest (i.e. by way of shareholding of 34.01%) in assessee-company. Therefore, the loan taken by assessee from “M/s Arihant Bio-Chem Ltd.” falls within the meaning of “dividend” u/s 2(22)(e) and consequently taxable in the hands of assessee to the extent of “accumulated profit” in possession of “M/s Arihant Bio-Chem Ltd.”. The AO computed the quantum of “accumulated profit” available with “M/s Arihant Bio-Chem Ltd.” at Rs. 49,56,118/- and accordingly held that the loan of Rs. 8,60,71,773/- constituted deemed dividend upto accumulated profit i.e. Rs. 49,46,118/- in the hands of assessee-company and made addition accordingly.
Page 3 of 10 provision of section 2(22)(e) had already been analysed in a series of decision by various appellate forums and it is now clear that the taxability would be attracted only if the recipient of loan (i.e. assessee-company in present case) itself is a shareholder in the giver of loan (i.e. “M/s Arihant Bio-Chem Ltd.”).
But, however, since the assessee-company was not at all a shareholder of the giver company in present case, the application of section 2(22)(e) by AO is wrong. Ld. AR placed reliance on following decisions and also drew our attention to the relevant paras of orders:
(i) CIT Vs. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC) (ii) ACIT, Mumbai Vs. Bhaumik Colour (P) Ltd. (2009) 118 ITD 1 (Mum) (SB) (iii) DCIT, New Delhi Vs. Yellow Sapphire International Pvt. Ltd. 2024 (9) TMI 783 (ITAT, Delhi) (iv) M/s Mahimananda Mishra Vs. Assistant Commissioner of Income-tax, Circle-1(1), Cuttack 2023 (1) TMI 780 – Orissa High Court
8. Accordingly, in the light of above decisions, Ld. AR prayed that the addition made by AO is not sustainable and the same must be deleted.
Ld. DR for revenue dutifully relied upon orders of lower-authorities and contended that the same must be upheld.
Page 4 of 10 examined the issue in the light of provisions of law and various judicial rulings. The controversy involved in present case has already been decided by ITAT, Indore in ACIT, Ratlam Vs. M/s Shirani Automobiles Pvt. Ltd., , order dated 31.03.2023, in favour of assessee.
The relevant portion of ITAT’s order is re-produced below:
“Ground No. (i): 5. In this ground, the revenue claims that the Ld. CIT(A) has erred in deleting the addition of Rs. 4,36,96,180/- made by AO on account of deemed dividend u/s 2(22)(e).
Apropos to this ground, facts are such that during the course of assessment-proceeding, Ld. AO observed that the assessee-company has taken loan from M/s Sagar Automobiles Pvt. Ltd. [“Sagar Ltd.”] On further examination, Ld. AO observed that the following persons were having more than 10% shareholding in Sagar Ltd. and at the same time holding more than 20% shareholding in assessee-company:
Person Shareholding Shareholding in Sagar Ltd. in assessee- company Shri Gulam Gaus Khan Shirani 45.69% 32.00% Shri Yahya Khan Shirani 46.32% 40.00% Thus, the Ld. AO found that the persons who were holding more than 10% shareholding in Sagar Ltd. were having substantial interest (minimum 20% shareholding) in assessee-company; therefore the loan taken by assessee from Sagar Ltd. falls within the meaning of “dividend” u/s 2(22)(e) and consequently taxable in the hands of assessee to the extent of “accumulated profit” in possession of Sagar Ltd. Ld. AO further observed that the quantum of “accumulated profit” available to Sagar Ltd. was Rs. 4,36,96,180/-; therefore the impugned loan of Rs. 4,54,75,935/- constituted dividend upto accumulated profit i.e. Rs. 4,36,96,180/-; accordingly made an addition of Rs. 4,36,96,180/- in the hands of assessee.
During first-appeal, Ld. CIT(A) deleted the addition by observing that the two companies, namely Sagar Ltd. and assessee-company are group companies having common shareholders and engaged in the same line of activities i.e. automobile dealerships. He further observed that the nature of Page 5 of 10 Assessment year 2015-16 transactions entered among these companies are not in the nature of loans or advances; they are inter-corporate deposits for business exigency and do not extend any individual benefit to any of the shareholders of company. More importantly, he further observed that though there are common shareholders in both companies but the assessee-company is neither a shareholder nor a beneficial owner in Sagar Ltd. Ld. CIT(A) has observed that the deemed dividend u/s 2(22)(e) is assessable only in the hands of shareholder and in the present case, the assessee is not shareholder at all in Sagar Ltd; therefore legally the dividend cannot be assessed in the hands of assessee. Ld. CIT(A) placed reliance on CIT vs. Jignesh P. Shah (2013) (Bombay HC) and CIT Vs. Mcc Marketing (P) Ltd. (2011) (Delhi HC) where it was held that that the provision of section 2(22)(e) cannot be invoked unless the assessee itself is the shareholder of the company who was lending money to it. Further reliance was placed on following decisions of ITAT, Indore: (a) Makhija Construction Company vs. Asst. CIT (2011) 18 ITJ 783 (Trib.- Indore): (2012) 49 SOT 27: Assessee firm’s partner was holding 69% shares in a closely held company- Loan advanced by closely held company to assessee-firm-AO treated the loan as deemed dividend in hands of assessee-firm-HELD-Dividend is taxable in hands of shareholder being registered and beneficial shareholder-Dividend is not taxable in hands of assessee as assessee-firm is no shareholder. (b) Manish Karwa v. Asst. CIT (2014) 24 ITJ 454 (Trib-Indore)/ (2014) 65 SOT 105 (URO): Assessee had 9.68% shares in the closely held company - AO added the shares held by HUF of assessee and minor child to contend the holding of the assessee was more than 10% - AO treated the dividend - HELD - The assessee should be the registered and beneficial owner of the shares- A minor child can be member of the company, if the shares are fully paid up - In the present case, assesses in not the registered or a beneficial owner of the shares held by the HUF and the minor child - No addition is called for. (c) Dy. CIT v. Apex Multitrade Pvt. Ltd. (2013) 21 ITJ 105 (Trib- Nagpur): Assessee-company engaged in money lending business-AO held that loan given to another company, which had common shareholding in terms of section 2(22)(e)-AO therefore treated the amount as dividend-HELD-Assessee was not shareholder in that company therefore in view of ACIT v. Bhaumik Colour Pvt. Ltd. (2009) (2009) 120 ITJ 865 (Mum), dividend cannot be added in hands of assessee- Also assessee was engaged in business of money lending, loan was given in ordinary course of business of money lending-Dividend cannot be added. (d) Asst. CIT v. Venkatesh Beverages Ltd. (2011) 18 ITJ 851 (Trib- Indore):
Page 6 of 10 Assessment year 2015-16 Assessee-Company received loan from other company-AO noted that shareholder of assessee-company and that of lender company was same holding more than requisite shares u/s 2(22)(e). AO therefore held that it was deemed dividend-HELD- Dividend is taxable in the hands of shareholder, who shall be both a registered and a beneficial shareholder. Dividend is not taxable in hands of assessee-borrower, who does not hold shares in lender- company. (e) Asst. CIT v Pragya Equipments Pvt. Ltd. (2011) 18 ITJ 579 (Trib.- Indore): Assessee-company took a loan from company where the director held substantial interest-AO treated the loan as deemed dividend- Assessee contended that loan was in ordinary course of business -AO-treated the same was in ordinary course of business-HELD-Loan was not given in ordinary course of business of money lending-Also, same is payment for sale of goods as the loan was given at beginning of the year whereas goods were sold at year-end-However, since assessee is not a registered or beneficial owner of shares; dividend cannot be added in hands of assessee in view of ACIT v. Bhaumik Colour (P) Ltd. (2009) 120 TTJ 865 (AT) SB(Mumbai)-Matter is remanded back to CIT(A) to decide afresh. (f) Agni Engineers v. Asst. CIT (2011) 17 ITJ 38 (Trib-Indore): Partners of assessee-firm has substantial interest in a closely held Company - Assessee-firm obtained loan from closely held company – AO held the same to be dividend in the hands of assessee-firm – HELD - Deemed dividend u/s 2(22)(e) can be taxed only in hands of shareholder-The assessee must be both registered as well as beneficial shareholder-Assessee-firm is neither registered nor beneficial shareholder-Dividend cannot be taxed in hands of assessee-firm. (g) Asst. CIT v. Gulmohar Traders (2016) 28 ITJ 302 (Trib.-Indore): AO made additions of Rs. 22.60 lacs on account of deemed dividend. CIT(A) deleted the additions – HELD - In Makson Nutrition Food India Pvt. Ltd. in the assessee company taken unsecured loans from various companies-AO treated it as deemed dividend-In that case it was held that for bringing an assessee within the purview of section 2(22)(e), both the conditions regarding assessee being registered as well as beneficial shareholder of the lender company are required to be established-In the present case, the assessee is neither a registered nor a beneficial shareholder of the lender company-Therefore, there is no infirmity in order of CIT(A)-ITAT confirmed the order of CIT(A).
We have perused the orders of lower authorities and the facts of case in the light of provisions of section 2(22)(e) and the judicial rulings mentioned above. At the same time, we also find that recently a case of identical facts was decided by Co-ordinate Bench of ITAT, Indore in another group company of assessee titled as ACIT, Ratlam Vs. M/s Shirani Motors Pvt. Ltd., ITA 553 & 554/Ind/2018 order dated 27.02.2023 where the Co-ordinate Bench has upheld the deletion of addition by CIT(A) referring to the decision of Page 7 of 10 Assessment year 2015-16 Hon’ble Supreme Court in CIT Vs. Madhur Housing & Development Co. [2018] 93 taxmann.com 502. The relevant paragraphs are extracted below: “6. We have given our thoughtful consideration and perused the materials available on record. As stated by the assessee, this issue has been settled by the Special Bench decision of this Tribunal in ACIT vs. Bhaumik Color Pvt. Ltd. (122 TTJ 865 Mum SB) wherein it has been held as follows: “…..Deemed dividend can be assessed only in the hands of a person who is a shareholder of a lender company and not in the hands of the borrowing concern in which such a shareholder is a member or partner having substantial interest. In the instant case the logo was given by a company not to its shareholder holding more that 10% of its equity shares, but to a concern in which such shareholder is member. Therefore respectfully following the decision of the Special Bench, we hold that the loan received by the assessee company in which the assessee does not hold any shares, cannot be assessed as deemed dividend u/s 2(22)(e).” 6.1. The Hon’ble Supreme Court of India has settled down the law on applicability of section 2(22)(e) of the Act, in the case of CIT Vs. Madhur Housing & Development Co. [2018] 93 taxmann.com 502 held as follows: “Section 2(22) of the Income-tax Act, 1961 - Deemed dividend - (Applicability of) - High Court relied upon judgment passed by Judgment of Delhi High Court in Commissioner of Income-tax v. Ankitech (P.) Ltd. [2011] 11 taxmann.com 100 (Delhi) in which it was held that: (i) legal fiction created under section 2(22)(e) enlarges definition of dividend only and it cannot be extended further for broadening concept of shareholders, (ii) a concern in which shareholder of payer company has at least 20 per cent of voting power and loan or advance under this category is given admittedly not to a shareholder/member of payer company, under no circumstances, said concern can be treated as shareholder/member receiving dividend, (iii) in a case where conditions stipulated in section 2(22)(e) treating loan and advance as deemed dividend are established, revenue can treat dividend income at hands of shareholders and tax them accordingly, and (iv) where loans and advances are given in normal course of business and transaction in question benefits both payer and payee companies, provisions of section 2(22) (e)
Page 8 of 10 Assessment year 2015-16 cannot be invoked - Whether judgment of High Court was to be agreed with.” 6.2. It is seen from record, though the director and shareholder holding more than 20% shares in the above stated two closely held companies but the said two closely held companies had no cross holding of shares in other companies. These companies had regular business transaction with each other. The transactions were in the nature of inter-corporate deposits made for business exigency and not in any way to give individual benefit to any of the shareholders of the Company. Therefore there is no question of invoking section 2(22)(e) in the above transaction. Thus the finding arrived by the Ld. CIT(A) does not require any interference. Thus the ground no. 1 raised by the Revenue is devoid of merits and the same is hereby rejected.”
9. During hearing before us, Ld. DR representing the revenue, though dutifully supported the assessment-order passed by Ld. AO, but could not rebut the applicability of aforesaid recent order of Co-ordinate Bench in assessee’s group company on identical facts. Therefore, we do not find any reason to deviate from the view taken by Hon’ble Co-ordinate Bench. Respectfully carrying the same view, we too hold that the deletion of addition done by Ld. CIT(A) in present case does not require any interference by us. Thus, the ground No. 1 raised by revenue is hereby dismissed being devoid of any merit.”
There is no change in facts or provision of law and there is no reason for non-applicability of pre-existing decision of ITAT, Indore as noted above.
Hence, respectfully following the same, we are inclined to hold that the impugned addition made by AO is not sustainable. The same is hereby deleted. The assessee succeeds in Ground No. 5 and consequently in this appeal.
Order pronounced in the open court on 22/09/2025.