Deemed Dividend u/s 2(22)(e) Inapplicable to Sister-Concern Loans: ITAT Deletes Addition [Read Order]

The two-member bench, comprising SuchitraKamble (Judicial Member), addressed the core legal issue: whether a loan transaction between two sister concerns, where a common shareholder holds a substantial interest in both, can be classified as a deemed dividend in the hands of the borrower company.

The tribunal noted the specific wording of Section 2(22)(e), which defines a dividend to include any payment by way of advance or loan to a shareholder who is the beneficial owner of shares holding not less than 10% of the voting power, or to any concern in which such shareholder has a substantial interest.

The Tribunal, relying on precedent, clarified that the crucial requirement is that the loan must be extended to a shareholder (who then benefits) or a concern where the shareholder is a member. In the present case, the loan was given by M/s Monachem Additives Pvt. Ltd. to Addpol Chemspecialities Pvt. Ltd.

The tribunal held that since the loan was to a sister concern, and not directly to the shareholder (Shri Dilip G. Shah) who was the beneficial owner of the shares, the transaction cannot be treated as a deemed dividend in the hands of the assessee company.

The tribunal also referred to the decision in the case of Shri Dilip G Shah (involving the same parties), which had previously supported this interpretation. The Tribunal concluded that the addition made by the AO and confirmed by the CIT(A) was legally unsustainable. The tribunal deleted the addition of ₹16,00,000. The appeal filed by the assessee was allowed.

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