Deeming Provisions Of Sec 2(22)(E) Gets Attracted To Beneficial Shareholder Only Who Has Controlling Interest: Kolkata ITAT

Finding that both, the assessee and APL are in no way in a position to compel KSWPL in any way for exercising its voting rights in a particular manner, and it is the other way that KSWPL, because of its shareholding, is in a position to compel both the assessee and APL, by exercising its voting power, the Bench of Sanjay Garg (Judicial Member) and Girish Agrawal (Accountant Member) observed that “the beneficial shareholder in the present case is KSWPL under whose controlling interest and influence, APL has given loan/advance to the assessee. Accordingly, the deeming provisions of section 2(22)(e) under the second limb are attracted on KSWPL”. (Para 11.2)

As per the brief facts of the case, the assessee, engaged in the business of Brand Owning and Consultancy, filed its return reporting total loss of Rs.2,16,59,610/-. During the year under consideration, assessee received a sum of Rs.5,50,11,501/- as loans/advances from another group company called as Apeejay Private Ltd. (APL). The Assessee is not a registered shareholder of APL who is a lender company. However, there is a common shareholder namely, Kathua Steel Works Pvt. Ltd. (KSWPL) who holds substantial interest in both the assessee and the lender company. The accumulated profits available for distribution in the books of APL, the lender was Rs.3691 lakhs. The AO thus, treated the amount of loans/advances received by the assessee from APL as deemed dividend u/s. 2(22)(e) of the Act since there was a common shareholding by KSWPL having substantial interest in both APL and ASMSPL.

The Bench explained that the intention behind the provisions of section 2(22)(e) of the Act is to tax such payments as dividend, and to meet this objective, the definition of 'dividend' was expanded to include such transactions of payment of loans/advances which otherwise are not in the nature of 'income' under the Act.

The Bench noted that deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance.

The Bench observed that KSWPL is in a position to control the affairs of both the lender i.e. APL and the receiver ASMSPL i.e. the concern, assessee, and the benefit of transaction between APL and ASMSPL accrues to KSWPL who is in a controlling position having more than 20% of shareholding in both of them, and therefore, provision as contained in section 2(22)(e) and the definition of substantial interest contained in section 2(32) of the Act, the beneficial ownership of shares is with KSWPL.

From reading of the provisions of the Companies Act, 2013 and the legislative intent of bringing amendment to section 2(22)(e) by the Finance Act, 1987, the Bench pointed that the beneficial ownership is with KSWPL under whose substantial control, loan from APL is granted to the concern i.e. ASMSPL, assessee.

Therefore, the deeming fiction of section 2(22)(e) can be applied only in the hands of KSWPL who is the beneficial owner of shares in both, the lender, and the receiving companies, added the Bench.

Further, the Bench clarified that a loan or advance received by assessee (a concern) is not per se in the nature of income, and it is in fact deemed accrual of income u/s. 5(1)(b) of the Act in the hands of the beneficial shareholder and not in the hands of the receiver (concern) who is a non-shareholder.

The ITAT therefore deleted the addition of Rs.5,50,11,501/- made in the hands of the assessee (ASMSPL) by treating the amount of loan and advance as deemed dividend u/s. 2(22)(e) of the Act.

Counsel for Appellant/ Assessee: Manish Tiwari

Counsel for Respondent/ Revenue: Abhijit Kundu

Case Title: Apeejay Surrendra Management Services Pvt Ltd. verses DCIT

Case Number: ITA Nos.987 & 988/Kol/2023

Click here to read/ download the Order