ITAT: Loan Between Sister Companies Not Deemed Dividend Under Section 2(22)(e):

ITAT: Loan Between Sister Companies Not Deemed Dividend Under Section 2(22)(e) The assessee, Addpol Chemspecialities Pvt. Ltd., filed its return for A.Y. 2012-13 declaring a loss, which was later reopened under Section 148 of the Income Tax Act. During reassessment proceedings, the Assessing Officer noted that the assessee had received a loan of Rs. 16,00,000 from Monachem Additives Pvt. Ltd., a closely held company. A common director, Shri Dilip G. Shah, held 87.7% shareholding in the lending company and 50% shareholding in the assessee company. The Assessing Officer treated the loan as a deemed dividend under Section 2(22)(e), holding that the payment was made by a closely held company out of accumulated profits to a concern in which the shareholder had a substantial interest. The amount was added to the assessee’s income, and interest expenditure was also partly disallowed. The CIT(A) upheld the addition, leading the assessee to file an appeal before the Tribunal. Issue Before Tribunal: Whether a short-term loan received by one company from a sister concern can be taxed as a deemed dividend under Section 2(22)(e) in the hands of the recipient company. ITAT Ruled: The Tribunal observed that Section 2(22)(e) applies only where a loan or advance is given to a shareholder who is the beneficial owner of shares or to a concern in which such shareholder has a substantial interest. The loan was advanced to the assessee company, which itself was not a shareholder of the lending company. The Tribunal accepted the assessee’s contention that the funds were transferred between sister concerns on a need-based, short-term basis as part of business exigencies. The Tribunal held that such inter-se fund movements between group entities could not be treated as a deemed dividend. It was further held that the addition confirmed by the CIT(A) was not justified in law. Therefore, the addition of Rs. 16,00,000 made under Section 2(22)(e) was deleted, and the appeal of the assessee was allowed. To Read Full Judgment, Download PDF Given Below