Income Tax: Shareholding Relationship Essential for Invoking Deemed Dividend Section 2(22)(e)

This present writ petition is being filed in the High Court of Ahmedabad (R/Special Civil Application No. 5399 of 2022), before the Division Bench of Justice Mr Justice Bhargav D. Karia and Mr Justice Pranav Trivedi, by Relitrade Stock Broking Private Limited (petitioner) under Article 226 of the Constitution of India. The decision of the current judgment was announced on 07/07/2025. The Income Tax Officer Ward 3(1)(1), Ahmedabad, is the legal respondent in this case. The court has allowed the petition and quashed the reassessment notice issued under Section 148 of the Income Tax Act, 1961.

Background of Case

• The petitioner (Relitrade Stock Broking Private Limited) is a Private Limited Company that has filed this civil appeal under Article 226 of the Constitution of India, challenging a notice dated March 26, 2021, passed under section 148 of the Income Tax Act, 1961.
• On October 17, 2016, the petitioner filed its income tax return (ITR) for the assessment year 2016-17, notifying total income worth Rs. 5,84,250. The respondent (Income Tax Officer Ward 3(1)(1) Ahmedabad) selected the return for investigation.
• Then, on August 06, 2018, the tax department issued a notice against the petitioner and then on December 18, 2018, issued the assessment order after examining all the related documents.
• On 27.06.2019, the petitioner company merged with another company named Relitrade Stock Broking Pvt. Ltd. (the name remained the same, but it’s legally a merged company now).
• On March 26, 2021, the income tax department issued a reassessment order against the petitioner under Section 148 (notices are released under this section when the department feels income has escaped assessment). However, this notice was issued with the name of the old company, which has legally ceased not exist after amalgamation.

Petitioner’s Response:

• Though the notice was invalid, the petitioner still responded to the notice and filed a return notifying income of Rs. 5,84,250.
• Additionally, the petitioner challenged the order, stating the allegations were already reviewed during the initial assessment.
• The notice was said to be based on wrong facts and was simply a change of opinion, which the law does not allow as grounds for reassessment.

Allegation by Tax Department:

• The Income Tax Department alleged that the company (petitioner) for taken an unsecured loan worth Rs. 6.08 crore from its group company, i.e., Relitrade Stockbroking Pvt. Ltd., and that this should be considered a “deemed dividend” under Section 2(22)(e) of the Income Tax Act.

Petitioner’s Arguments:

• On the respondent’s argument, the petitioner said it was not a loan but a trade transaction, just a credit balance from the regular business account between the two companies. These include F&O Trading, payment, receipts, margin and interest on margin, etc.
• It was shown under the “sundry creditors” head in the financials, not under “loans”.
• CBDT’s Circular No. 19/2017, dated 12.6.2017, clearly states that such trade advances are not covered under Section 2(22)(e) (i.e., they are not considered deemed dividends).
• Further, the petitioner argued that all the details had already been examined in the initial assessment order in 2018. However, the department still passed the reassessment order, which is illegal.
• Hence, reopening now was just a change of opinion, which the Supreme Court in CIT v. Kelvinator of India Ltd. (2010) said is not allowed.

Arguments by Respondent:

• The tax department claimed that the transaction between the companies and the fact that common directors existed (Mr Karan Sanghvi in both) led them to believe this was a case of a deemed dividend.
• They supported the reassessment and wanted the court to allow the Income Tax Officer to proceed.

Court’s Analysis and Findings:

The high court analysed the following points:

• The court found that the transaction was not a loan but part of business dealings, clearly outside the scope of Section 2(22)(e).
• Additionally, the CBDT Circular and prior court decisions (like GSEC Ltd v. DCIT) support that trade advances are not dividends.

The court also took reference from past judgments to release final orders. Referred to Gujarat High Court rulings, Delhi High Court in the Ankitech case, and the Supreme Court decision in Madhur Housing, all of which ruled:

• Deemed dividend under 2(22)(e) applies only if certain conditions are satisfied, especially shareholding in the company giving the loan.
• If the recipient company is not a shareholder, the amount cannot be taxed as a dividend. Also, honest trade transactions in the ordinary course of business are excluded.
• The notice was issued with the name of the initial company, which was changed after the amalgamation. This is a procedural error and renders the notice invalid.
• The reassessment was based on existing records, not any new evidence. Hence, it was merely a change of opinion, which is not permitted under law.

Court’s Final Judgement:

• The court quashed the reassessment notice dated 26.03.2021 under Section 148.
• It ruled in favour of the petitioner company and allowed the petition.
• The rule is made absolute, which means the court has given a final decision in favour of the petitioner, and the reassessment cannot continue.