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TMI Blog2025 (5) TMI 676X X X X Extracts X X X X X X X X Extracts X X X X ..... aboratories Ltd in fact represents loan or advance which attracts the provisions of Sec.2(22)(e) of the Act 4) The Ld. CIT(A) erred in not appreciating the fact that the assessee is a substantial shareholder (having shareholding exceeding 20%) in both the companies M/s. Maithri Laboratories Pvt. Ltd. (company which advanced loans) and M/s. MSN Organics Pvt. Ltd., (company which accepted loans) 3. The brief facts of the case are that the assessee is an individual and the Director of M/s. MSN Laboratories Pvt. Ltd., and M/s. MSN Pharma Chem Pvt. Limited having income from salary, other sources and house property, filed his return of income for the A.Y. 2021-22 originally on 29.03.2022 admitting therein net income of Rs. 156,71,42,700/- and the same was processed u/s 143(1) of the Act. A search and seizure operations u/s 132 of the I.T. Act were carried out in the case of M/s MSN Laboratories Group cases, on 24.02.2021, in connection with the same the assessee is also covered. In the case of assessee, search & seizure operations were commenced on 24.02.2021 and the proceedings were finally concluded on 27.04.2021. Initially the case has been notified to the Central Circle-3(1), Hyd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide details of sales and purchases made to/from both the companies. The assessee was also required to produce the nature and purpose of payments made, the necessity or purpose of giving such amounts in excess of purchases made, and to provide a copy of the Board resolution passed, if any, for making payments in excess of purchases made along with details of interest charged on such excess amounts paid, if any. In response, M.S.N. Reddy, has submitted ledger account copies of MSNL and MSNO in the books of payer company and also filed details of opening balance and sales made during the relevant financial year, purchases made from the above two companies, payments made and received from the above two companies and closing balances. M.S.N. Reddy had also explained the nature and necessity of payments made to the above two group companies and submitted that buyer company and the other two group companies i.e., MSNL and MSNO, are engaged in the same line of business of manufacture and sale of Active Pharmaceutical Ingredients (APIs). Buyer company and the recipient company have carried out trading transactions of both purchases and sales made with each other in the course of said b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer company has not engaged in the business of finance and no interest was charged in respect of said loans and advances and therefore, invoked provisions of Section 2(22)(e) of the Act and made addition of Rs. 13,20,26,206/- for the assessment year 2021-22. 7. The AO further observed that the M/s. MSN Pharma Chem Pvt. Ltd, being the payee, is liable to pay dividend distribution tax under the provisions of Section 115-O of the Income Tax Act, 1961 in respect of the said deemed dividend under Section 2(22)(e) in the hands of the common substantial shareholder, in view of the amendment made to Section 115Q with effect from 01.04.2018, making dividend distribution tax applicable to deemed dividends also. Since no dividend distribution tax has been paid as deemed dividend by M/s. MSN Pharma Chem Pvt. Ltd, the AO made addition towards deemed dividend under Section 2(22)(e) of the Act and computed dividend distribution tax for the assessment year 2021-22. 8. Being aggrieved by the assessment order, the assessee filed an appeal before the LD.CIT(A) and challenged the addition made towards deemed dividend u/s 2(22)(e) and consequent dividend distribution tax under Section 115Q of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the contention of the appellant that the transactions between the two companies are in the nature of current account adjustments due to two-way movement of funds on a need basis is also incorrect because, in a current account (running), it is an opening account, an unsettled running account used in a trade between the buyer and seller, wherein it allows the buyer to make ongoing purchases with amounts paid by reducing the balance, and there is a fixed date by which payments and receipts must be settled. However, in the present case, during the assessment year 2021-22, the appellant has purchased Rs.5.69 crores from MSN Organics and made sales of Rs. 29.25 crores and consequently, the appellant had to receive a balance amount of Rs. 16,05,06,533/-. 10. The LD.CIT(A) further observed that the appellant has also failed to establish any business exigency or need for making huge payments when compared to purchases or sales. Although there are purchase / sale transactions existing between the appellant and the recipient company for the assessment year, when these transactions are compared to payments made by the buyer company to the recipient company, it can be seen that the quantu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO to consider the transactions between the appellant company and the other two companies as loans and advances must be examined in light of the transactions between these companies. If you go by the analysis of the transactions between the buyer company and the other two companies, as done by the Assessing Officer, there is a clear fact to the effect that M.S.N. Reddy has made very minimum purchases from the above two companies, but has made substantial amounts over and above the value of purchases. Therefore, the Assessing Officer came to the conclusion that any amount paid in excess of 150% / 200% of purchases should be treated as loans and advances, and thus, rightly computed the excess amount paid by the buyer company to the two companies and invoked the provisions of Section 2(22)(e) read with Section 115Q of the Act. Therefore, he submitted that the order of LD.CIT(A) should be upheld. 13. Per contra, the learned counsel for the assessee Shri M.V. Prasad, C.A. submitted that the LD.CIT(A) erred in sustaining additions made by the AO towards deemed dividend under Section 2(22)(e) and the consequent dividend distribution tax under Section 115Q, without appreciating the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 13.1 The Learned Counsel for the assessee, referring to certain judicial precedents, including the decision of the Hon'ble Gujarat High Court in the case of Jayesh T Kotak Vs. DCIT reported in (2020) 425 ITR 435 (Gujarat), submitted 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 intention of the Legislature is to tax funds ultimately received by a shareholder holding not less than 10% of voting power in the company, where such funds have been routed through different modes / concerns and used for the benefit of the shareholder. In the present case, the amounts paid by the buyer company to the two associated companies are for their business requirements, including deployment of working capital, purchase of new assets, and financial support in furtherance of their business activities. Therefore, these transactions cannot be considered as loans and advances for the purpose of Section 2(22)(e) of the Act. The Learned Counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,33,690 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 (sales + payments - purchases - receipts) 242,51,01,857 1,80,15,228 Less: Additional 50% of purchases in addition to 100% of purchases considered above 97,51,822 26,68,051 Balance excess payments treated as "advance or loan" constituting deemed dividend 241,53,50,035 1,53,47,177 Aggregate deemed dividend for AY 2019-20 243,06,97,212 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 + payments - purchases - receipts) 267,83,57,645 Less: Additional 50% of purchases in addition to 100% of purchases considered above 1,06,72,998 Balance excess payments treated as "advance or loan" constituting de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '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. 18. 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 shareholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vances' in the nature of commercial transactions. The AO has wrongly treated the payments in excess of 150% of the purchases as 'loans or advance' and wrongly held the same to be deemed dividend u/s 2(22)(e) of the Act. Similarly, the LD.CIT(A) has wrongly treated the payments in excess of 200% of the purchases as 'loans or advance' and wrongly upheld the same to be deemed dividend u/s 2(22)(e) of the Act. In our considered view, the said approach of the AO/CIT(A) is arbitrary and the same is not founded on any settled principle laid down by the Courts or on any stipulation conveyed by the Board through a circular regarding the reasonableness of the quantum of trade advances. The AO/CIT(A) has not revealed the basis on which they arrived at the threshold of 150%/200% of purchases for accepting the reasonableness of the quantum of trade advances. In the absence of specification of the relevant basis by the AO/CIT(A), the same is required to be regarded as arbitrary and non-maintainable. Further, having accepted that purchases are being made regularly from the recipient companies and payments in the nature of trade advances are being made to the said companies against the purchases, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade advances. As a result, the amounts paid to recipient company in excess of 200% of the purchases also have to be regarded as 'trade advances' which are in the nature of commercial transactions only and they cannot be characterized as 'loans or advance' constituting deemed dividend within the meaning of section 2(22)(e). The addition made by the AO and upheld by the CIT(A) towards deemed dividend is therefore wholly untenable and needs to be deleted. 21. 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance 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. 22. The second limb of argument of the appellant is that current adjustment account transactions do not represent 'loans or advance' for the purpose of deemed dividend. We, find that there is a two-way movement of funds between the appellant company and the recipient companies as per the business requirements of the said companies and the same is evident from the perusal of the respective ledger account copy of the recipient companies in the books of the appellant company, the copies of which were furnished to the AO during the assessment proceedings (Pg No.62-67 and Pg No.68 of PB-I). We further observed that there is a series of debits and credits in the concerned ledger accounts, which clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 both types of entries of giving and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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. 27. 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 sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 28. 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 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. 15. In this case, the Ld.CIT(A) has recorded categorical finding that M/s. Maithri Laboratories Private Limited (hereinafter referred to as "Maithri Labs") has not made any excess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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