Loans from Subsidiary to Holding Company not Deemed Dividend u/s 2(22)(e) When Transactions are Part of Consistent Business Practice: ITAT [Read Order]

In a recent ruling, the Income Tax Appellate Tribunal ( ITAT ) Kolkata Bench has held that loans received by a holding company from its subsidiary cannot be taxed as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, when such transactions are part of a consistent business practice and are duly disclosed.

The appellant, Merino Industries Ltd, a private limited company engaged in the business of manufacturing laminates, panel products, furniture, potato flakes and agro-products, had filed its return of income for the Assessment Year 2014-15 declaring a total income of Rs 36,06,90,830 under the normal provisions. The company also declared book profits under Section 115JB at Rs 21,01,31,281. It had claimed deduction under Section 80IA of the Income tax act for steam energy generation.The case was selected for scrutiny, and notice under Section 143(2) was issued on 07.09.2015.

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During the course of assessment, the Assessing Officer observed from the investment schedule that the assessee held 74.65% equity in its subsidiary company, Merino Panel Products Ltd. It was further noted from the loan schedule and Clause 31(a) of the tax audit report that the assessee had received Rs 39,34,10,000 as a loan from the said subsidiary during the relevant financial year.

On this basis, the Assessing Officer invoked Section 2(22)(e) of the Income Tax law and treated Rs 7,84,77,378 as deemed dividend in the hands of the assessee, adding it to the total income.

The assessee contested this addition before the Commissioner of Income Tax (Appeals) [CIT(A)], contending that the loan was a regular business transaction between group companies engaged in financing and repayment on an ongoing basis, and hence did not fall within the scope of deemed dividend. The CIT(A) accepted the submission and deleted the entire addition of Rs 7,84,77,378, concluding that the transaction was commercial in nature and did not warrant tax under Section 2(22)(e).

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The Revenue challenged this relief before the ITAT, arguing that the loan should be considered a deemed dividend due to the shareholding pattern. The Tribunal, however, noted that there was no dispute about the corporate relationship or the receipt of the loan. It agreed with the CIT(A) that the transaction was in the ordinary course of business and consistently reported, and that the assessee had not derived any benefit which could be classified as a dividend.

The Tribunal relied on judicial precedents, including the Delhi High Court’s ruling in the case of Creative Dyeing & Printing Pvt. Ltd. (2009), which clarified that loans given during the course of business would not amount to deemed dividends.

The bench comprising  Sanjay Garg (Judicial Member) and Rajesh Kumar (Accountant Member) dismissed the Revenue’s appeal, affirming that Section 2(22)(e) was not applicable in the present case.

To Read the full text of the Order CLICK HERE

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