Deemed Dividend u/s 2(22)(e) Not Attractable Where Borrower is Not Shareholder: ITAT Deletes Rs. 49.56 Lakh Addition [Read Order]

The Indore bench of Income Tax Appellate Tribunal (ITAT) held that the addition of Rs. 49,56,118/- made by the AO as deemed dividend under section 2(22)(e) was unsustainable, as the assessee-company was not a shareholder of the lender.

The assessee, Arihant Fertiliser and Chemicals India Ltd., filed its return of income for AY 2015-16 declaring total income of ₹8.39 crore, which was assessed under Section 143(3) at ₹8.44 crore. Subsequently, the case was reopened under Section 147, and the assessment was completed at ₹8.93 crore after making an addition of ₹49.56 lakh as deemed dividend under Section 2(22)(e).

The addition was based on a loan of ₹8.60 crore taken by the assessee from M/s Arihant Bio-Chem Ltd., in which one Mr Abhay Jain held 50% shares. Since the same individual also held 34.01% shares in the assessee-company, the AO held that the loan fell within the ambit of section 2(22)(e) and treated the amount equivalent to accumulated profits of the lender company as deemed dividend in the hands of the assessee.

Aggrieved, the assessee challenged the addition before the CIT(A), contending that the provisions of section 2(22)(e) were wrongly invoked. The CIT(A), however, upheld the AO’s action, leading the assessee to file the present appeal before the Tribunal.

The assessee submitted that section 2(22)(e) could apply only if the recipient of the loan is a registered shareholder of the lending company. In the present case, Arihant Fertiliser and Chemicals India Ltd. was not a shareholder of Arihant Bio-Chem Ltd., and therefore, the fundamental condition for invoking the deeming provision was not satisfied.

Reliance was placed on the rulings of the Supreme Court in CIT v. C.P. Sarathy Mudaliar, the Special Bench decision in ACIT v. Bhaumik Colour (P) Ltd., and subsequent judgments of the Orissa High Court and ITAT Delhi holding that loans to non-shareholder concerns cannot be taxed as deemed dividends.

The Revenue relied on the orders of the AO and CIT(A), arguing that since a common shareholder held a substantial interest in both companies, the transaction fell squarely within the meaning of deemed dividend under Section 2(22)(e). It was contended that the provision was intended to prevent the diversion of accumulated profits of closely held companies through loans or advances to concerns in which substantial shareholders had an interest.

The Tribunal observed that the issue was squarely covered by the decision of the coordinate bench in ACIT v. Shirani Automobiles Pvt. Ltd.(2018), where it was held that a deemed dividend under section 2(22)(e) is taxable only in the hands of a shareholder and not in the hands of a borrowing concern that is not a shareholder in the lending company.

The Tribunal also referred to the Supreme Court’s judgment in CIT v. Madhur Housing & Development Co., which affirmed that the deeming fiction cannot be extended to non-shareholders.

Following these settled principles and finding no change in facts or law, the two-member bench comprising Paresh M. Joshi (judicial member) and B.M. Biyani (Accountant Member)held that the assessee, being neither a registered nor a beneficial shareholder of Arihant Bio-Chem Ltd., could not be taxed on the loan received.

Consequently, the addition of ₹49.56 lakh representing the accumulated profits of the lender company was deleted, and the assessee’s appeal was allowed

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